Workers compensation insurance, which is mandated in most states when you have employees, is based or rated on your company’s payroll and is an auditable policy. In this post, we discuss the workers comp audit process and how to be compliant.
At the beginning of the policy period the payrolls you estimate to be true for the next 12 months are broken into the proper classification codes and the premium you pay is based on that estimate. After the policy year, you’ll get a notice from the insurance company indicating that they will perform an audit to determine the actual rating exposures – meaning payroll by class code.
That audit will generally take place within about 30 days from the close of your policy.
An audit can be physical – meaning an auditor will physically come to your business and view your books and records to calculate the actual payrolls by class code – or,
The audit can be voluntary, meaning the auditor will send you a form to complete and provide the necessary documentation to prove the actual exposures.
Once the auditor or audit department at the insurance company has all their data they will calculate your actual payroll exposures and compare them to the estimates used at the beginning of the year. If the actual is higher than the estimate you’ll pay an additional premium, if it’s lower than the estimated exposures you’ll get a credit or refund.
Why is there a workers comp audit process?
Well, a lot of things can happen during a policy year. Payrolls can go up or down, you can add class codes, change operations, cease certain operations or locations, and more. The estimates are just that – estimates and the insurance company charges you the premium based on the actual exposures.
How can you avoid getting slammed at audit?
I’ve heard prospective clients complain loudly to me that they can’t take always getting slammed by higher audit premiums every year.
Listen, this shouldn’t happen and it’s easy to fix. If your payrolls are variable and your worker’s comp is expensive – usually this describes contractors, manufacturers, and wholesale distributors who experience ups and downs in their business – then you need to have regular check-in calls with your broker. If your broker doesn’t bring this up then bring it up to them and suggest that you schedule calls every 4 months or at least once at the six-month mark.
Review the payrolls and sales – where are you compared to your estimates? Does a mid-term adjustment make sense so you can spread the additional premium over the remaining installments? Or do you want to hold onto that cash and just bank it and pay the additional premium at audit?
Another way to avoid large audit bills is to use a pay-as-you-go system. The good news is that you pay your worker’s comp premium based on the actual payroll during the year so there are no big audit surprises. The bad news is that it can be an extra step for your accounting and bookkeeping department.
So, getting back to the audits,
Let’s talk about compliance.
Whether your worker’s comp audit is physical or voluntary doesn’t matter. For an audit to go smoothly, be prepared. That means having all the requested documents and records the auditor wants for the proper time frames and they are properly coordinated for your class codes. If they want copies of them, have those copies readily available – take a highlighter to emphasize the important summaries, class codes, and form numbers. In short, do everything you can to make the auditor’s job easy and things will go smoothly.
Finally, I want to put special emphasis on companies that use 1099 independent contractors. You will need certificates of insurance that show worker’s compensation coverage for all sub-contractors you hire for the same time frame as your policy. If those certs don’t show workers comp coverage, or if there’s a cert missing the auditor will take the entire amount you paid that sub and insert it into the worker’s comp audit as payroll and charge you accordingly. For example, you hired an electrician to install lighting in a project and the total cost was $100,000 including materials which you estimated at half the job cost – you’ll pay the full $100,000 of payroll times the electrician’s workers comp rate if you don’t have a cert for that electrician.
Yes, it can be very expensive.
If you want a copy of our 10 point audit checklist just let me know and I’ll send you a copy. This guide will help you know that you’re staying compliant.
Okay, that’s compliance.
What happens if you don’t comply with a workers comp audit? Or just refuse to do an audit?
Insurance companies are given a lot of leeway with the insurance departments across the country regarding how they handle clients who refuse to perform an audit or provide them all the data they need to complete an audit. This includes issuing an “estimated audit” which is typically 2 times the premium you paid last year for your worker’s comp policy. They can threaten the cancellation of the existing policy in some states. If the policy stays in effect, not only will they bill you for the estimated audit, but often the insurer will also revise the payrolls of the current policy in effect at two times and charge you for that.
The bottom line is that you don’t want to go there. Comply with the worker’s comp audit requirements and if it results in a large additional premium most insurers will break that up into installments to make it more affordable.
Now, what happens if the actual audit is incorrect in your opinion?
Then work with your broker to point out the differences or inaccuracies of the auditor’s work. But, this is not a negotiating ploy. I’ve had clients believe that they can rework the numbers in their favor but provide insufficient documentation and it doesn’t fly. I’ve also had clients with large additional premiums come back to the audit department and say something like, “look this $100,000 additional premium is outrageous, but I’m prepared to pay you $50,000 today to be done with it”
Sorry, this doesn’t work. Insurance companies aren’t going to play that game, because they don’t have to. They know that the policy is a contract and what you signed up for is what they should be paid for. They’ve also got many lawyers and won’t hesitate to bill you the estimated audit, cancel your policy, put you into collections, and hound you until the bill is paid.
That may sound a little unforgiving, but I think it’s important to be realistic about this and give you my experiences when it comes to worker’s comp audits.
Will mistakes happen? Yes.
Do auditors sometimes move employees to different classifications or new classifications without telling you? Yes.
Is the process a bit overwhelming? Sure.
But the bottom line is that you need an advocate that knows the ins and outs of worker’s compensation and workers comp audits so you don’t pay more than you’re legally obligated to. And, more importantly, is that his expert helps you set up your policy the right way at the beginning of the policy term and can help guide you during the policy year.
