Chapter 3 | Basis of Premium

Table of Contents

  Educational Objectives
  Basis of Premium - Total Remuneration
  Remuneration Inclusions
  Remuneration Exclusions
  Payroll Limitation
  Miscellaneous Premium Basis Interpretations

Educational Objectives

Upon completion of this section, you should be able to:

1. Define total remuneration as the basis for premium calculations.

2. Understand and explain remuneration inclusions and exclusions.

3. Explain what constitutes overtime and how it is applied.

4. Discuss payments made to employees on any basis other than time worked.

5. Recognize that state exceptions may exist, and where to locate specific references.

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Although payroll is the basis on which premium is computed for Workers’ Compensation coverage, it is important to remember that payroll is more than just a figure in a payroll earnings book. This section broadens and clarifies the term payroll so that the term "total remuneration" more accurately describes the premium basis. Most of the major inclusions and exclusions to remuneration are covered in this section. State manuals and/or state exception pages should be consulted for the particular state being audited.

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Primarily, the basis of premium for Workers’ Compensation is payroll. Essentially, this means wages, but the Workers’ Compensation Manual states: "Premium shall be computed on the basis of the total payroll paid or payable by the insured for services of employees covered by the policy." This has the effect of broadening the premium base by a considerable extent. Payroll means money or substitutes of money.

Note: For clarification purposes in this chapter, the terms payroll and remuneration have the same meaning.

Some classifications have a different premium basis. For example, premium for domestic worker classifications is computed on a per capita basis. Refer to the manual rule regarding Domestics. For vehicles hired under contract, the premium basis is a percentage of the total contract price. Other exceptions are explained in the classification rules and footnotes.

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Payroll includes the following items:

Wages and salary payments made during the policy period are usually included in the audit. This also includes retroactive wages.

Many employees are paid on a salary plus commission basis, a straight commission basis or a drawing account against commission. Some types of employees paid on a commission or commission plus salary basis are:

  • Commission Salespersons
  • Drivers for laundries, bakers, bottling companies, oil and gas distributors, milk dealers and the like. This applies whether they drive their own automobiles or those of their employer.

In a situation involving salary plus commission, the auditor will pick up salary plus commission paid during the policy period. When an employee is hired on a straight commission basis, it is necessary that the auditor determine the full amount of commissions paid. One way is to examine the insured’s tax file, including I.R.S. forms W-2 and 1099.

Salespersons are often hired under a contract calling for a drawing account against commission. If the commission is less than the drawing account or if no commission is earned, the drawing account shall be included in the premium base. If the commission earned, but not paid, is greater than the drawing account, the commission earned should be included.

Expenses Incurred by Salespersons
It is customary when a salesperson receives only a salary that the insured pays the traveling expenses. In such an event, the expenses should not be added to the salary for premium computation purposes, provided a separate, verifiable record of them is maintained.

Expenses incurred in connection with their employment, including the operation of an automobile, may only be deducted when the following conditions apply:

1) If itemized expense accounts are submitted regularly, preferably monthly.

2) If the insured maintains a separate and permanent record of the accounts.

3) If drivers or chauffeurs operate their own equipment (commercial, not pleasure) and accounts showing the operating expenses are submitted regularly, and a separate and permanent record of such accounts is maintained, the cost of repairs, licenses, insurance, etc., may be deducted if receipts for such costs are presented for review.

NOTE: The reason for deducting these costs is that commercial vehicles are used only in connection with business and not pleasure, therefore, any expenses which might be incurred are chargeable solely to the operation of the business. A passenger car with a combination license which is used for both business and pleasure should be treated as a passenger car and not as a commercial vehicle.

The following expenses are not deductible:

1) The repair, licenses, cost of insurance, etc., of a salesperson’s personally owned automobile (passenger car).

NOTE: It is impossible to ascertain the proportion of these expenses chargeable to either business or personal activities.

2) If the account shows the expense in a lump sum, not being itemized.

3) If the account is not submitted regularly, preferably monthly.

Some insureds attempt to submit accounts showing expenses for several months or a full year which were prepared by the salesperson after expiration of the policy. Such accounts are not acceptable. Others, who will not or cannot obtain accounts, request that an arbitrary amount or a percentage of the salesperson’s earnings be deducted to represent the expenses. This is not permissible.

