First in a three-part series
CLASSIFYING RISK
Understanding payroll helps agents
understand contractors' codes
By Linda D. Ferguson
First in a three-part series
It was a dark and stormy night. Our family was watching Home Improvement. As the storm became stronger, the children asked if they should head for the basement. Suddenly, BANG--glass broke, the dog ran under the desk and the kids headed to the basement as my husband discovered our neighbor's metal porch had flown into our dining room. This was our introduction to a number of contractors. The claim came in under $5,000 but we had to work with a roofing contractor (the porch split with part coming through the roof and part through the window and wall), siding contractor, window installer, floor refinisher and painting contractor.
Contractors come in many sizes and take on many roles, but most are like the men we met after our claim: hard-working individuals who are interested in doing the best job they can for their customers, whom they meet only once or twice and often in very trying situations. They must work efficiently and guard their time jealously because their time is truly their money. How then can we best serve them and make sure we provide the best coverage at the most equitable cost? The first step is understanding their classification and cost basis.
While many contractors can fit into specialized BOP products, starting with ISO continues to be the best bet. This is a neutral starting place for understanding the risk. Using the ISO payroll and receipts definitions can help when analyzing the offerings from the various BOP companies. The more accurate the receipts and payroll, the easier it is to understand the differences in plans and guide clients to the best plan for their circumstances.
The contractors class is an extremely broad category with no limitation on size or payroll. However, there are some consistencies. Almost all contractors' codes are based on payroll, which makes it is very important to understand who is included in the payroll.
As usual, all clerical and drivers are excluded.
Sole proprietors, copartners, executive officers and managers of limited liability companies are subject to a payroll limitation. This limitation is by state and can impact premium dramatically. As an example, if the sole proprietor has an actual payroll of $50,000 but the state exception limits the payroll to $24,000, the insured has received a considerable savings. This rule recognizes the fact that the compensation of sole proprietors, officers and managers is different from that of an employee. If there are multiple employees, these individuals will be operating in a more supervisory capacity. If there are no other employees, a large amount of time will be devoted to clerical and other functions. Many companies have filed payroll limitations that vary from the ISO standard. This subtle change can dramatically impact the premium for a small contractor.
Since the limitation is an annual figure, ISO has developed a formula for seasonal or part-time businesses. It states that the annual limitation may be reduced by 2% for each full calendar week in excess of 12 during which the risk performs no operations. Therefore if the limitation is $24,000 but the insured only works three months, the actual limitation would be computed as follows:
Out of 52 weeks, 12 weeks the insured works + 12 weeks before the ISO exception begins = 24 weeks. The 24 weeks of downtime is multiplied by .02 to give .48 reduction. The reduction is a multiple by the state limitation and becomes $24,000 x .48 = $11,520. The insured would report a payroll of only $11,520 instead of the annual limitation of $24,000.
Contractors with employees who have just started out in the contractor industry may include a tool purchase plan as part of the hiring process. The employer will require that the employees have certain tools of their own and help them buy the tools over the course of employment. In addition, some employees own mobile equipment that will be useful to the employer. The employee is then paid for his or her labor plus the cost of the equipment. This cost of equipment usage is considered with the payroll.
Contractors also must travel from job to job. While many can stay in one place, there are times when travel is a requirement and cost is less to stay on location than travel back and forth. The cost of renting a home or other lodging must be included in the payroll for an employee. If the home is owned by the insured and the insured provides the home free of charge to the employee, the fair rental value of that home must be considered payroll.
The away-from-home employee may be given additional incentives to make life more pleasant. All of these incentives are considered to be part of the remuneration for that employee. This is not limited to food alone but could include store certificates, merchandise and more.
Mobile equipment operators and their helpers' payrolls must be included. If the equipment is hired and the breakdown between equipment and payroll is not known, then one-third of the hire of the equipment is used.
Many contractors have found that leasing employees can be more attractive than hiring employees. This arrangement can be helpful to all parties due to the seasonal nature of the operations. When this direction is chosen, the insured has two options for showing payroll. First, the leased employees can be shown as the same as a comparable employee on the insured payroll. The second option is to use 100% of the total cost of the contract for the leased employees. However if the contract is broken down to show the payroll for a special employee, that payroll may be used.
An important item for any firm that uses leasing firms is that the employee fee is considered remuneration and must be included in the payroll.
Next month we will explore the proper classification and the important discussion: When does a subcontractor become an employee? *
The author
Linda D. Ferguson, CPCU, has 30 years of underwriting experience with national commercial lines carriers. She now operates a consulting business, Pleasant Street Consulting Company, in West Union, Ohio.