Narrative
Classifications are the insurance industry’s
way of lumping together employers with a similar likelihood
of claims. The rate that is assigned to each classification
anticipates those claims, plus insurance company overhead
and profit.
Since rates anticipate future claims, they
must come from a base large enough to provide statistically
valid conclusions. If that base is too small, then the rates
will not closely match claims. The only way to insure a large
enough rate base is to limit the number of classifications
that are available. This is the underlying rationale for the
workers compensation classification system.
Since no two business are identical, all
employers are funneled into one or more of the approximately
600 available classes. By definition, the classes that are
assigned to an employer can only approximate the operations
of that business. Further refinements, such as the experience
modification, adjust the final premium to match the policyholder's
anticipated claims.
The general rule is to group employers
with the same risk into similar classifications. Subject to
several exceptions, the overall business of the employer within
a state is classified and not the individual duties or operations
of employees. The primary classification assigned to an employer
is called the governing classification and usually
(but not always) is the classification that contains the most
payroll.
Because some workplace duties are common
to all businesses, four exceptions to the governing class
are permitted. Called Standard Exceptions, these include;
1) Clerical office employees (#8810) and clerical telecommuter
employees (#8871), 2) Drafting (#8810) and telecommuter drafting
(#8871), 3) Drivers (#7380), and 4) Salespersons (#8742).
The governing classification is assigned
to a policy by state and by entity. If two or more entities
are covered under a policy, then each is entitled to its own
governing classification. (This is a loophole that, with a
little bit of planning, can save some companies significant
money.) Further, if a business operates in two or more states,
each state is assigned its own governing class (another overlooked
loophole.)
There are several exceptions to the governing
class rule. Special rules apply for construction, employee
leasing and temporary labor contractors, and farm operations.
These businesses are not assigned a governing classification.
Instead, employees are classified based on their specific
jobs and duties.
Some businesses may not have a classification
that exactly describes their operations. For them, a classification
is assigned that most closely describes the business.
A recent new rule, called the Interchange
of Labor Rule, allows for the division of an employee's payroll
between two or more classifications, subject to three conditions;
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