Documents and records required to complete a workers compensation audit.

If you’ve ever been through a worker’s compensation audit you will certainly recall the list of documents the auditor asked you to compile and make available for their review. It’s not optional! The requirement to provide documents and records for review is a part of the workers compensation policy. In this blog we’ll explore the type of records you need to be ready to provide for review and answer a few questions that are common for this topic.

The purpose of document and record review, as conducted in a workers compensation audit, are to determine premium generating exposure for the workers compensation policy being audited.

Here’s a listing of the type of records you will be asked to provide with a little detail to consider about each:

Journals – A common definition of this term is a record of financial transactions shown in date order by transaction. You’ll find journals hasten back to a time when accounting was accomplished in a manual manner. Journals would be broken down into individual topics that would include Sales Journals where sales transactions would be recorded; Purchase Journals where individual purchases made by the company would be recorded; Cash Receipts and Cash Disbursement Journals would be used to track cash transactions. Accounting transactions like these would be manually written in one of these types of journals prior to being posted to accounts found in the general ledger.

Ledgers – Ledgers are made up of a series of accounts. A typical general ledger may include asset accounts; liability accounts; equity, revenue and expense accounts. Financial reports, such as income statements, trial balance and balance sheets, will be generated from the ledger level of summarized journal information. While journals provide transaction details, ledgers provide summarized categories of that information. Again, you will typically find ledgers used in manual accounting methods.

Contracts – Certain contracts may be reviewed as they may include ratable policy exposure.

Registers – Think of journals. Registers are normally a grouping of similar transaction types as used in accounting. A check register may also be considered a cash disbursement journal. Get the idea? It’s a listing of transactions. A listing of cash being sent out.

Payroll Records – This is a big one! Of course payroll records must be reviewed. Payroll records may be in the form of a register or journal listing each employee and compensation disbursed to that employee. These records will typically include the hours worked, overtime hours, rate of pay per hour, rate of pay for overtime or premium time paid. These records may include bonus paid and or other type of compensation for work provided to the employee. Payroll records may be subdivided into categories by location, state, job function and any other additional tracking information that the employer may find useful from a management function.

Disbursement Records – These will typically fall under some form of cash disbursement journal. These records will often include payments made to sub contractors, independent contractors and others whose relationship with the employer may create a ratable exposure for the workers compensation insurance company.

Computer Programs – Of course most small business accounting functions are today performed by use of a computer program. When you take a look, you’ll find that wording found in the workers compensation policy language will include computer programs, used to store and retrieve accounting information, as part of the required accounting records needed to complete the audit.

Tax Documents – Tax documents are used to verify that the information being provided for use in an audit, is in fact, accurate. You may ask why tax documents? Think about it…it’s one thing to lie to someone conducting a workers comp audit but entirely something else to lie to the government! Actually, to provide false documents or to lie about the information you are providing to a workers comp auditor may constitute the act of committing insurance fraud. Sure mistakes do happen, but when those “mistakes” are made on purpose, with the intent to secure a lower premium, they cross over into the realm of fraud. What tax documents may you be asked to provide:

  • 941 Form – This is a federal tax form prepared to report your employee payroll along with taxes withheld for those employees to the government.
  • State Wage and Contribution Form – This is a report used to report employee payroll along with state taxes withheld to the state in question.
  • Schedule C – For an individual or sole proprietor, an auditor may ask to review your IRS Schedule C. This is a form is used to report a profit or loss from a business if you operate as an individual or sole proprietor. On the form you will find a section where income is reported and a section where expenses are reported. Under the expense section you’ll find items like commissions paid, contract labor and wages paid. This is just another place where an auditor looks to identify and verify workers compensation ratable exposure.

