The Hidden Costs of Misclassified Workers: How to Take Control of Your Premiums

When I first became a business owner, managing Workers' Compensation felt like navigating a maze. It was a necessary expense, but one I didn’t fully understand. For trade businesses like mine, that had multiple labor codes for various roles, the potential for overpaying is significant. Misclassifications and inaccurate reporting can lead to inflated premiums and surprise audit bills that disrupt cash flow.

Managing Workers' Compensation is more than just a compliance requirement; it’s an opportunity to control costs and protect your business's cash flow. This proactive mindset can save thousands of dollars annually while avoiding disruptive audit surprises. Failing to take control of your Workers’ Comp classifications and payroll reporting can result in significant financial strain. Passive management often leads to inflated premiums, unexpected audit findings, and lost opportunities to reinvest in your business. A lack of attention to detail here can quietly erode your profitability over time.

In the early days at Frontline Property Services, my insurer projected our monthly Workers’ Comp premium at $1,600. That was the number they calculated based on averages and assumptions and not our actual payroll. When we switched to monthly reporting and started filing with accurate payroll data, that projection dropped significantly. We began averaging $400 to $600 per month. That’s a difference of nearly $1,000 per month and money I could reinvest into the growing business. The audit findings, which once caused headaches, became minimal, leaving our operating cash flow intact.

Misclassifications are another common issue. For instance, project managers are mistakenly included in mitigation or carpentry labor codes, and clerical/administrative employees are misclassified under production roles. These mistakes cost companies money until you dig into the details and correct them. It’s also worth noting that owners of companies can be exempt from Workers’ Comp coverage, depending on your state’s regulations, which can lead to additional savings if applied correctly.

For example, in restoration, technicians may be misclassified under higher-risk asbestos abetment roles or HVAC installers might be grouped with general laborers when their work falls under a less expensive code. These small missteps, when scaled across multiple employees, can add up to tens of thousands of dollars in unnecessary costs.

It’s easy for insurers to lump employees into higher-cost codes by default, especially in trade businesses where roles often overlap. Do you know how many labor codes apply to your employees? For us, understanding the specifics of each role—whether someone was doing trim carpentry versus framing, or clerical work versus field tasks—was crucial. Once we started paying attention to these distinctions, the savings were immediate and substantial.

If you’re looking to avoid overpaying, here are a few steps you can take:

Step 1: File your Workers’ Comp monthly and ensure it reflects your actual payroll. This prevents insurers from using inflated projections that don’t match your business’s reality. Also, if you are in growth mode, you can make accurate payments based on your labor and not have a hefty bill after the audit.

Step 2. Review your employee classifications regularly. Understand which tasks fall under specific labor codes and ensure your employees are categorized correctly.

Step 3. Keep detailed records of job descriptions and tasks performed. This documentation is invaluable during audits and helps justify your classifications.

A 2021 industry study found that 30% of businesses overpay on Workers’ Comp premiums due to misclassifications and reporting errors. Imagine the impact of reclaiming even a fraction of those costs—for a company with 10 employees, this could amount to $20,000 or more annually. Switching to monthly reporting was a game-changer for my business. It not only reduced our premiums but also gave us more control over our finances. Imagine finding out that your Workers’ Comp or General Liability rates could drop by 30%, and that you might even recover overpaid premiums from the past three years. That’s real money back into your business. This process isn’t just about saving money today; it’s about protecting your cash flow and preventing future surprises.

Ask yourself:

• How confident are you that your Workers’ Comp insurer has properly classified your employees?
• Have you reviewed your classifications and payroll reporting practices recently?
• How often do you review your payroll against the labor codes your insurer uses?
• Could you reinvest thousands of dollars into training, equipment, or growth if you corrected misclassifications?

As a business owner, I’ve learned these lessons firsthand. If you’ve had similar experiences or found success in optimizing your Workers’ Comp processes, I’d love to hear your story. Let’s connect and follow me on LinkedIn at https://www.dhirubhai.net/in/scottmaysura/ ?to join in a conversation and share insights. I love to connect with others, hear their challenges, and be a resource.?

Author:

Scott Maysura is a seasoned business consultant and advisor with over 20 years of experience in the restoration and services industry. Beyond owning and operating restoration companies, Scott successfully grew a plumbing and HVAC startup, providing him with firsthand knowledge of the challenges and opportunities faced by trade businesses.

Scott works closely with clients to drive growth and operational excellence by developing and implementing strategic plans, systems, and processes. His expertise includes operations management, commercial large-loss experience, and leadership development. With a Bachelor’s degree in Psychology, a diploma in Small Business Management, and recognition as a Triple Master Restorer, Scott combines a unique blend of business acumen and industry-specific insights.

Scott is passionate about helping business owners simplify complexity, optimize their operations, and achieve sustainable success. Connect with Scott at [email protected].