For a specific interpretation regarding personal expenses incurred by employees, see New York’s "Digest of Rulings and Interpretations" distributed by the New York Compensation Insurance Rating Board.

Employee Expense Reimbursements and Allowances
The following is contained in Rule 2-2.h of the Basic Manual; it is to clarify the treatment of reimbursed employee expenses and flat expense allowances as a basis of premium:

Reimbursed expenses and flat expense allowances, except for hand or power tools, paid to employees may be excluded from the audit, provided that all three of the following conditions are met:

1) The reimbursed expenses or expenses for which allowances were paid were incurred upon the business of the employer, and

2) The amount of each employee’s expense payments or allowances is shown separately in the records of the employer, and

3) The amount of each expense reimbursement or allowance payment approximates the actual expenses incurred by the employee in the conduct of his or her work.

However, the NCCI Basic Manual states that "when it can be verified that the employee was away from home overnight on the business of the employer, but the employer did not maintain verifiable receipts for incurred expenses, a reasonable expense allowance, limited to a maximum of $30 for each such day, will be permitted."

Bonuses & Stock Bonus Plans
A bonus is something given in addition to what is usual or strictly due. While a bonus may be given at any time, traditionally it is given at Christmas or year end. Except for bonuses awarded as a special reward for individual invention or discovery, the amount of bonuses is to be included in total payroll.

A special caution must be mentioned in light of recent rulings regarding bonuses in certain states. In Louisiana, Oregon, and Tennessee unanticipated bonuses are no longer includable in the payroll of an employee. Unfortunately, "unanticipated" was not defined.

Extra Pay for Overtime Work
The inclusion of extra pay earned for overtime work reflects the fact that injuries can also occur after the normal number of hours worked. Because of the complexities and special guidelines that pertain to overtime, a separate rule pertaining to overtime is included in the Basic Manual. We will look at this rule in detail later in this section.

Wages for Holidays, Vacations, or Periods of Sickness
The Basis of Premium rule of the Workers’ Compensation Manual includes pay for unworked holidays, vacations or sick time as remuneration for premium determinations. Some union contracts include pay for unworked days for jury duty, funerals, weddings, birthdays, etc. Under such circumstances, this pay must also be included for remuneration. The auditor should be cautious of the method the insured uses to account for these items. The auditor should be aware that these items are often recorded in overtime on an insured’s records. Therefore, it is important to verify the content of those records.

The NCCI Basic Manual states "when a division of payroll exists for an individual employee, payroll for holiday, vacation, sick pay, overtime and all other forms of remuneration not directly attributable to a specific classification code shall be allocated to the classification code with the greatest amount of payroll applicable to the individual employee. If no one classification code applicable to the employee has the greatest amount of payroll, the payroll for holiday, vacation, sick pay, overtime and all other forms of remuneration not directly attributable to a specific classification code shall be allocated to the highest rated classification code applicable to the employee."

Once again, the auditor should be aware of state exceptions to this inclusion item.

Payments by the Employer of Contributions Required by Law
Payments by the employer required by law which otherwise would be paid by the employee are not to be deducted from an employee’s remuneration. Such payments are to be included. Examples of this type of payment would be statutory insurance or statutory pension plans such as the Federal Social Security Plan. It is typical of many union contracts that the "employee" share of the FICA payment is not deducted from the employee’s wages. It is paid by the employer. When this occurs, the auditor should add to the employee’s earnings the payments made by the employer on behalf of the employee.

Payments to Employees Made on any Basis Other than that of Time Actually Engaged in Work
This includes but is not limited to the following items:

1) Piece Work. This is a system whereby an employee is paid a certain amount for each piece of work produced, subject to an agreed upon minimum wage. The principle is that an employee, by working efficiently, can earn more money on a piece work basis than could be earned on an hourly wage basis. Usually, increments are paid upon completion of established quotas.

2) Incentive Plan. This system, like the piece work system, is designed to stimulate a higher rate of production on the part of the employee. Basic in such a plan would be an increase in an employee’s hourly rate of pay after a preset quota of units of work had been completed. The auditor will include straight time wages plus the incentive increment wages.

