Bonus Rule Law and the Tennessee Exception
Below is the Tennessee law which prohibits the including of bonuses in the premium calculation in almost all cases.
Tennessee Code Ann. §50-6-402. Classification of risks and premiums - Filing - Approval
(a) In determining classifications of risks and premiums relating thereto, the insurer may include allowances of any character made to any employee, only when such allowances are in lieu of wages, and are specified as part of the wage contract.
Many companies refuse to recognize this exception for a variety of reasons. The most common reason is that they do not know it exists in Tennessee and the rules are different in other states. The key to the law and the Tennessee exception is that both parts must be true. Therefore, the bonus must be both 1) in lieu of wages and 2) specified in the wage contract.
Below is text from the State Rule Exception from the NCCI manual which says a company cannot include bonuses in the calculation of WC premiums in Tennessee.
State Rule Exception
RULE 2—PREMIUM BASIS AND PAYROLL ALLOCATION
Effective 01 Jul 2001
A. PREMIUM BASIS
Change Rule 2-A as follows:
Premium is calculated on the basis of the total payroll paid or payable by the insured for services of employees covered by the policy.
The application of this rule is subject to Tennessee Code Annotated, § 50-6-402(a). This Section provides in part that, in determining premium, the insurer may include allowances of any character made to any employee, only when such allowances are in lieu of wages and are specified as part of the wage contract.
• Premium for domestic worker classifications is calculated on a per capita basis instead of payroll. Domestic workers are employees who perform household duties. Refer to Rule 3-C.
• A per capita classification uses the number of workers rather than payroll to measure exposure.
Effective 01 Mar 2008
Change Rule 2-B-1 as follows:
c. Bonuses including stock bonus plans, only:
• When paid in lieu of wages, and
• Specified as a part of the wage contract.
e. Pay for holidays, vacations, or periods of sickness. (Refer to Rule 2-G-3 for allocation of payroll for employees subject to more than one classification code; Refer to Tennessee State Special Rule 2-B-2-n for an exception for risks classified to Code 1016—Coal Mining—NOC.)
Add the following to Rule 2-B-2:
n. Pay for vacation for operations assigned to Code 1016—Coal Mining—NOC.
Every so often Tennessee’s Bonus Rule is questioned by agents and auditors alike. The confusion arises because Tennessee has a different Rule from other jurisdictions. Tennessee’s rule is an EXCEPTION that controls how bonuses are treated for premium calculation purposes. The Bonus Rule as it applies in Tennessee says that premium is to be calculated on the basis of the total payroll paid by the insured for services of “Employees” and shall only include bonuses when the bonus is paid in lieu of wages and specified as part of the wage contract.
Frequently members ask whether corporate officers who receive bonuses are treated differently under the rules. The short answer is “No.” First, look at NCCI Rule C1. Rule C1 clearly states that state law will control over how corporate officers are treated. Tennessee law in T.C.A. 50-6-102 defines corporate officers as Employees. Finally, the Executive Officer Rule states that the premium for executive officers is based upon their total payroll subject to the minimums and maximums. It is clear that bonuses should NOT be included in determining premium.
NCCI has issued a clarification at the request of the INSURORS of Tennessee regarding the Tennessee Special Rule as it relates to bonuses. The memorandum states, "Bonuses should not be included in the premium determination process." It is referring to situations when the bonuses are not paid in lieu of wages and not specified as part of the wage contract. Notice of the clarification has been sent to all companies.
From BULLETIN VOL. 2, January 21, 1991