Why having the right classifications is so critical

As businesses in Ohio set up shop or expand their operations, two critical items related to their workers’ compensation coverage involve their manual classification, which is based on their business operations and their reportable payroll. If this information is incorrect, not only is an employer paying incorrectly, but it could cause other employers across the state to pay incorrectly as well.

Smart Business spoke with Jarred Post, rate representative at CompManagement, about how manual classifications are assigned in Ohio and what an employer should be reporting regarding its payroll.

What are manual classifications and how are they assigned?

Ohio Bureau of Workers’ Compensation (BWC) assigns manual classification codes established by the National Council on Compensation Insurance (NCCI) based on the description of operations provided on an employer’s initial coverage application.

Manual classifications codes are divided into two types — basic and standard exception. Basic classifications describe a company’s general business operations. With over 500 basic classification codes, many companies may, however, find that they are so specialized in their operations that there is not a specific code for them. In these cases, BWC will assign the basic classification code most analogous to their operations.

There are five standard exceptions that apply to employees common to many businesses whose job duties are not described by a basic classification, such as clerical office employees. To qualify, employees generally cannot have any other duties within the company outside the scope of the standard exception.

Why is the correct manual classification so important?

Workers’ compensation premiums are based on these classifications. Every year, each classification is assigned a base, or starting premium rate that BWC calculates based on statewide claims costs and payroll for employers reporting under that code. If you are not reporting payroll and claims correctly, not only are you paying incorrect premiums, but you are also potentially causing other employers statewide to pay incorrectly. This can also result in an inaccurate calculation of your experience modification rate (EMR). Your EMR is the percentage above or below the base rate at which an employer will pay premium. Reporting payroll using the wrong classification can, in some cases, result in over-inflated workers’ compensation premium.

What is considered reportable payroll?

BWC reportable wages typically consist of gross wages — including overtime and bonuses — less employee contributions to health insurance, flexible spending accounts and dependent care savings accounts. The basic rule of thumb is that if something is not reportable to the IRS, then it is not reportable to BWC.

Are there any caps or limits regarding payroll reporting?

There are minimum and maximum payroll reporting limits for active executive officers of a corporation, owners of sole proprietorships, partners in a partnership, and individuals incorporated as a corporation with no employees. There is also a maximum weekly reporting cap for employees in the construction industry, which is the same as the weekly maximum for the people previously listed. However, there are no minimum or maximum reporting limits for regular, non-construction employees.  For the current rate year of July 1, 2016 to June 30, 2017, the payroll reporting minimum is $443 and the maximum is $1,328.

What if incorrect payroll is reported? 

If incorrect payroll has been reported, an employer can file an amended payroll report with revised payroll amounts. However, this could trigger an audit by the BWC. Usually an amended report that would result in a refund of over $5,000 in premium will be referred for audit. During an audit, BWC compares internal payroll records and reports to other agencies — IRS, Ohio Department of Job and Family Services — to validate information reported. They can audit up to two years, but usually audit only one.

Insights Workers’ Compensation is brought to you by CompManagement