3) Profit Sharing Plan. Again, such a plan is designed to stimulate greater and more efficient production. An employer may have a plan whereby any profit over a certain level will be distributed among his employees on some fair basis. The auditor will include any income from the profit sharing plan with the other wages in determining an employee’s total remuneration. Oregon does not permit profit sharing income as remuneration.

Payments or Allowances to Employees for Hand or Power Tools Furnished by Employees
In some trades or occupations it is customary to grant a monetary tool allowance to employees who furnish their own hand or power tools for use in their work or operations for the insured. Such allowances are to be included with wages in determining an employee’s total remuneration when paid directly or through a third party.

Be sure to check State Exceptions relating to tool allowances. For example, Tennessee provides that an insurer may include allowances of any character made to an employee only when such allowances are in lieu of wages and are specified as part of the wage contract. Kentucky and Missouri do not include these allowances and New York excludes reimbursed allowances under specific conditions.

Rental Values
As a part of many employment agreements, the employee may also be provided an apartment or a house at no charge or at a substantially reduced amount. The value of these accommodations is includable for purposes of determining remuneration. This may be determined by the actual rentals of similar accommodations in the vicinity. In the case of clergymen, and sometimes teachers, the church or school budget will contain an amount of housing allowance. If this amount is consistent with the value of similar housing in the vicinity, it should be added to payroll to obtain remuneration. If, however, it is apparent that the budgeted amount is not consistent with the value of similar housing in the vicinity, an amount should be added to the budgeted amount to bring it up to the value of similar housing. Value of housing, paid utilities, gasoline, milk and farm produce provided to a farm employee must be established on the basis of the market value to the employee in the area involved.

Where the value of lodging constitutes part of an employee’s earnings, the value of such item, to the extent disclosed in the insured’s records, shall be included with the actual wages as remuneration. Lodging is not included in Arizona. Montana applies a minimum amount as do New Jersey and Wisconsin.

To the extent shown in the insured’s records, the value of meals received by employees as part of their pay is included for premium computation purposes, except in Arizona. Montana applies a minimum amount as do New Jersey and Wisconsin.

Store Certificates and Other Substitutes for Money
These are certificates awarded for exceeding established quotas. Their value is subject to income taxes. The value is also to be included in determining total remuneration.

Other substitutes for money might be merchandise or store credits. They are most common in mercantile businesses. These items would not be found on payroll records. Their existence can generally only be established by asking questions of the insured who will usually maintain a separate journal or other record of merchandise or store credits to employees. The actual value of merchandise must be included in the employee’s payroll, as would the value of any credits.

Salary Reduction Plans
In determining the remuneration to be used for premium computation purposes, no deduction shall be permitted for contributions to employee benefit plans including employment savings plans, retirement or cafeteria plans (IRC 125) made by employees either directly or through salary reduction agreements. The typical salary reduction plan involves a binding salary reduction agreement through which a specific percentage of the employee’s salary is not paid to him or her but is paid into a pension plan.

Davis Bacon Wages
The Davis-Bacon Act is a 1931 Federal law that requires contractors working on Federal or Federally assisted projects to adhere to wage schedules established by the Department of Labor for the local area where the job is let. Though the wage schedules vary by trade and by location, two minimum wage rates are included, (1) a base wage, and (2) the prevailing wage. The base wage is generally the wage or hourly amount which must be paid to the employee as salary. The prevailing wage is a higher amount which consists of the base wage and an amount normally encountered as fringe benefits for the area in which the work is being performed.

The law’s original intent was to protect workers by placing a floor under construction wages. This floor prevented contractors from importing workers from other areas where the wages were lower than those of the particular community where the project was being let. Proponents of the law also assert that cheap labor will produce results that are less than desirable.

Opponents of Davis-Bacon view it as outdated and inflationary because it sets artificially high wages that put an upward pressure on all local wages. It is also alleged that many qualified contractors avoid federally financed projects due to the record keeping costs and the problems encountered in paying some people more than others on a particular job.

