When it comes to workers' compensation, few topics generate as much confusion and debate as classification codes. It’s a question franchisors and franchisees alike grapple with, especially when faced with wildly differing premium rates or advice from various representatives. A post shared in a franchise Facebook group recently highlighted this issue, with one franchisee questioning whether their business should fall under a higher or lower-risk classification—and what that means for their wallet.
This is a perfect example of why understanding workers' compensation classification codes matters. While it’s tempting to believe what a “state representative” or another industry professional says, the reality is much more nuanced. These codes are not arbitrary; they’re governed by regulatory bodies with strict rules designed to reflect the risks associated with specific job duties. Here’s what you need to know about how these codes are determined, how they impact your premiums, and what happens when mistakes are made.
Who Decides Your Classification Code?
In most states, workers’ compensation classifications are determined by the National Council on Compensation Insurance (NCCI). This body governs 38 states, while other states—like California, New York, and monopolistic states such as Ohio—rely on their own systems. The NCCI creates and maintains a comprehensive list of codes designed to capture the risk level of various industries and job functions. For example, a janitorial business performing general cleaning might fall under code 9014, while higher-risk activities like window cleaning above three stories would fall under 9170. Meanwhile, specialized tasks like biohazard cleaning, which involve exposure to hazardous materials, are typically assigned to 5473 (Asbestos Contractor – Not Otherwise Classified).
However, just because someone tells you your business fits a specific code doesn’t mean they’re correct. Each governing body has its own interpretations, and carriers often have additional requirements. Missteps here can lead to reclassification during an audit—sometimes at significant cost.
Navigating the Process of Classification
Let’s say you’re trying to determine your workers' compensation classification. The process may seem straightforward—identify what your employees do, assign the appropriate code, and calculate premiums. But in practice, it’s rarely that simple. For instance, does your business handle biohazard cleaning? If so, it likely falls under 5473, which carries a much higher risk factor compared to general cleaning codes like 9014. On the other hand, if your employees clean windows above three stories, they’ll likely fall under 9170.
In many cases, businesses seek to split their class codes, assigning different employees or tasks to different codes. This practice is common in construction but less so in industries like janitorial services. The key to splitting codes is maintaining clear payroll records and ensuring there’s no overlap in job duties. If even one employee crosses into a higher-risk task, the entire payroll may be assigned to the higher-risk code.
What If I’m Classified Incorrectly?
One of the most significant challenges with classification codes arises during workers' compensation audits. Audits are routine, but they’re also the point where errors come to light. A franchisee from the same Facebook group shared their frustration after their carrier disallowed a split between two codes during an audit, retroactively applying the higher-risk code to their entire payroll. The result? A hefty additional premium bill.
This isn’t unusual. Auditors rely on payroll records, job descriptions, and governing body guidelines to ensure businesses are classified correctly. If records are unclear or tasks overlap, they err on the side of caution—assigning higher-risk codes. The financial impact can be devastating, which is why accuracy from the start is so critical.
Hearing Different Advice? Proceed With Caution
One of the biggest challenges franchisees face is conflicting advice. A state representative, a carrier, or even another franchisee might suggest your business is overpaying or misclassified. While these comments may be well-intentioned, they often lack the full context. Proper classification requires:
Documentation of your business operations.
Verification with both your carrier and the governing body.
If you’re unsure, seek a second opinion from someone familiar with your industry and its specific risks. In industries like franchising, where job duties can vary significantly, it’s especially important to work with carriers who understand your business model.
Why Accurate Classification Matters
Workers' compensation classification codes are about more than just premiums; they’re about protecting your business. An inaccurate code can result in surprise costs during an audit, denied claims, or even compliance issues. Conversely, a correct classification ensures you’re paying the right amount for the risks your business faces—not a penny more or less.
The takeaway? While it’s tempting to take advice at face value, the only way to ensure accuracy is through thorough documentation, communication with your carrier, and confirmation from the appropriate governing body. Misclassifications may seem like small issues until they snowball into financial or operational headaches.
Final Thoughts
For franchisors, this topic isn’t going away. Questions about classification codes will continue to arise as franchisees navigate workers’ compensation requirements. By providing clarity—whether through training, resources, or one-on-one guidance—you can empower your franchisees to make informed decisions. And when the inevitable questions arise, remind them: in workers’ compensation, the details matter, and so does getting it right.
Would it help to have a course or resource added to your onboarding materials? If so, let’s talk. Providing clarity now can save your franchisees thousands later.
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