Does a bonus count as payroll for work comp?

One of our clients recently asked if he had to pay work comp on a bonus to his employee. The simple answer is yes because any compensation to the employee counts as payroll. This can include meals, lodging or any other type of compensation.

This is pretty straightforward unless the employee is in a class code that can be split to "wages above" and "wages below". If the employee is already in the "wages above" classification there is no change - it simply counts as payroll. If he is in the wages below classification then a bonus could bump the employee into the higher classification and that would result in a lower work comp premium.

The purpose of the bonus can also have an effect. If it is simply and annual bonus then it would be applied over the whole year but what if the bonus were tied to a specific project? In this case it could bump the employee into the "wages above" classification for that project. If this is your intention and an employee gets moved into a "wages above" by a bonus be sure to document in detail. At the year end audit the person doing the audit could have a different idea and try to average the bonus. If you document what you are doing you can argue the point at the audit.

If you intend to give a bonus to an employee it is important to understand the above concept and do the math to see how the premium would be affected. If you are giving the employee a $5,000 bonus but you are only $200 away from moving him to a "wages above" class code then you may save money overall by paying $5,200 instead of just $5,000. Keep in mind that you will also pay taxes on the higher payroll. There are a lot of possible scenarios that could be thought up.  If you understand the basic concept you can do the math to come up with the most advantageous solution.

Here is the wording of the applicable rules:

"1. Payroll – Remuneration
As used in this Plan, payroll and remuneration are synonymous and mean the monetary value at which service is recompensed. Except as provided herein, remuneration includes: gross wages, salaries, commissions, bonuses, vacation, holiday and sick pay, overtime payments, the market value of gifts, and all substitutes for money earned during the policy period by employees and officers of the employer, and any other persons for whom voluntary coverage is provided under the policy.

4. Standard Exceptions
Employees engaged in the clerical office or outside sales functions described below are referred to as Standard Exception Employees. If a standard classification specifically includes Clerical Office Employees or Outside Salespersons, such employees shall be assigned to the standard classification, regardless of California Workers’ Compensation Uniform Statistical Reporting Plan—1995 Effective January 1, 2018 Part 3 – Standard Classification System whether the work is conducted at the same or at a separate location. It is not permissible to divide a single employee’s payroll, within a single policy period, between a Standard Exception classification and any
other classification with the exception of a single permanent job reassignment. Otherwise, the remuneration of Standard Exception Employees is subject to division of payroll in connection with all other classifications in accordance with the following:

a. Classification 8810, Clerical Office Employees Clerical Office Employees are defined as those employees whose duties are confined to keeping the books, records or cash of the employer; conducting correspondence; using computers; dispatching; recording weights; or who are engaged wholly in general office work or office drafting, having no regular duty of a non-clerical nature in the service of the employer. Except as otherwise provided in this Rule, the entire payroll of any employee who is engaged in operations performed by Clerical Office Employees and also is exposed (1) to any operative hazard of the business or (2) to any outside selling or collecting work, shall be assigned to the highest rated classification of work to which the employee is so exposed. Supervisors and clerks, such as time, stock or tally clerks, whose work is necessary, in connection with or related to any operations of the business other than clerical office operations shall not be classified as Clerical Office Employees. Classification 8810, Clerical Office Employees, shall be applied only to the payroll of persons herein described who work exclusively in areas that are separated from all other work places of the employer by buildings, floors, partitions, railings or counters and within which no work is performed other than clerical office or drafting duties
as defined in this Rule."

Effect of Dual Wage Changes

Effect of Dual Wage Changes

The following amendments to the California Workers’ Compensation Uniform Statistical  Reporting Plan—1995, were approved effective January 1, 2017:

1. Carpentry (Classifications 5403/5432) $32
2. Concrete (Classifications 5201/5205) $25
3. Glaziers (Classifications 5467/5470) $31
4. Masonry (Classifications 5027/5028) $27
5. Painting (Classifications 5474/5482) $26
6. Refrigeration Equipment (Classifications 5183(2)/5187(2) $26
7. Steel Framing (Classifications 5632/5633) from $32
8. Wallboard Application (Classifications 5446/5447) from $34

Amendments to Classification 5146(1), Cabinet or Fixtures — portable; interior trim, to direct that the installation of doors, door frames and sash shall be assigned to Classification 5107, Door, Door Frame or Pre-Glazed Window Installation — not overhead doors;

Establishment of Classification 3724(3), Concrete Sawing or Drilling — N.O.C., for specialty contractors engaged exclusively in concrete sawing or drilling at a specific job site or location.

You must keep adequate Time Card. Here is on online or mobile app system.

Here are some rough estimates of how much impact this change could have using carpentry to compare with typical rates as of Nov 2017. This is based on the carpentry class and 13% total taxes. The tax can vary some depending on your unemployment insurance rates.

As you can see from the above estimates if your employee wage is close to the threshold you would actually lower your total cost by increasing the payroll. The benefit to your employee however could in turn be much more valuable to you as employer.

Dual Wage - Construction and Erection Classifications

California - Split Classifications in the Construction Industry

There are a number of class codes used in the construction industry that fall under two codes. These are often referred to as "wages above" and "wages below" classifications. The dual classifications are used to provide a fair distribution of premium over the different classifications. The split occurs in the $25 to $32 dollar per hour range (as of 2017). An employee who gets paid the higher wage is allowed a lower rate for coverage. As of 2017 for carpentry the split occurs at $32 per hour. Check your policy for specific information on where the split occurs.

