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B_L_Inc_Construction_PO_04doc - STATE OF OREGON by gabyion


									 1                          BEFORE THE HEARING OFFICER PANEL
 2                                  STATE OF OREGON
 3                                       for the
 5                                 INSURANCE DIVISION


 7   In the Matter of the Final Premium Audit of         )                Case No. INS 00-11-006
 8                                                       )
 9   B & L INC. CONSTRUCTION,                            )                PROPOSED ORDER
10   An Oregon corporation.                              )


12          This workers’ compensation premium audit appeal was first heard by Administrative Law

13   Judge Ella D. Johnson on March 14, 2001 and continued to September 19, 20001. The record closed

14   following receipt of petitioner’s Exhibits 19 and 20 on September 24, 2001. William H. Replogle,

15   Attorney at Law represented petitioning employer B & L Inc. Construction (B & L or petitioner). David

16   B. Hatton, Assistant Attorney General, represented respondent insurer SAIF Corporation (SAIF).

17   Respondent rating bureau National Council on Compensation Insurance (NCCI) waived appearance at

18   the hearing. Lonnie Knodel (Knodel) and Rebecca Willey (Willey) testified on behalf of petitioner.

19   SAIF called Lonnie Johansen (Johansen), De Anne Hoyt (Hoyt) and Kathy Sim (Sim) as witnesses.

20          Petitioner appeals the final premium audit billing for the period of July 1, 1999 through June

21   30, 2000 (audit period). After review and consideration of the entire record in this matter, I now issue

22   this Proposed Order.

23                                                 JURISDICTION

24          Petitioner’s hearing request was filed within 60 days of receiving the billing as required by ORS

25   737.505 (4). The Department of Consumer and Business Services (department) has jurisdiction to

26   consider this appeal.

27   ////

     Page 1 – PROPOSED ORDER /B & L INC. CONSTUCTION, INS 00-11-006
 1                                                       ISSUES

 2   1) Whether the insurer incorrectly reclassified payroll to Class Code 5213 (Concrete Construction

 3      NOC) and 5651 (Carpentry – Dwellings – Three Stories or Less) from the reported codes;

 4   2) Whether the insurer erred in concluding that the employer failed to maintain verifiable payroll

 5      records.

 6                                            EVIDENTIARY RULING

 7          The record consists of petitioner’s Exhibit 1 through 20 and insurer’s Exhibits 101 through 120,

 8   which were admitted into the record without objection.

 9                                               OFFICIAL NOTICE

10          As noted at hearing, I take official notice of the Basic Manual of Workers’ Compensation and

11   Employers Liability Insurance (Basic Manual). The Basic Manual is a publication of NCCI and

12   includes the rules insurers follow to arrive at the correct class code for a business and the official

13   description for all class codes filed with the department. The Basic Manual is a required part of every

14   insurer’s audit procedure guide. OAR 836-43-115 (1) (a). I also take official notice of the Scopes of

15   Basic Manual Classifications (Scopes Manual), another NCCI publication. The Scopes Manual

16   consists of a numerical listing of class codes with descriptive terminology and examples of types of

17   business activities that have been included in class codes in the past.

18                                               FINDINGS OF FACT

19          NCCI is the licensed rating bureau for workers’ compensation in Oregon. NCCI also

20   administers the Oregon Workers’ Compensation Insurance Plan (assigned risk plan). When B & L first

21   applied for coverage with the assigned risk plan on June 30, 1993, it was assigned Class Codes 5645

22   (Carpentry – Detached One or Two Family Dwellings), 5651 (Roofing – All Kinds & Drivers), 5215

23   (Concrete Work - Private Residences), and 8810 (Office Clerical). Codes 5651, 5645 and 5215 were

     Page 2 – PROPOSED ORDER /B & L INC. CONSTUCTION, INS 00-11-006
 1   assigned on an “if any” basis.1 SAIF sent B & L a description of the class codes assigned to the policy

 2   and a copy of the Workers’ Compensation Basics Manual, which explained how to keep verifiable time

 3   records. At all relevant times herein, SAIF provided workers’ compensation insurance coverage to B &

 4   L through the assigned risk plan. (Exs. 101-103, 120).

 5           B & L was incorporated in Oregon in March 1992 and is engaged in the business of new

 6   commercial and residential construction and remodeling. B & L has a crew of nine to fifteen

 7   construction workers. Lonnie Knodle (Knodle) is the secretary and part-owner of the corporation. He

 8   owns 45 percent of the corporation and his brother Darrell Knodle owns 10 percent; Mark Bennett also

 9   owns 45 percent of B & L. When the corporation was first formed, the owners specialized in building

10   custom homes and performed all of the work. In 1998, B & L began hiring employees and the business

11   grew rapidly and expanded the types of work performed. Knodle and office manager Rebecca Willey

12   were responsible for keeping track of the payroll and how much time was spent on each job.

