Workers Compensation Insurance Audits

A work comp audit is the examination of the books or records of a policyholder (insured) to determine the accuracy of the estimated policy premium. The actual premium bases and exposure are reconciled after policy expiration against the estimates used to establish the actual earned premium for the policy.  A year-end final audit is really a verification of the exposure of a policyholder to determine the final premium to be charged since the original quote was based on estimated payroll only. 

It is worth noting that Pay As You Go Workers Compensation coverage helps reduce audit exposure because it is based on actual payroll verses estimated payroll.

Audits are always conducted after each policy period ends or expires.  After the audit has been completed the carrier will send a Final Audit Statement to the policy holder.  This statement will indicate if any additional premium an insured owes or any credits to be received based on payroll adjustments by the auditor conducting the year-end audit.

Records you need to have available for Work Comp Audits:

When preparing for your workers compensation audit you need to make available to the auditor only those items they ask for. Don't give them or volunteer more information than they ask for. Remember, the quicker an auditor can finish his job and move onto another audit, the better it is for you and for them. Here's some of the things you employers need for a smooth premium audit:

• Payroll Records:

  • Payroll journal and summary.

  • Your check book if its the only way you keep records.

  • Federal Tax Reports - 941's that cover the audit period.

  • State Unemployment reports and Individual Earnings Records.

  • All overtime payroll break outs.

• Employee Records:

  • Include a detailed explanation of the job duties of each employee if available.

  • Hours, days, and weeks worked annually

• Any cash disbursements or payments:

  • Payments to subcontractors

  • Materials

  • Casual labor

• Certificates of Insurance:

  • For all subcontractors used during the term.

  • For any independent contractors.

• A detailed description of your business operations.

• NCCI Mod Worksheet if available or applicable to verify the experience mod used for the audit.

Types of Workers Compensation Audits performed:

There are two types of workers compensation audits performed. A physical audit and A voluntary audit. Whether an insurance company performs a physical or voluntary workers compensation audit will depend upon the type and nature of your business operations and the size of the premium. The more complicated business or policy exposure will usually require a physical audit

The Physical Workers Compensation Audit

This type of audit is performed at your place of business within 60 days after the expiration of your workers compensation policy. The auditor will notify you by mail and schedule the audit appointment.  Keep in mind that the auditor is on a time schedule. Most insurance carriers require them to return the complete audit within a 30 day time period.  If the audit is not completed within the time frame given, the auditor must return it to the insurance company marked delinquent.   This may result in a larger than necessary audit bill by the carrier.

The Voluntary Workers Compensation Audit

Within 30 days of the expiration of your policy you will receive a voluntary audit form from the insurance company in the mail. This form should be completed and returned to the insurance company as soon as possible. The form usually shows the classifications as shown on your policy and asks for your actual payroll exposures for each class. These forms are basic but can be confusing for someone who has not complete one before. If you have any questions about these forms it is in your best interest to contact the insurance company or agent and ask them how to complete the form.  The information you send back is what they will use for your audited payroll. So it is very important that you understand how the information you send back will affect the audit outcome.

It is very important that the audit be completed and submitted to the insurance company within a timely manner. If a physical audit, do all within reason to comply with requests the auditor may make.  If you've been asked to complete a voluntary audit do your best to fully complete the forms and ask for help if you need clarification on any item being requested.

Workers Compensation Premium Audit Tips:

• Separate and summarize employee overtime paid to employees by job classification or or class code.

  • Premium on overtime wages are charged at a reduced rate.

• Get current certificates of insurance for all subcontractors you paid during the policy period.

  • Make sure the certificate proves the subcontractor had work comp during the time of service.

  • If you can't provide a work comp certificate for the sub you will be charged premium on that class code.

• It is somewhat common for  a single employee's payroll to be divided over different class codes unless the employee works in a clerical or sales position. Proper records must be kept in dollar amounts which reflect work actually performed before a multi-class separation can be applied. This is called Payroll Separation. Without adequate records, the entire payroll for the employee will be placed in the highest rated classification and payroll separation will not be applied.

• Make the Auditors job easy.

