Tuesday, May 19, 2020

The Great California Workers Comp Insurance Dual Wage Classification Scam

I've just finished reviewing my second California Shock Audit today that was caused by the same outrageous insurance industry scam, one that is unique to California and that typically ambushes small contractors: The Dual Wage Classification Scam.

Here's how it worked for one of these contractors, a small plumbing contractor in Los Angeles. When the policy was written, all the non-clerical payroll was placed into Code 5187, the plumbing classification to be used when workers are paid $26.00 per hour or more. This class had a rate of 5.21 per hundred dollars of payroll.

Also on the policy was Class 5183, for workers paid less than $26.00 per hour. That class had a rate of $10.41 per hundred dollars of payroll. But that class had no payroll shown, just "IF ANY", so since there was zero payroll in that class it generated zero premium--at least, zero initial estimated premium, on the original policy that was sold to this plumber.

But of course, the initial estimated premium on the policy isn't the actual cost for the insurance. After the policy ends, the insurer normally wants to determine what the actual payroll was for the policy period--after all, premiums for Workers Comp insurance are based on payroll.

But audits often do more than just adjust payroll. In this case, the audit did a classic Shock Audit switcheroo--the audit, unlike the original policy, placed all non-clerical payroll into the $10.41 classification, and none into the $5.21 class.

Presto, change-o--this plumber's insurance rate just doubled, after the policy was ended and it was too late to do anything about it.

And all perfectly according to Hoyle, or rather, according to the self-serving rules the insurance industry has created.

The insurance industry rules require very specific timekeeping records be kept, and if they are not kept exactly as required then the payroll shifts to the more expensive one and it doesn't matter a bit how the policy was set up when purchased.

Now, with my small plumber, this was not explained when he purchased his policy. It doesn't matter.

The easy to understand rules that were not explained are:

 1. Original time cards or time book entries for each employee. Original records must include the operations performed, the total hours worked each day and the times the employee started and ended each work period throughout the workday. At job locations where all of the employer’s operations cease for a uniform unpaid meal period, recording the start and stop times of the uniform break period is not required. 2. A valid collective bargaining agreement that shows the regular hourly wage rate by job classification of worker. If using a collective bargaining agreement, the records must include an employee roster by job classification that permits the reconciliation of individual employees to the job classifications set forth in the collective bargaining agreement.  

This clever arrangement guarantees that a fair number of small employers will think they are buying a policy with a five dollar rate, only to learn after the policy ends that they really owe based on a ten dollar rate.

Sure wish I could run my business like that.

And unless this insured kept those kinds of records, there's nothing at all he can do about this legal bait and switch operation.

Fortunately, it looks like there might be other errors in how these premium charges were computed, errors that might be more amenable to correction.

But it rankles me that the existing rules allow this kind of classification hocus-pocus to happen. And it happens to a lot to small contractors in California, and they typically have to just suck it up and pay.