Certificates of Insurance – We can’t talk about this topic without mentioning one of the most important documents that an employer may be asked to provide. Certificates of insurance are used to show that another company, one who the employer conducted business with, in fact had a workers compensation policy in place. This is especially important for those employers in the construction trades. Most uninsured subcontractors will be considered statutory employees of the hiring employer. Translated into english, this means the auditor conducting the hiring contractor’s workers comp audit will pick up any amount paid to the uninsured subcontractor and include that as ratable exposure on the hiring employers audit.  Be careful here because these situations can often lead to unexpected high addition premium audits.  A valid certificate of insurance will show the auditor that the subcontractor did have workers compensation coverage in place so the hiring employer will then not charged.  Be sure to check out the special certificate of insurance section found on our website for more detail information about this proof of coverage documents.

Keep in mind that when an auditor asks you to provide these documents they are doing so to discover and verify ratable exposure used to determine the ultimate premium you will pay for your workers compensation policy. Don’t forget that ratable exposure means much more than payroll. The actual term is remuneration. Payroll is only a part of the more general remuneration category.

We often encounter employers who have had a bad experience working with a workers comp auditor. Of course the best survival plan of having an audit conducted on your business is to be prepared, be aware and walk away with no surprises!

I hope this post has been helpful. And thanks for reading!

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Audit Noncompliant Charge – What does it take to be deemed non-compliant on a workers compensation audit?

Wow! Time and time again we are approached by an employer whose workers compensation insurance company has deemed them to be non-compliant in completion of their workers compensation audit. So what’s it take to be compliant? What’s it really mean to be noncompliant or uncooperative? What’s the repercussion associated with this action? Let’s talk!

How would you like to have your insurance company send you a bill after your policy has ended for an additional premium of 300%? Yep! Some states allow an insurance company to apply a 300% increase in exposure base (ratable payroll) to policies where the employer (policyholder) is deemed noncompliant with their audit. So to tell an insurance company to go jump off a cliff just because you don’t want to complete their audit process may result in significant penalties!

Mostly that last paragraph was mostly just to get your attention. Does it happen? Yes. But for the most part you’ll find the insurance company just wants to complete their audit process so they can develop the final premium on the policy, collect any additional premium or return unearned premium based on the outcome of the audit.

Let’s look at some specifics:

           State                           Noncompliance Charge

  • Alaska                         Up to 200%
  • Arkansas                    Up to 200%
  • Arizona                       200%
  • Colorado                     Up to 200%
  • Connecticut               Up to 200%
  • DC                               Up to 200%
  • Georgia                      Up to 200%
  • Hawaii                        200%
  • Iowa                           Up to 200%
  • Illinois                        Up to 200%
  • Kansas                        200%
  • Kentucky                   Up to 200%
  • Louisiana                   Up to 200%
  • Maryland                   Up to 200%
  • Maine                         Up to 200%
  • Mississippi                 Up to 200%
  • Missouri                     Up to 200%
  • Montana                    100%
  • Nevada                       Up to 100%
  • New Hampshire        Up to 200%
  • New Mexico              Up to 200%
  • Oklahoma                  200%
  • Oregon                       Up to 200%
  • Rhode Island             Up to 200%
  • South Carolina          Up to 200%
  • Tennessee                 Up to 200%
  • Utah                           Up to 200%
  • Virginia                      Up to 200%
  • Vermont                    Up to 200%
  • West Virginia            Up to 200%

This is a partial list. Just because your state may not be listed does not mean they don’t allow noncompliance charges to be applied!

So consider this, if your estimated premium at the beginning of your policy period was $3,000 and your business is located in Missouri and you do not comply with the insurance carriers request to complete the audit, your insurance company is within their rights to close your audit, mark it non-compliant and send you an additional premium bill of up to $6,000. That’s 2x’s the Estimated Annual Premium on your policy!

Do insurance companies really do this? Yes they do.

Certainly some insurance companies are better at sticking to the rules and make sure they apply this factor, if you snub them, at audit time. And when they do apply the Audit Noncompliance Charge, ANC, they will be allowed to collect it.

