What is payroll segregation?
Payroll segregation is a payroll reporting process that allows employers to divide (or segregate) an employee’s payroll if that employee performs work in more than one job classification (class code). Since different class codes are often billed at different rates, this has the potential to save premium dollars on your workers’ compensation policy.
Payroll segregation may also be applied to an entire business. For example, if a manufacturing business also purchases and resells products, it is possible to segregate the payroll of employees working in the resale and distribution part of the business from the employees working in the manufacturing part of the business.
Are there any jobs that don’t qualify for payroll segregation?
Yes. Clerical (8810) and Outside Sales (8742) are not allowed to be included in payroll segregation. These classifications are considered the standard exceptions and are already billed at the lowest rates.
Dividing a clerical or outside sales payroll with any other class is prohibited.
Which employees qualify for the clerical or outside sales class codes?
Employees whose exclusive duties are office-related, including phones, computer input, drafting and bookkeeping, qualify as clerical.
Employees who spend most of their time in outside sales and collections qualify for the outside sales classification. These sales employees must spend the balance of their time in the office performing only sales- or office-related duties as outlined above.
Another requirement of these classifications is that the employees must be physically separated from the other employees. Physical separation methods may include partitions, walls, railings or counters.
In addition, there are certain industries that do not qualify for payroll segregation.
What is the correct payroll reporting procedure for segregating payroll?
Employers must maintain detailed payroll records in order to segregate payroll. These records must divide the hours an employee works in each job classification and must also include the hourly wage paid for those hours including overtime (see sample weekly time record on back for reference). Only actual hours and wages qualify; percentage of time worked does not. Timecards alone do not qualify as sufficient documentation; they must be accompanied by your payroll summary as described above.
Are there any payments to employees that can be deducted for payroll reporting?
Yes. Certain payments can be deducted including employee contributions to a section 125 cafeteria plan, tips and severance pay.
The excess payment for overtime can also be deducted. This means if an employee earned half-time or double-time, only the straight-time portion of the hourly wage is included for premium calculation purposes. This means if an employee earns $10 per hour for the first 40 hours and $15 for overtime, then only the $10 per hour wage will be included in the premium calculation.
D U T I I IE S
Are only wages included, or are there other types of employee remuneration that need to be reported?
In addition to wages, employers must report other payments including:
• Bonuses
• Auto
• Full market value for lodging provided if in lieu of wages, or the classification wording specifically includes lodging
• 401k employee contributions pay
• Vacation
• Holiday pay pay
How do I segregate between wage-level classification codes if I pay my employees on a piecework or commission basis?
If actual hours worked per class code are not available, Zenith’s auditors must assume 40 hours per week, or 8 hours per day, to calculate the regular hourly rate for each pay period. This requires that timecards or time-record books record the workday start time, end time and lunch breaks to allow the lower-rated wage-level classification.
Are officers of the company excluded from coverage?
In order for officers to be excluded from coverage, the following criteria must be met:
• The officer must own stock
• All stock for the corporation must be privately held by officers and directors
• An exclusion endorsement listing all officers must be included in the policy
Are there payroll limitations for covered officers and partners?
Yes. There are annual payroll limitations and they are subject to change on an annual basis. Call Zenith’s premium audit department for current limitations.

Do I have to pay workers’ compensation insurance for contract labor?
It is very important to establish whether someone working for your company is a contractor or an employee. In order to verify that someone is working as a contractor, they must be properly licensed and carry their own workers’ compensation insurance. If the contractor does not have the required license, then that person may be considered an employee and be covered under your workers’ compensation policy.
You may validate licensing status for the following industries:
• Construction contractors – Contractor’s State License Board at http://www.cslb.ca.gov
• Truckers – DMV at http://www.dmv.ca.gov
• Farm labor contractors – Department of Industrial Relations at http://www.dir.ca.gov
For other types of businesses, contact your local city or county recorder’s office or contact the Zenith premium audit department for additional information.
Is there a way to avoid major premium differences at the end of the year?
The best way to avoid premium differences at the end of the year is to learn the basic rules and ask questions. Reading through and understanding this brochure is a good start. If you are on payroll reporting, make sure that you report payroll accurately by class code.
If you are on stipulated payments, be certain the estimated payroll shown in your policy is reflective of your actual payroll.
In addition, you should match the company’s gross payroll to the payroll sums in your quarterly state and federal tax reports. To do this, take all wages reported and add them to the total deductions taken for premium audit purposes; the total should match those reported for tax purposes. If there is a discrepancy, the higher figure is used and the difference is charged at the highest rated classification possible.
REMUNERATION – Payroll
Includes, but is not limited to, gross wages, salaries, commissions, bonuses, vacation, holiday and sick pay, overtime, and the market value of gifts and substitutes for money.
CLASSIFICATIONS – Index of Job Codes
Most classifications carry rates which are multiplied by each
$100 of remuneration earned by covered employees to determine premium.
OVERTIME – Remuneration over straight time
Only straight-time payrolls are used to determine workers’ compensation premiums. To qualify for credit, overtime must be totaled and summarized by classification.
INDEPENDENT CONTRACTOR – A self-employed individual
Independent contractors are not employees. Persons engaging independent contractors are not employers, but principals.
Generally, an independent contractor renders a service for a specified recompense for a specified result, is under the control of the principal as to the result of the work only, and is not under the control of the principal as to the means by which such result is accomplished. Additional criteria may include specified time or work place, tools, materials or vehicles provided, salary deductions for taxes, whether or not they have their own business license, or regularly do similar work for others.
?
Call Zenith’s customer service for assistance with your payroll segregation questions.
800-440-5020
WEEK ENDING 8/14/16
Dan Smith
Bob Baker
Ana Lopez
Class
Code
5645-1
Reg
Rate
OT
Rate
$12.00
$18.00
5205-1 $24.50
$36.75
5201-1 $12.00
$19.00
MON
3.00
0.50
TUE WED
3.00
THUR FRI SAT
3.00
SUN TOTAL
Reg OT Reg OT Reg OT Reg OT Reg OT Reg OT Reg OT Reg OT Reg OT
6.00 3.50 $72.00
$63.00
5.00
8.00
3.00
8.00
8.00 1.00
32.00
1.00
$384.00
$18.00
5645-1
5205-1
5201-1
$14.00
$24.00
$21.00
$35.00
$13.00
$19.50
3.00
5645-1
5205-1
$19.00
$25.00
$28.50
$37.50
5201-1 $16.00
$24.00
5.00
5.00
3.00
7.50
5.00
3.00
8.00
8.00
8.00
1.00
8.00
2.00
8.00
0.50
3.00
5.00
8.00
0.50
$112.00
$10.50
31.50
4.00
5.00
27.00
8.50
$409.50
$95.00
$78.00
$675.00 $318.75
WAGES
Tips 125
$5.50
Net Total
$119.50
$396.00
$8.75
$127.75
$461.50
$7.35
$102.35
$887.50
To calculate the Total Net Wages for each row:
(A) Multiply the employee’s total regular hours worked for each class code times their regular pay rate.
(B) Multiply the employee’s total overtime hours worked for each class code times their overtime pay rate, and then multiply this total figure by 2/3 (because workers’ comp law permits billing only at the regular rate).
(C) Add the totals from (A) and (B) as well as any tips and 125 Plan contributions.
Net Wages for each Class Code
Code No. 5645-1 $349.60
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