I can’t tell you how many small employers, mostly small owner operator contractors without employees, have been caught up in a non-compliant audit situation just for not having a checking account or using a check book. Right or wrong this situation happens often and we’re going to talk about it in this blog!
Just this past week we had two small artisan contractors contact our firm asking for assistance with what they perceived as a horrible work comp audit experience. After a few questions we quickly determined they both suffered from the dreaded “you did not provide us with the required documentation” stamp of non-compliance by the auditor. What terrible thing had they done? These guys simply operate their businesses without having a checking account! Yep! That’s an almost kiss of death situation! Watch out cause the earth is about to open up and swallow all mankind!
In the first case, the contractor complied with the auditors request to meet. They sat down and the auditor began to review information provided by the contractor. Now this guy, the contractor, is the owner operator of a heating and cooling service company. He has no employees and has been in business for well over 20 years providing his services throughout his community. His workers compensation coverage was provided through his states assigned risk plan. Why the assigned risk plan? Because he’s a sole proprietor, has no employees, does not want to carry coverage on himself and sometimes works for other contractors who require him to provide a valid certificate of insurance in order to do work for them. Sound like the workings of a “ghost policy?” The assigned risk plan is his only option to secure coverage. You might (should) ask why’s that? Simply put standard insurance carriers want nothing to do with this guy! It’s not him personally but the coverage situation he presents. And there’s plenty of good reasons for that. If you’ve spent any time on this blog you’ll have run across plenty of articles about that situation (no employees, owner not included in coverage and only needs a policy to secure work.). Sorry for the diversion…so back to our contractor. This contractor is pretty much a cash and carry sort of guy and when the auditor asked him to provide his check book he told her he did not have a checking account and could not provide a check register but would answer any questions and provide her with anything she asked. At that point the auditor closed her computer up, packed up her stuff and informed the contractor that since he could not provide her with a check book that she would have to consider him non-compliant on his audit. And that’s what she did. Shortly after the meeting the contractor received a notice from the assigned risk plan informing him of his non-compliant status. Shortly after receiving that notice he received another notice that his policy was being canceled.
There you go! No check book, you’re toast!
For this contractor he is now looking at the assigned risk carrier levying an audit non-compliance surcharge to his account. In the state he operates the ANC (audit non-compliance surcharge) is 200% of the original deposit premium. Deposit premium was $1060. That means he now gets billed an additional premium charge of $2,120. What do you think about that?
Let’s move on…
In our second case, we have another contractor. Same state. Same assigned risk carrier. This guy likewise operates his small business without a checking account. Has done so for many years. Ok, I know there’s many of you out there reading this post that believe these guys operating their small business without having a checking account are just a joke. Geez! What ever happened to a small business owner in this country paying his bills and paying his taxes without causing anyone grief?
So in this case the contractor is a small excavator. He trenches water lines, helps install septic systems, works by himself and has never had an employee, statutory or otherwise. While in his business he mostly deals with the single home or property owner, he occasionally works for larger local contractors. Those other contractors require him to have a workers compensation policy in place in order to do any work for them. Like I mentioned above, this guy has no employees, hires no subcontractors and works by himself. The hiring contractors require him to provide them with a certificate of insurance in order to do any work for them. The policy he bought was another “ghost policy.” A policy that excludes him as the owner (technically does not include him as in his state he must elect to be included within coverage) and since he has no employees and hires no subcontractors, the premium is based on the minimum for that state and classification code of $1,060. The travisity about this whole thing is that the hiring contractor requires this excavator guy to have a policy in place simply because his workers compensation insurance company must…MUST…charge him on his policy if the small excavator does not provide the hiring contractor with a certificate of insurance. What? Doesn’t this sound like a bunch of Hooy?? Ok Ok! Back to our excavator contractor who doesn’t have a checking account. So…the auditor makes an appointment to conduct a physical audit of our small excavator contractor. He, the excavator, makes the appointment and sits down with the auditor. The auditor asks to review his checking account register and the contractor informs the auditor that he does not have a checking account. At which time the auditor closes his computer up, packs up his stuff and says that if the contractor cannot provide him with the records he needs to determine if there was any compensation paid to others, then he would have to deem our excavator contractor non-compliant with his audit!
In the second case our excavator contractor was finally, with the help of our firm, able to provide enough information directly to the servicing insurance carrier that they accepted and reinstated his policy. Can’t say as much for the first contractor we discussed above.
This is a real problem. Insurance agents who are using the assigned risk plan for any of their clients need to be made aware of this situation and that’s why I’m writing about it here.
If you are a contractor and have secured a policy through any assigned risk carrier, otherwise known as the state workers compensation pool, you need to know that you will be asked to provide certain documentation at your audit. Those documents will include a copy of your check register. If you do not provide this information your policy may be canceled and you may be levied with an Audit Non-Compliance charge of up to 300%. You then may not be able to find replacement coverage through any other insurance company.
So, what the heck does all this mean?
It means that if you don’t have a checking account you may not meet the document requirements that an auditor will request to review. Leading to cancellation of your policy and your inability to to find replacement coverage.
Be sure to read our post on the type of documents that will be required during a workers compensation audit. That post will give you a heads up on what you will need to provide the auditor.
All that said, this continues to be a big problem. If you are an insurance agent remember to advise your insured that they will need to provide certain documents and one of those will be a check register. Agents give your client a chance to get up to date and let them know of this situation.
For you employers out there, especially you guys that want to run your business on a cash basis be prepared for this situation by having detailed documents representing your invoices, income and outlays readily available for the auditor to review. Make sure you keep your records in some type of ledger where you can refer to all of those cash outlays. If you don’t have a check register you must provide something that will show those funds you’ve paid to others. Who you paid them, when you paid them and why you paid them.
Do not underestimate the power of your insurance company to put stress on your business operation. When you buy a workers compensation policy you agree to certain conditions contained in that policy. There are consequences if you do not comply with the requirements of the policy. Don’t comply with the audit, receive an Audit Non-Compliance Charge of up to 300%! Did they tell you that when you signed up for the policy? It always surprises me when an employer client refutes the idea that their insurance company can inspect their records or levy penalties. When I hear that it simply means to me that the employer has never read their policy. Not only never read it but more than likely have never even looked at it!
If you are a small owner operator, have no employees, hire no uninsured subcontractors, have secured a workers comp policy because you had to have one in order to get work from a hiring contractor, exclude yourself from coverage and typically operate your business on a cash basis, have no checking account and cannot provide a workers compensation auditor with a copy of your check register…beware!!!! You had better keep accurate cash journals that you can provide to the auditor along with back up documents to prove your intake and expenditures.
Well, enough on this subject for now. I hope you’ve found something useful here today. Thanks for visiting our blog and website and thank you for reading!