Despite the controversy, an employer awarded a contract subject to the act is, in effect, agreeing to adhere to one of the following options:

1. The contractor pays the entire prevailing wage as salary,

2. The contractor pays the established base wage and provides acceptable fringe benefits, or

3. The contractor pays the base wage to the employee and deposits the difference between the base wage and the prevailing wage into a third-party pension trust fund for the exclusive and irrevocable benefit of the employee.

When an employer pays the fringe benefit portion of the prevailing wage as salary(#1) for the benefit of the employee, include the entire Davis-Bacon wage as remuneration. However, if the employer places the difference between the base wage and the prevailing Davis-Bacon wage into a third-party pension trust fund for the benefit of the employee (#3, usually a 401A or 501A account), the entire Davis-Bacon wage should be excluded from remuneration. The first should be self-explanatory; option #3 may require an explanation.

When a contractor opts to pay the base wage as salary plus provide acceptable fringe benefits (#2), the fringe benefits would be excluded from the development of chargeable remuneration as outlined by the Basic Manual rules.

Annuity Plans
An annuity ordinarily is insurance that an employee purchases which will provide defined regular payments to that employee, to begin at a fixed date and continue either through the employee’s life or for a defined number of years. Since the employee purchases the annuity with after-tax dollars, the part of the payment received at distribution that represents a return of the annuity’s cost is tax-free to the recipient; the part representing investment earnings is taxable to the recipient. In practice, the main difference between an annuity plan and a pension is in the funding method. Typically, an annuity will be funded by individual contracts, issued in the name of each participant.

While the annuity contract is generally purchased from an insurance company, an annuity may be issued by an individual or some other party. The following represent the most common types of annuities:

  • Fixed annuity - pays a fixed amount at regular intervals for a fixed term.
  • Single-life annuity - pays a fixed amount at regular intervals for the life of one individual.
  • Joint and survivor annuity - pays a fixed amount at regular intervals to one person for life, and, on his/her death, pays the same or different amount at the same or different intervals to a second individual for life.
  • Variable annuity - pays a varying amount based upon the insurer’s investment experience, cost-of-living indexes, or similar factors. Payments may be made for a fixed term or for the life of one or more persons.

It should be noted that when auditing certain tax-exempt organizations, the Internal Revenue Service has established that special tax deferred or tax sheltered annuity programs may be offered to their employees. Such would include public schools, hospitals, churches, and other exempt organizations; the plans are subject to section IRC 403(b).

Employees in such organizations are provided the opportunity to shelter their earnings by purchasing the annuity contract using pretax dollars. This increases their purchasing capacity in a similar fashion to the Flexible Benefits programs explained earlier. Unlike other programs, such as an individual retirement account (to be explained later), the individual participant, within the limits set by the IRS, can pay an amount that meets his/her personal financial needs; the limit, or exclusion allowance, is determined by a rating formula and is not a flat, annual maximum as in the case of an IRA.

The money deducted for the purchase of an annuity contract is considered remuneration and should be included on your audit. The fact that the IRS does not tax the amounts contributed under the special 403(b) program is not relevant for exclusion. In either instance, the employee is simply electing to defer compensation using the purchase of the annuity contract.

Payments for Filming
Often celebrities, such as sports personalities or entertainers, are employed for the filming of commercials. They will receive a session fee, which pays them for the days involved in filming the commercial. They may also receive additional payments (residuals) in the future, based on the number of times the commercial is actually broadcast.

The basis of premium should include only the session fee and not the residual payments, provided the records of the employer clearly identify such payments.

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Excluded from payroll are the following items:

Tips and other gratuities received by employees are excluded. Florida and New Jersey have special rulings concerning tips.

The essence of the "tips" exclusion is that these amounts are not paid by the employer. The auditor should only include monies actually paid by the employer.

Payments to Group Plans
Payments made by an employer to group insurance or group pension plans for employees, other than those required by law, are excluded from remuneration for the purpose of premium computation.

As explained regarding employee savings plans, the contributions arising out of the employee’s salary reduction agreement, but technically made by the employer, are included as remuneration. However, employer matching contributions to such plans are excluded (unless they are included by the employer in the employee’s taxable income) the same as a payment made by the employer to a group insurance or pension plan.

Remember that payments by an employer into a third-part pension trust for the Davis-Bacon Act or similar prevailing wage law under qualification of the IRC Sections 401A and 501A are to be excluded from remuneration.