13   (Testimony of Knodle).

14           On August 10, 1993 and August 9, 1999, SAIF provided a description of the applicable class

15   codes. SAIF also provided a description of verifiable time records to B & L, stating:

16                  “Verifiable time records are documents completed by either the employee or
17                  an on-site supervisor on each workday which separate the actual hours spent
18                  on each classification. * * * The record must include a brief description of the
19                  type of work and must account for the total hours in each workday, not just
20                  those spent in the lower-rated classification.” (Exs. 102, 105).
22           On August 9, 1999, SAIF added five additional class codes to B & L’s policy: Codes 8227

23   (Contractor’s Permanent Yard), 5403 (Carpentry Commercial), 5213 (Concrete Construction NOC),

24   5221 (Concrete Work – Floor/Driveway/ Yards/Walks), and 9519 (Household Appliances –Electrical

      Codes assigned on a “if any” basis are assigned to allow employers to report payroll should they engage in any work
     described by the code and report any payroll in the proper code.
     Page 3 – PROPOSED ORDER /B & L INC. CONSTUCTION, INS 00-11-006
 1   Installation, Service or Repair & Drivers). The new classifications were assigned on an “if any” basis.

 2   (Exs. 7, 105).

 3          The audit for the period of July 1, 1998 through June 30, 1999 (previous audit period)

 4   concluded that B & L had failed to maintain verifiable time records. Prior to the previous audit period,

 5   Knodle was unaware that the corporation was required to keep verifiable time records in order to split

 6   payroll into the various class codes assigned to the policy. He did not read the Workers’ Compensation

 7   Manual which had been sent to the corporation in 1993. (Exs. 107, 114, 115 and Knodle’s testimony).

 8          The time cards for the previous audit period showed only the job name or number and did not

 9   divide the employees’ wages or describe the work performed. The audit moved all payroll reported in

10   Codes 5215 and all unreported wages to the highest-rated class code, Code 5645. On March 28, 2000,

11   SAIF allowed B & L to re-summarize the records based on a combination of time card and contract

12   information. SAIF adjusted the premium amount due by $12,011.85 with the warning that B & L “will

13   need to maintain better records to allow for payroll division in the future.” (Exs. 107, 114, 115).

14          On August 23, 1999, SAIF added three additional codes to B & L’s policy: Codes 5102 (Door,

15   Door Frame or Sash Erection – Metal or Metal Covered), 5481 (Plastering NOC & Drivers), and 5491

16   (Paper Hanging & Drivers). The new class codes were assigned on an “if any” basis. SAIF once again

17   provided the same description of verifiable time records to B & L. (Exs. 9, 109, 111).

18          During the audit period, B & L worked on residential, commercial and multi-family projects.

19   The employees performed a variety of activities which are properly classified in various class codes.

20   Many of the time records for the audit period were incomplete. (Ex. 117). Some time records did not

21   have the date or week the work was performed; most indicated the job but had no description of the

22   activities performed or a one word description such as “finish” or “shop”; most had class codes

23   assigned but no description confirming whether the code assigned was correct. (See e.g. Ex. 1-1

     Page 4 – PROPOSED ORDER /B & L INC. CONSTUCTION, INS 00-11-006
 1   through 1-117). Some of the records contained entries which should have been allocated to higher rated

 2   class codes. (See e.g. Exs. 1-95, 1-122).

 3          The workers filled out the time cards daily and the supervisors fill out daily reports on the jobs.

 4   Knodle was responsible for entering the class codes on the time cards and he did so every Monday. B

 5   & L’s insurance agent provided Knodle with a copy of the description of the each class code assigned

 6   to the policy as set forth in the Scopes Manual. Based on his knowledge of B & L’s contracts and

 7   invoices, Knodle could determine from the time cards what type of work the employee performed even

 8   without a full description. (Knodle’s testimony).