There are rules the insurance company must to follow in order to apply this charge. Those rules may differ from state to state. And those rules will, for the most part, include these types of conditions:

  • The insurance will have to comply any special audit rules the state in question may apply;
  • There must be some type of endorsement attached to the employers policy that outlines the application of this charge. That endorsement will spell out the conditions when and how the insurance company can make the charge.
  • There will be some kind of requirement as to how many attempts the insurance company must make to conduct the audit.(If you’ve ever wondered when an auditor contacts you why they seems to be in such a hurry to complete the audit and get it submitted to the insurance carrier this has a lot to do with it.)
  • There will be some kind of requirement as to the type of documentation the insurance company must keep to prove the non-compliant status.

What’s it take to be deemed non-compliant? Here’s a few things:

  • Not responding to the requests made to conduct the audit;
  • Making appointments with the auditor but not showing up;
  • Not providing or the inability to provide the auditor with the proper documentation required to properly determine the rating exposure of the policy.

Why do you have to provide records? In a standard workers compensation insurance policy look for the section titled “Part Five – Premium, Item F – Records.” It’s here where you’ll find the policy says something like this; “ You will keep records of information needed to compute premium. You will provide us with copies of those records when we ask for them.” So Item F tells you that you have to keep records and provide them when asked.

What records are they talking about? Under the same “Part Five – Premium” look for “Item G – Audit.” It’s in this section where you’ll find the wording that goes something like this: “Records may include journals, ledgers, contracts, registers, payment vouchers, tax reports, payroll records, disbursement records, including computer programs used for storing and retrieving such records.”

What else can the insurance company do when an audit is deemed non-compliant? Another problem an employer may encounter when non-compliant is that the insurance carrier may, under certain circumstances and where allowed by state law, cancel the employers policy. Another possible situation is where the insurance doesn’t cancel the policy but will tag the policy to be non-renewed. Either one of these situations could cause the employer to find themselves unable to secure workers compensation coverage with an other insurance company.

So there you go. The workers compensation policy pretty well lines out what your responsibilities are during the audit process.

Did I forget to mention that a workers compensation policy is a contract? Sure, it’s an insurance contract, but a contract none the less. It contains promises and conditions. And it’s within those conditions where an employer agrees to live up to their responsibilities of making sure they complete the audit.

Let’s recap:

  • When you buy a workers comp policy you agree to certain conditions found within that policy and one of those conditions is to allow the insurance company examine your records that relate to the policy in question.
  • The audit is a process used to determine the final premium for the workers compensation policy.
  • Certain records must be maintained, produced and shown to the insurance company auditor when asked.
  • When an employer fails to live up to their responsibilities of completing the audit there may be financial consequences.
  • The insurance company may be able to levy an audit noncompliance charge, ANC, against the employer for failure to comply with the audit process.
  • Audit noncompliance charges can in some cases be as much as 300% of the estimated premium on the policy.
  • There are certain conditions an insurance company must follow in order to apply an audit noncompliance charge. This will vary state to state.
  • The insurance company may cancel the employers policy or they may set the policy up to non-renew. Causing the employer to be unable to secure coverage elsewhere.

An employer can avoid this whole mess by simply fulfilling their responsibility of meeting with the insurance company auditor when requested and providing the books and records they ask to review.

Hope this helps you out! And thanks for reading!

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6 Common Work Comp Mistakes Employers Make – An Academy of Insurance Webinar Presented by Randy Sieberg

I’ll be presenting an educational webinar on November 10, 2016, sponsored ijacademy-400x200by the Academy of Insurance, an Insurance Journal Company. The title of this webinar is “6 Common Work Comp Mistakes Employers Make.”  Please go here to sign up for this webinar!

We all know that employers make mistakes in managing their workers compensation programs on a daily basis. Some of those mistakes are made by making inaccurate assumptions about key premium producing areas of a work comp policy while others are simply made from a lack of knowledge. Some of those mistakes can be quite costly creating opportunities for the informed insurance agent to help out.