Special Rewards
The Basic Manual also excludes from remuneration "the value of special rewards for individual invention or discovery." Such rewards are one-time payments that do not reflect time worked. Thus, they do not reflect an exposure to Workers’ Compensation losses.

Dismissal Wages - Severance Pay
Dismissal amounts should not be included in the payroll as a basis of premium computation because they are not earnings of the employee but are merely paid as a matter of labor policy to carry the employee over until another position is procured. Note that severance pay accounts often include pay for accrued vacation or for time worked. Remember, both of these items are included for premium computation.

Payments for Active Military Duty
The National Council has ruled that voluntary payments by business concerns to employees who have been selected for military service shall be considered pure gratuities and not subject to inclusion in the payroll reported for premium computation purposes. Such was the case when military reservists were called to active duty during World War II, the Korean War and the Persian Gulf War. During these conflicts, some employers made payments to their conscripted employees. The wage payments were often the difference between the military pay and the amount the employee normally would have received.

Employee Discounts on Goods Purchased from the Employer
While more prevalent in mercantile businesses, this practice may be applied in other industries. When provided, the employer establishes a percentage discount for his/her employees on the purchase of items offered to the public. The employee pays the discounted price at the cash register; no money is exchanged in the form of wages or remuneration. Due to the difficulty in establishing the figures, the bureaus have ruled that the measurement of such discounts makes it impractical to use as a premium base.

Employee discount programs should not be confused with incentive awards, awards offered by employers when employees perform in excess of their established goals. An incentive award may consist of a gift or store certificate which the employee(s) may use to purchase items of his/her own choosing. Similarly, the employer may select a catalog from an established company and award the employee(s) a dollar amount that can be used to order items in the catalog. Whether a prize, gift certificate, store certificate or catalog amount, each is considered a substitute for money and should be included as remuneration.

Supper Money
Employees who work late may be provided an actual reimbursement for supper or a flat amount set by the employer. In either case, this money does not represent an increase in exposure to loss for Workers’ Compensation; the increase in exposure to loss results from the additional time spent on the job by the employee. The exposure will be measured whether the employees are paid their regular rate of pay only or their regular rate plus overtime for the late work. With adequate records, the amount provided as supper money for this late work should not be included in the remuneration base.

Work Uniform Allowances
A work uniform allowance represents an expense to the employer by requiring employees to wear a company uniform. It is a benefit to the employer, not the employee. A uniform allowance would be excluded from the premium base, the same as any other legitimate, substantiated, reimbursed expense.

Third Party Sick Pay
Third party sick pay refers specifically to plans such as an insured’s group insurance carrier which is paying income benefits to a disabled employee. In this case, the employee is not working, not exposed to Workers’ Compensation losses, and the sick pay is not being paid by the employer. These types of payments would be extremely difficult to identify in the insured’s records, but if found, they should not be included as remuneration.

Company Perks
Although company perks are generally considered to be income for IRS purposes, the following should be excluded from remuneration for Workers’ Compensation premium purposes:

  • An employer-provided automobile or other road vehicle.
  • A flight on an employer-provided airplane.
  • An employer-provided free or discounted commercial airplane flight.
  • An employer-provided incentive vacation. (e.g. Contest winner).
  • An employer-provided discount on property or services.
  • An employer-provided membership in a country club or other social club.
  • An employer-provided ticket to an entertainment event.

Employer Contributions to employee benefit plans such as:

  • Employee savings plans
  • Retirement plans
  • Cafeteria plans (IRC 125)

These include contributions made by the employer, at the employer’s expense, which are determined by the amount contributed by the employee.

The presence of overtime pay earned by employees of an insured will have a direct impact upon audit procedures undertaken by the auditor. The existence of overtime pay can first be discovered during the initial interview of the audit contact and later confirmed through examination of the insured’s records. Sometime during the audit, the auditor must determine if the "overtime" meets the definition as stated in the Basic Manual Rule 2-C.:

Overtime means those hours worked for which there is an increase in the rate of pay:

  • For work in any day or week in excess of the number of hours normally worked, or
  • For hours in excess of 8 hours in any day or 40 hours in any week, or
  • For work on Saturdays, Sundays or holidays.

