If you are a contractor in California, your Workers’ Compensation premium can be affected by much more than just your total payroll.
Two important factors are:
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Dual wage classifications
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Properly dividing payroll between different Workers’ Compensation class codes
For contractors who perform remodeling, carpentry, plumbing, electrical, drywall, painting, and other construction work, keeping accurate payroll and time records can make a significant difference at audit.
The most important thing to remember is simple:
If you want the insurance company to recognize different classifications, you need records that prove what your employees actually did.
What Is a Workers’ Compensation Class Code?
Workers’ Compensation insurance uses classification codes to identify the type of work your employees perform.
Different types of construction work can have different Workers’ Compensation rates.
For example, a remodeling contractor may have employees performing work such as:
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Carpentry and remodeling
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Plumbing
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Electrical work
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Drywall installation
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Painting
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Cabinet installation
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Other construction operations
The classification assigned to the payroll can affect the amount you pay for Workers’ Compensation insurance.
This is why correctly describing your operations and maintaining accurate records is so important.
What Is a Dual Wage Classification?
California has certain construction classifications that use a dual wage system.
This means there may be two Workers’ Compensation classification codes for the same general type of work.
Which classification applies can depend on the employee’s hourly wage.
For example, carpentry classifications may have one code for employees earning below the applicable wage threshold and another code for employees earning at or above that threshold.
The higher-wage classification frequently carries a lower Workers’ Compensation rate.
Why Does This Matter?
Imagine two employees performing similar carpentry work.
One earns $35 per hour.
The other earns $50 per hour.
Depending on the classification rules and wage threshold applicable to the policy period, those employees may qualify for different Workers’ Compensation classifications.
That can affect your premium.
However, the insurance company will generally require payroll and timekeeping records to support the classification being used.
Simply telling the auditor what an employee was paid may not be enough.
What Does Splitting Payroll Mean?
Contractors often have employees who perform more than one type of work.
For example, one employee might spend part of the week doing:
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Carpentry
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Drywall
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Painting
Another employee might perform plumbing on one job and different qualifying work on another.
Under certain circumstances, California Workers’ Compensation rules may allow an employee’s payroll to be divided between different classifications.
But there is an important requirement:
You must maintain complete and accurate time records showing the actual work performed.
You Cannot Guess at the End of the Year
This is where many contractors get into trouble.
At the end of the policy year, you generally cannot simply tell the auditor:
“Joe spent about half his time doing carpentry and the other half painting.”
The insurance company will want records supporting that division.
Your records should be created when the work is actually performed, not reconstructed months later when the audit begins.
A good timekeeping record might look like this:
DateJobWork PerformedHoursMondaySmith RemodelCarpentry5MondaySmith RemodelDrywall3TuesdayJones RemodelCarpentry6TuesdayJones RemodelPainting2
This is much better than a time card that simply says:
Monday: 8 hours
Tuesday: 8 hours
The insurance company needs to know what the employee actually did during those hours if payroll is going to be divided between classifications.
What Records Should Contractors Keep?
If your employees perform more than one type of work, your timekeeping and payroll system should be detailed.
We recommend tracking:
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Employee name
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Date worked
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Job or project
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Job location
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Type of work performed
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Hours spent on each operation
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Employee hourly wage
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Gross payroll
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Overtime information
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Payroll reports
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Summaries of payroll by operation or classification
The totals should be supported by the employee’s original timekeeping records.
The goal is to make it easy for an auditor to trace the payroll back to the work actually performed.
What Happens If You Do Not Keep Good Records?
Poor recordkeeping can become expensive.
If employees perform several types of construction work but you cannot support the payroll division with proper records, the insurance carrier may not allow you to divide the payroll the way you expected.
Depending on the applicable classification rules, payroll may have to be assigned to a higher-rated classification.
For example, imagine an employee legitimately performs:
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70% lower-rated work
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30% higher-rated work
If you have detailed time records, you may be able to support the proper division of payroll.
Without those records, substantially more payroll may end up in the higher-rated classification.
That can result in a significant additional premium at audit.
Good Records Can Help Reduce Workers’ Compensation Costs
Accurate recordkeeping provides several advantages.
You May Qualify for Lower-Rated Classifications
If an employee legitimately qualifies for a different classification, your records can help support that classification.
You May Benefit From Dual Wage Classifications
Higher-paid construction employees may qualify for higher-wage classifications that can carry lower Workers’ Compensation rates.
Your payroll records need to support the employee’s hourly wage.
You Can Properly Divide Payroll
When employees perform qualifying work under multiple classifications, detailed time records may allow payroll to be assigned more accurately.
Your Workers’ Compensation Audit Is Easier
At audit, the insurance company will want to know:
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Who worked for you?
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How much were they paid?
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What work did they perform?
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Where did they work?
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Did you use subcontractors?
Good records make these questions much easier to answer.
You Reduce Unexpected Audit Premiums
One of the biggest surprises contractors face is receiving a large additional premium after a Workers’ Compensation audit.
Proper recordkeeping throughout the year can help reduce those surprises.
Do Not Forget About Subcontractors
Workers’ Compensation audits often include a review of subcontractors and outside labor.
If you use subcontractors, keep copies of:
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Written subcontract agreements
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Certificates of Workers’ Compensation insurance
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General Liability certificates
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Contractor license information
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Invoices
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Job descriptions
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Dates worked
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Amounts paid
Do not assume someone is automatically excluded from Workers’ Compensation exposure simply because they receive a 1099.
The insurance carrier may review whether that person or company had proper insurance and whether their work creates an exposure under your policy.
The Simple Rule Every Contractor Should Follow
For every employee, your records should answer six questions:
WHO performed the work?
WHAT work did they perform?
WHERE did they perform it?
WHEN did they perform it?
HOW MANY HOURS did they spend performing each type of work?
HOW MUCH were they paid?
If your payroll and timekeeping records clearly answer those questions, your Workers’ Compensation audit will generally be much easier to manage.
Contractors Should Review Their Classifications Before the Audit
The worst time to discover a classification or payroll-record problem is after the policy expires.
If your company performs kitchen remodeling, bathroom remodeling, carpentry, plumbing, electrical work, drywall, painting, roofing, flooring, or other construction operations, review your classifications and recordkeeping procedures during the policy year.
Insurance Incorporated can help you understand your Workers’ Compensation classifications, dual wage requirements, payroll recordkeeping, subcontractor exposures, and audit requirements.
Need Help With Contractors Workers’ Compensation Insurance?
Insurance Incorporated works with contractors throughout California and can help you compare Workers’ Compensation options from multiple insurance companies.
We can also help you understand how to properly document payroll so that your classifications can be reviewed accurately at audit.
Call Insurance Incorporated at 877-898-9333
Visit www.insuranceinc.com
California License #0235301
Important Disclaimer
Workers’ Compensation classification rules can be complex and classifications depend on the employer’s actual operations, applicable California classification rules, employee wages, payroll records, and the work being performed. Classification decisions are subject to review by the insurance carrier and the Workers’ Compensation Insurance Rating Bureau of California. Employers should not change classifications or divide payroll without confirming that the applicable rules allow it.