  • Be prepared and have complete and accurate records available for review.

  • Do not volunteer too much information.  Just have straightforward and direct answers for the auditor's questions.

  • Make sure an owner or a person knowledgeable about the business is available to meet with the Auditor.

It is always a good idea to engage the auditor during the audit process and review any worksheets they prepare.  Do not sign off on any incomplete audit worksheets.  Ask questions about anything that may not make sense to you.  Finally, ask to make a copy of the audit worksheet they prepare.  It is not uncommon for auditors to make mistakes on the audit worksheets.  Remember, they work for the carrier and most mistakes are in favor of the carrier.

Audits are a contractual obligation within the workers compensation insurance policy.  It is common practice for carriers to add an additional 25% to all estimated payroll figures when businesses fail to comply during the audit process.  It is in your best interest to have a reasonable understanding of your work comp class codes, payroll, and subcontractor payments prior to any physical or voluntary audit.

Frequently asked questions regarding workers' compensation audits:

What Records do I need for a premium audit?

Common records include payroll and disbursement journals, general ledger, cash receipt journals, checkbooks, 941's, state unemployment wage reports, 1099's, 1040c (Schedule C), 1120, 1065, etc.

Are holiday, vacation, sick time wages and housing allowances included in the premium calculation?

Yes.  There are included as wages in the calculation.

How are overtime wages handled in the audit premium calculation?

O.T. Wages are included as payroll at the employees regular pay rate if they can be separated via a report.  Overtime wages are included at two-thirds of the amount paid.  * Not applicable in every state.

When can an employee's payroll be split among two or more class codes?

Employee payroll should be assigned to the basic classification that best describes the business of the employer.  It is the overall business that is classified as opposed to each employee or job duty.  However, the payroll for an employee can be split if two or more classifications can be applied to your business/employee, and you maintain a payroll record breakdown for the employee by job classification.  The following class codes can't be split for one employee:  8810- clerical, 8742- sales or messenger, 8748- auto sales person, and 8871- clerical telecommuter.  Estimated or percentage allocation of payroll is not acceptable.

Can corporate officers be excluded from coverage?

Some states permit officers to elect exclude from coverage.  See state specific information page.  Any required exclusion forms need to be signed and given to the carrier prior to policy inception.

What if my legal status or ownership changes during the policy term?

This will more than likely impact your work comp coverage and premium.  You will likely need to complete an ERM-14 Form to determine the impact.  Advise your agent or carrier immediately.

What qualifies as an independent contractor?

Generally speaking, it is one who makes a business of providing a service for a predetermined price to several different customers, under his or her own terms.  Maintain copies of contracts and invoices showing a breakdown of labor and materials.  Keep copies of any business cards and certificates.

Will I be charged premium for independent Contractors (subcontractors)?

You will be liable for premium unless you have valid certificates of workers' compensation insurance.  Always ask for and get a valid work comp certificate prior to them starting a job.

What is a valid certificate of workers' compensation insurance?

A valid certificate or "cert" identifies a policy which is effective during your same policy period.  It shows the independent contractor or subcontractor as the "insured" and shows your company as the Certificate Holder.

Definitions:

Premiums Earned

1. Portion of written premiums that are applicable to the expired portion of the time for which the insurance was in effect.

2. When used as an accounting term, "premiums earned" describes the premiums written during a period plus the unearned premiums at the beginning of the period less the unearned premiums at the end of the period.

Payroll

The wages paid by an employer in a given state and work comp classification code.  In Workers Compensation, an insured's exposure to hazard is usually measured in terms of its payroll.  Premium is calculated per $100.00 in wages.

Payroll Audit

An examination of the insured's payroll records by a representative of the insurer to determine the premium due on a policy for which payroll is the basis.

Premium Discount

Refers to a percentage discount based on the size of the computed premium, with larger premiums subject to larger percentage discounts, recognizing relatively less insurer expense in issuing and servicing large policies. The discount is designed to distribute the cost of Workers Compensation insurance equitably among risks of all sizes, so that larger policies pay no more than their fair share of loss costs and insurance company expenses.

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