In guaranteed wage agreements, overtime means only those hours worked in excess of the number of hours specified in such agreements. The manual also now clarifies that forms of incentive pay commonly referred to as "shift differential" or "premium pay" associated with working other than normal day-shift hours during the standard workweek are not to be considered overtime.

The auditor must determine if the insured’s books and records conform with the Manual rule that allows for the exclusion of the excess portion of the overtime wages. The Basic Manual requires the insured to show overtime pay separately by employee and in summary by classification. This requirement can be met either by the insured preparing a separate schedule or by summarizing overtime pay in the payroll records. This can be done manually or as a standard function within a computer payroll service.

The next step the auditor will take is to determine what method the insured used to show the overtime pay. The records may provide just the premium portion of overtime pay or show the total overtime pay. Keep in mind that the intent is to exclude only the excess portion of overtime earnings.

Care should be taken in reviewing the amounts included in the overtime column of the insureds records as this column is sometimes used for such items as jury duty pay, shift differential or payments for holidays worked.

If overtime is paid at the rate of 1.5 times the regular rate, one-third of the overtime payment should be excluded. This deduction, in effect, adjusts the overtime wages back to regular wages. Likewise, if overtime is paid at double time, one-half of the overtime is deducted.

If the insured fails to properly maintain the records, the auditor should explain the need to keep these records to allow for the premium overtime deduction and its favorable impact on the insured’s premium. If after explaining this procedure the insured refuses to segregate the overtime pay, the auditor should explain that those payments will be included in the premium determination. Also, it should be indicated on the audit worksheet why the deduction was not allowed. Additional information that may be shown on your worksheet as a guide for next year’s auditor: indicate the source records used to obtain the overtime pay and whether the schedule is prepared as premium pay or as overtime pay.

Other Overtime Comments:

1) Premium overtime is not deducted in Delaware, Pennsylvania or Utah.

2) An exception to the overtime rule applies to payrolls assigned to any classification under the caption "Stevedoring" with a code number followed by the letter "F" . Such overtime is not excludable. The stevedoring wage rate structure varies according to the type of cargo. A review of the applicable wage rates or "cargo rates" to determine the exclusion of extra pay for overtime would be both cumbersome and unrealistic. Accordingly, the overtime rules show the above exception.

3) So called "premium" pay is not subject to the overtime rule. Premium pay is a higher rate for night work, weekend work, or work under special conditions or work at unusual hours. The premium pay is the normal rate for such work. However, if employees work in excess of the normal period and receive a rate of pay over and above the premium pay rate, the rule does apply.

4) Some employers pay their employees for extra time not worked, e.g., paid for eight hours when in fact only seven hours were worked. Such wages for time not worked are not deductible as there was no overtime work involved, i.e., no wages above the normal rate for overtime actually worked.

5) When a payroll limitation applies, the premium overtime deduction is performed prior to the limitation calculation.

6) The NCCI Basic Manual contains an excellent section relative to overtime. This can be found in the Users Guide Rule C on pages UG 21-23.

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Most states have approved the use of actual payrolls without limitation (except in the case of executive officers). The previous limit was $300 per week except in several states where a $100 or $400 per week limitation applied. This amended rule revised the basis of premium by eliminating the per week limitation and provided for the use of unlimited payrolls for most employees. (Note: Overtime rules still apply).

How Payroll Limitation Applies
The premium for executive officers is based on their total payroll subject to a minimum and a maximum individual payroll as shown in your manuals on the state rate pages. These limitations are applied to the average weekly payroll of each executive officer determined on the basis of the total number of weeks employed during the audit period. A part of a week is considered as a full week in determining the average weekly payroll. The auditor must refer to the Basic Manual Rule 2-E-1.b, which covers situations when the executive officer’s remuneration is to be included, or not included in the premium basis.

Some states allow partners and sole proprietors to be covered for Workers’ Compensation. If they have elected coverage, they are usually subject to a fixed amount per year shown in the Miscellaneous Values section of the state rate pages.

