Workers Compensation 101: Employee Misclassification

Workers Compensation 101: Employee Misclassification

Workers’ compensation policy audits are crucial for ensuring the accuracy of premiums and aligning them with the real risks and activities of a business. Errors or misunderstandings during these audits can result in overpayment, underpayment, or even legal issues. Understanding the audit process, being aware of common pitfalls, and seeking expert guidance are essential for business owners and policy managers.

Once such error is misclassification of employees.

Workers need to be classified based on the type of work they perform. If they are incorrectly classified, you will pay at an audit.

Misclassification of employees in your workers’ compensation policy is a big issue. This misclassification can result in inaccurate premium calculations, leaving businesses vulnerable to legal consequences, financial penalties, and diminished worker safeguards. Ensuring precise classification not only adheres to legal standards and safeguards workers’ rights but also upholds the integrity of the workers’ compensation system and protects employers.

Common Employee Misclassification Errors:

The intricate nature of job classification codes can often result in misclassifications. For instance, warehouse workers may be mistakenly categorized as office clerical workers, potentially leading to inaccuracies in premiums. Conversely, clerical employees could be erroneously labeled as warehouse workers, resulting in overcharged premiums. 

Certain industries have more complex classification systems, which require extra diligence. For instance, industries like construction or manufacturing often have a wider range of job roles and associated risks, making accurate classification more challenging but essential.

Employee vs. 1099 Independent Contractors:

The distinction between an employee and a 1099 independent contractor is primarily based on the level of control and autonomy in their work. Factors such as the type of work performed, control over the tasks, and financial aspects like payment and profit play a crucial role. In 2024 new rules are going into effect that will expand work comp coverage and other rights to misclassified 1099 workers and treat them as employees.   Independent Contractors who are found to be employees will lead to their payroll being included in the work comp policy.

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The consequences of employeee misclassification

Misclassifying employees on your workers comp policy can have significant financial consequences on your business. Varied job codes, such as clerical work versus manufacturing work, come with different levels of risk. Incorrect classifications may lead to overpaying or underpaying premiums, impacting not only the business’s finances but also potentially leading to increased premiums for all policyholders through the insurance carrier. In addition, incorrect employee classification can even lead to errors and omissions (E&O) claims.

It’s crucial for businesses to ensure that the information reported on their workers’ compensation applications accurately describes their operations and verify this on the insurance policy. This includes proper classification and an accurate count of all employees.

We know that Workers Compensation Insurance can seem overwhelming and confusing. The good news is that we are experts at it. Whether you are looking for a brand new policy, or you already have one in place, we can help. You need a workers compensation policy that meets the unique needs of your business and the hazards that it presents.
Let’s make sure you’re covered in the correct way and at the right price.Every one of our protection advisors is an expert in business insurance. Contact us here and let’s get started!

A little more about Holley Insurance…

Holley Insurance was founded in 2000, and retains a core base of loyal clients. We have locations in Roanoke, Rocky Mount, and Forest, VA. As an independent insurance agency, Holley Insurance represents a carefully selected group of financially strong, reputable insurance companies. Therefore, we are able to offer you the best coverage at the most competitive price. Holley Insurance was named “Top Insurance Broker in Southwest Virginia” by Virginia Living Magazine for 2021. 

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