Effective January 1, 2008 it became a requirement that time cards or time sheets exist to demonstrate that the actual payroll per hour as compared to hours worked meet the requirements for using the "wages above" classification. What this means in practical terms is that a contractor has to keep accurate time cards for work performed. The change specifically names 19 classifications.

• Automatic Sprinkler Installation
• Carpentry - Residences
• Carpentry - Commercial
• Concrete or Cement Work
• Electrical Wiring
• Excavation/Grading/Land Leveling
• Gas Mains or Connections Construction
• Glaziers
• Masonry
• Painting/Waterproofing
• Plastering or Stucco Work
• Plumbing/Refrigeration
• Roofing
• Sewer Construction
• Sheet Metal Work
• Steel Framing, Light Gauge - Residential
• Steel Framing, Light Gauge - Commercial
• Wallboard Application
• Water Mains or Connections Construction

If you are using any of these codes it is important to understand that if you have an audit from a Work Comp carrier you will be charged the higher rate (the wages below rate) if you cannot show time cards and hours worked for employees that you report as being in the "wages above" classification.

You can also read a related article on the Workers' Compensation Insurance Rating Bureau of California (WCIRB) web site and you can find out about record keeping requirements here or you can use a system such as this online or mobile app system.

At Venture Insurance Services we have access to many Workers Compensation markets. Call us for a quote.

Venture Insurance Services

866-726-8442

Experience Modifications

The following is an excerpt from an article from 2008 entitled, "The Basics of Experience Rating". Links to the complete articles part one and two appear below.

Experience rating has undergone revision since this article was written. Some of this information in this article no longer applies. (May 2020)

Primary Losses Are the Most Expensive

"Every time you report a claim to your insurance company, a reserve is set for the claim. ...

The first $5,000 of each claim is considered primary. Any amount of reserve above $5,000 is considered excess loss. ...

So what does this mean? Experience rating places more emphasis on the frequency of injuries than on the severity. An employer with one large loss ($100,000) will pay less for future insurance than an employer with 10 smaller lost time claims of $5,000 each  a total of $50,000 in losses -- because the full $50,000 is primary loss in the premium calculation for the second employer, while there is only $5,000 in primary losses for the first employer. Experience rating cushions the blow of the large loss, but hammers employers with frequent losses.

(Note: in California Primary Loss = Actual Loss if Total Loss is less than $7,000;

= $7,000 if Total Loss is equal to or greater than $7,000.)

Note: As of Jan 2012 the first $7000 is now considered primary and there is an individual claim limitation of $175,000.

Small Employer, Big Trouble

Here's where a lot of smaller employers get caught: if you have a frequency problem (a lot of relatively small injuries involving at least some lost time) and just one big loss, the primary losses add up in a hurry. You quickly exceed the expected level of primary losses. As a result, your experience rating pushes up into the debit zone. You start paying a lot more for insurance."

Later on in this article it states:

"When it comes to determining the experience rating for your next policy year, there is only one day that really counts. About six months after the end of your policy year, a summary of your losses (the unit stat report) is prepared by your insurance carrier(s) and submitted to your rating bureau. For employers with open claims in prior years, it is essential to make sure that the numbers contained in the unit stat report are accurate and reflect an up-to-date understanding of the status of each open claim."

If you would like to read the whole article here are the links  Part One and Part Two

Here is a link to another detailed article about dealing with disputes Workers Compensation Insurance Premium Disputes

If you would like to get into the "nuts and bolts" of experience mod calculation download this article published by Zenith Insurance.

For an overview of experience rating see the NCCI article here.

The following is an excerpt from the above article:

"Experience Modifications

The second factor limiting market rate competition is “experience rating.” Insurance Code 11730(c). When insurers report claims under the policies they issue, the WCIRB compares each employer’s claims history to that of its industry competitors. This calculation produces a merit rating called an “experience modification” for every employer large enough to have a minimally statistically credible claims history.

The purpose of experience (aka “merit”) rating is to provide an economic incentive (or penalty) for safety. Indeed, employers with high experience modifications are assessed to pay for special Cal/OSHA inspections and consultations Labor Code 62.7, 6314.1, 6354(a). An employer may not enter into an employee leasing arrangement Labor Code 3602(d) to evade application of its experience modification. Insurance Code 3600(d).

The WCIRB’s calculation of experience modifications is governed by the California Experience Rating Plan, or “CERP,” 10 California Code of Regulations 2353.1. Rather than making their own projections of a policyholder’s likely claims experience, as they do for most other types of insurance, insurers must apply to their policy the WCIRB-promulgated experience modification for the policyholder. Insurance Code 11734(a). Generally, an employer receives its first experience rating at the beginning of its third year in operation.

Soon thereafter, the WCIRB inspects the employer’s premises and operations to confirm that the insurer is reporting the employer’s payroll under the correct classification(s). The USRP also governs both insurer reporting and classification assignments. Both the CERP and the USRP are posted on the WCIRB’s website, www.wcirbonline.com.

Insurer data reports to the WCIRB under the USRP, called “unit statistical reports” or “USRs,” reflect data deemed accurate as of eighteen months after insurance policy inception. Since premium is based, in part, upon the employer’s actual payroll during the policy term, final premium can’t be determined until the insurer conducts an “audit” or physical examination of the employer’s books a few months after policy expiration. Insurers must then submit updated USRs, typically tracking developments in claim value estimates, annually for nine more years, as necessary."