Among other categories using limitations are Codes 9178 & 9179 - Athletic Teams or Parks, and Code 9186 - Carnivals, Circuses or Amusement Device Operators. When dealing with these classes, always refer to the Miscellaneous Values section of the state rate pages for the applicable limitation.

The maximum weekly payroll limitations are indexed to a limit usually based on four times the state’s average weekly wage. National Council reviews the limitation applicable at the time of each rate revision and adjusts it by any indicated change in the wage level. Since these limitations change periodically, the auditor must always refer to the state rate pages Miscellaneous Values section for the applicable amounts.

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There are many other premium basis scenarios that an auditor may encounter, some commonplace, others unique. Following are some additional interpretations that have been provided by NCCI.

Employees Retirement Income Securities Act of 1974
Under the Employees Retirement Income Securities Act of 1974, an employee may establish an individual retirement account. Contributions to this account are deductible from the employee’s current year’s income for the purpose of federal income tax. If an employer establishes individual retirement accounts, these contributions will be included as gross income to the employees but excluded from the computation of their federal income tax. These contributions will also be subject to withholding for F.I.C.A. and Unemployment Tax. All payments made to individual retirement accounts in accordance with the provisions of the Employees Retirement Income Securities Act of 1974 shall be considered as remuneration for Workers’ Compensation premium computation purposes.

Traveling Time Payments
Payments made by an employer to an employee to reimburse him or her for time spent in traveling to or from work, or to or from a specific job, shall be considered as payroll, and such payroll shall be assigned to the Manual classification which applies to the work normally performed by such employee.

Wages Paid for Idle Time, Strike Periods, etc.
The entire amount of wages paid for idle time shall be included as payroll. The technique as to the appropriate classification to be applied when the employee is idle depends on the circumstances surrounding this idle time. The Basic Manual provides the following detail and appropriate classification techniques regarding this topic in Rule 2-F.

When an employee is idle due to any of the following conditions, the wages for that employee should be assigned, in their entirety, to the classification which describes the work normally performed by that employee:

  • Suspension or delay of work resulting from weather conditions,
  • Delays while waiting for materials,
  • Delays while waiting for another contractor to complete certain work,
  • Delays arising from a breakdown of equipment,
  • Stand-by time where employees are on the job but their services are not required on a continual basis, such as crane operators,
  • Special union agreements or requirements that employees are paid for idle time under certain specific contractual arrangements, or
  • Any other causes of a similar nature.

Note that many of these conditions arise on construction or erection projects. The auditor must be aware of the definition of idle time and the Division Of A Single Employee’s Payroll rule when analyzing the assignment of wages under the various conditions.

For example, suppose an employee is roofing a building using sheet metal panels. During the day, a thunderstorm develops which makes it impossible to continue roofing. If the weather forecast calls for the storm to move out of the area in a relatively short time, the roofer may stay at the jobsite awaiting the rain to stop. This waiting period is idle time and the wages earned should be assigned to the roofing classification.

Conversely, the weather report may indicate that the storm will continue for the balance of the day. As such, the employer may require the employee to return to the insured’s headquarters. At this location, the employer maintains a sheet metal shop for the production of various metal products such as gutters, metal siding, air ducts, etc. Due to the weather conditions, this employee now spends four hours working in the shop. This is a change in duties and is subject to the Division Of A Single Employee’s Payroll rule. This is not idle time; the wages earned working in the shop should be assigned to the classification that describes the shop operation provided separate payroll records are maintained.

  • In some businesses, key employees are retained on the payroll even though no jobs exist.

    This is particularly true of superintendents, foremen and engineers in construction, erection or stevedoring operations. The wages earned by these key employees during periods when no jobs are in progress should be assigned to the classification that describes the work actually performed, even if the work qualifies for Code 8810, Clerical or Drafting. If the key employees are retained on the payroll and perform no duties during this time, their wages should be assigned to Code 8810.

    Note, however, that the wages of a key employee who is subject to the classification, Contractor - Executive Supervisor, Code 5606, does not qualify for this payroll division to Code 8810. It is normally expected that an executive supervisor will spend a great deal of time in the office.

  • When wages are paid for idle time and the employees are engaged in work other than construction, erection or stevedoring, the wages should be assigned without division to the classification(s) that would normally apply to each employee’s activity.
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