 9          In March 2000, B & L changed the format of the employee time records to better capture the

10   information necessary for the time records to be verifiable. (Willey’s testimony). The new time cards

11   specifically requested the job location and a description of the work done. Many of the workers’

12   continued to list only the job and the hours; some continued to include one word descriptions of the

13   work performed. (See e.g. Exs. 1-122 – 1-171).

14          The audit for the audit period did not have sufficient information to tie the payroll reported in

15   the class codes to the time records. The audit moved all payroll report in Codes 5102, 5403, 5437,

16   5445, 5474, 5645, 8227 and 9519 to Code 5651 and all payroll reported in Codes 5215 and 5221 to

17   Code 5213 because the audit concluded that the time records did not accurately classify the work

18   performed. The audit found that the “class assignments were dramatically contaminated” because lower

19   rated class activities had been mingled with activities belonging in the higher rated class codes. The

20   audit, therefore, concluded that the breakdown of payroll should not be allowed. (Exs. 13, 117 and

21   testimony of Johansen and Hoyt).

22          On October 5, 2000, SAIF adjusted the final premium audit billing for the audit period resulting

23   in a credit of $2,456.65. (Exs. 13, 118). After the audit was completed, B & L generated from its

     Page 5 – PROPOSED ORDER /B & L INC. CONSTUCTION, INS 00-11-006
 1   computer a summary of the payroll records by worker for the period of November 1999 through April

 2   2000 which allocated the workers’ payroll to various class codes. (Ex. 2).

 3                                    ULTIMATE FINDINGS OF FACT

 4          B & L’s payroll records are not verifiable because they do not accurately describe the work

 5   performed and require additional explanation or interpretation to determine whether the activities were

 6   properly classified.

 7                                    OPINION AND CONCLUSIONS OF LAW

 8          The issues to be resolved here are whether the insurer: (1) incorrectly reclassified payroll to

 9   Class Code 5213 (Concrete Construction NOC) and 5651 (Carpentry – Dwellings – Three Stories or

10   Less) from the reported codes; and (2) erred in concluding that the employer failed to maintain

11   verifiable payroll records. Because B & L is the party seeking redress before the department concerning

12   its final premium audit billing, it has the burden of establishing by a preponderance of the evidence that

13   it maintained verifiable payroll records and the amounts now sought by SAIF are not owed. See Salem

14   Decorating v. Natl. Council on Comp. Ins., 116 Or App 166 (1992), rev den 315 Or 643 (1993) (in

15   premium audit cases, burden of proof is on the employer).

16              Under certain circumstances, employers in Oregon are permitted to report payroll in more

17   than one manual classification. ORS 737.310 (10). Former Rule IV-E-2 (Oregon Special pages) of the

18   Basic Manual provides in relevant part:

19                “Some employees * * * may perform duties directly related to more than one
20                classification. An example is an employee who from time to time
21                interchanges between operations subject to more than one classification.
22                When there is interchange, the remuneration of an individual may be assigned
23                to any such classifications which may be properly assigned to the employer
24                according to the rules of the classification system used by the insurer and
25                original payroll records of the employer disclose a specific allocation for each
26                such individual employee. However, if the original records do not disclose
27                the allocation of payroll, the entire payroll of the individual employee shall

     Page 6 – PROPOSED ORDER /B & L INC. CONSTUCTION, INS 00-11-006
 1               be assigned to the classification representing any part of their work which
 2               carries the highest authorized premium rate.” (Emphasis added.)
 4          Additionally, OAR 836–042–0060 defines the conditions precedent to allocation of payroll

 5   between more than one classification in relevant part:

 6               “(1) When there is an interchange of labor, the payroll of an individual
 7               employee shall be divided and allocated among the classification or
 8               classifications that may be properly assigned to the employer, provided
 9               verifiable payroll records of the employer disclose a specific allocation
10               for each such individual employee, in accordance with the standards for
11               rebilling set forth in OAR 836–043–0190 and this rule.
13                  “* * * * *
15               “(3)When verifiable payroll records are required with respect to a single
16               employer and the employer does not maintain them as required by this
17               rule, the entire payroll of the employer shall be assigned to the highest
18               rated classification exposure in accordance with the standards for billing set
19               forth in OAR 836-043-190
21               “(4) For the purpose of this rule, payroll records are verifiable if they have the
22               following characteristics:
24               “(a) The records must establish a time basis, and the time basis must be
25               hourly or part thereof, daily or part thereof, monthly or part thereof or yearly
26               or part thereof;
29                  “* * * * *
31               “(c) The records must include a description of duties performed by the
32               employee, to enable the insurer to determine correct classification
33               assignment. Records requiring additional explanation or interpretation
34               are not considered to be verifiable; and
36               “(d) The records must be supported by original entries from other records,
37               including but not limited to time cards, calendars, planners or daily logs
38               prepared by the employee or the employee's direct supervisor or manager.
39               Estimated ratios or percentages do not comply with the requirement of this
40               subsection and are not acceptable for verification. Verifiable records must be
41               summarized in the insured employer's accounting records.” (Emphasis
42               added).

     Page 7 – PROPOSED ORDER /B & L INC. CONSTUCTION, INS 00-11-006
 1          The purpose behind the requirement that a payroll record be verifiable is to enable a third party,

 2   such as an insurer, to determine if an employer is correctly reporting a divided payroll by classification.

 3   To achieve that purpose, the term “verifiable” must also mean “that the accuracy of the insured’s

 4   classification and job description technique be capable of independent confirmation by an insurer using

 5   records that are maintained by the employer and available to the insurer at the time of the audit.” Pease

 6   v. NCCI, 128 Or App 471, 475 (1994).

 7          Here, like the audit, I find that B & L’s time records do not contain the information necessary to

 8   make them verifiable records. Many of the time records for the audit period were incomplete in that

 9   they did not contain the time period within which the work was performed. While most of the time

10   cards indicated the name of the job and had class codes assigned, very few had descriptions of the

11   activities performed. Those that had descriptions were inadequate one-word descriptions such as

12   “finish” or “shop,” which would not allow a third party to confirm whether the codes assigned were

13   correct. Even after B & L changed the format, the time records failed to provide the information

14   necessary to be verifiable.

15          At hearing, B & L contended that the time records were in compliance with OAR 836–042–

16   0060. In support of its contention, B & L argued that the time records satisfied subsection (4)(a)

17   because they did establish a time basis by the week, day and hour. B & L also argued that the time

18   records were in substantial compliance with subsection (4)(c) because all of the time records either

19   contained the name of the job, the job code and/or a description of the work performed. Finally, B & L

20   argued that the time records satisfy subsection (4)(d) because they are supported by the computer

21   generated payroll summary that was available but not requested during the audit.

22          I do not find petitioner’s arguments persuasive. Many of the time cards did not contain a date of

23   the work. Additionally, Knodle acknowledged in his testimony that interpreting the time records to

24   allocate payroll to the various class codes required additional information provided to him by other
     Page 8 – PROPOSED ORDER /B & L INC. CONSTUCTION, INS 00-11-006
 1   documents. My review of the time cards confirms that the auditor would not have been able to verify

 2   the accuracy of the employer’s class code assignments without the additional information. Finally,

 3   although the payroll summary may have been available on the computer at the time of the audit, it was

 4   not provided to SAIF. Moreover, the summary does not cover the entire audit period and, given the

 5   information missing from the time records, I also question the accuracy of the summary. Consequently,

 6   I conclude that petitioner failed to meet its burden of proving that the records are verifiable.

 7   Accordingly, under OAR 836-042-0060, SAIF was entitled to move all payroll to the highest rated

 8   classifications for the audit period.

 9                                                      ORDER

10           SAIF’s premium audit billing issued to B & L for the audit period of July 1, 1999 through June

11   30, 2000 is correct and payable.

12               IT IS SO ORDERED.

13               Dated this ________ day of November 2001 at Salem, Oregon.


15                                       _______________________________________________
16                                       Ella D. Johnson, Administrative Law Judge
17                                       Hearing Officer Panel


19          NOTICE: Pursuant to ORS 183.460, the parties are entitled to file written exceptions to this
20   proposed order and to present written argument concerning those exceptions to the Director. Written
21   exceptions must be received by the Department of Consumer and Business Services within 30 days
22   following the date of service of this proposed order. Mail exceptions to:


24               Department of Consumer and Business Services
25               c/o Cindy Jones
26               Insurance Division
27               350 Winter Street NE
28               Salem, OR 97301-3883
     Page 9 – PROPOSED ORDER /B & L INC. CONSTUCTION, INS 00-11-006

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