In this presentation we’ll explore common workers compensation errors made by employers within these six categories:

  • Payroll
  • Changes in Business Operations
  • Claims
  • Class Codes
  • Experience Rating
  • Audits

Our emphasis will be on:

  • How to identify key points that you may use to help with sales and earn a new clients business when it comes to inaccuracies found within these categories;
  • How employers create issues that cause problems within these categories;
  • How to identify hidden future problems that an employer may have to face;
  • And how to turn identified problems into sales opportunities for agents while improving an employers situation

It’s a tall order for only a hour webinar! I do tend to talk a lot! But I’ll do my best to provide real life examples from cases worked that will help shine a light on using an employers work comp problems to gain new clients. And provide some tips that may help save an employer premium dollars and other headaches in the future!

So be sure to go to “6 Common Work Comp Mistakes Employers Make” at the Insurance Journals Academy of Insurance website for more information on this webinar and be sure to sign up!

Thanks for reading and hope to “see” you on the webinar!

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A Workers Comp Problem With Garage Risks Code 8380, 8391 and Using Clerical Code 8810

Classification codes cause problems. It’s not their fault. They’re just numbers. But the kind of numbers that cause a lot of folks a lot of trouble! And one of those problems is when a garage business classifies counter help in the clerical classification. Let’s talk a bit about this.

First off there’s really nothing new about this common classification code problem. It’s been causing problems for a long time. But it’s something where we want shine a little light. It’s not uncommon for 0ur office to receive calls from garage business owners who are experiencing an insurance company class code payroll reassignment of clerical employees, code 8810, into the business governing code of 8380 or 8391 or one of the other auto repair codes. This often happens after a physical audit has been conducted. That’s where the auditor actually has a chance to look around the business and observe how normal business operations are conducted.

Here’s what commonly happens. When looking at a garage type risk you will typically find a pretty good example of separation of work space. Most auto repair operations will have a physical separation of space between the garage repair area or shop and the office or counter area where the customer comes in and discusses the problem with their vehicle and turns over their keys to the service writer. Mechanics are normally exposed to hazards found within the shop. Lifting, removing and installing vehicle parts, the use of tools, grinding, cutting, lifts and jacks used on vehicles can all be found within the typical auto service repair garage.

Counter help will typically handle checking in and checking out customers when they drop off or pick up their vehicles before or after repair. Most often, in smaller garage operations, counter help will be a combination of the garage owner and bookkeeper. This is the point where things will go wrong.

Common sense would indicate that a bookkeeper or office helper who stands behind the counter, welcomes the customer, shakes their hand, takes their keys and completes the sales transaction by taking cash from the customer would fall into the clerical or 8810 classification. Wrong! It continues to be a common practice that those employees who handle cash transactions with a customer in a garage risk operation will be classified into the governing class, 8380 or 8391. If on the original workers compensation policy their payroll or remuneration was included under 8810, they will most likely be moved into 8380 or 8391. This action will increase an employers premium because the 8810 class would carry a very low rate per 100 of somewhere around .30 while the garage repair class code would carry a much higher rate, perhaps somewhere around $5 per 100 or payroll.

The premium impact? The premium for an employee making $30,000 in the clerical code may be somewhere around $90. While the premium for the same employee in the garage code could be somewhere around $1,500. That’s a significant difference in what the employer may have to pay. Just for having a clerical employee complete a money transaction with a customer.

There’s another issue with these codes. If you read the scopes description of 8380 or 8391 you’ll see that they include counter help. Specifically, if a repair shop has a parts department that retails or wholesales parts to customers, you’ll see that those parts department employees will fall under 8380 or 8391. This situation has in the past caused agents and employers a bit of trouble. You see, most parts departments are segregated from the repair operations. As a matter of fact, if you’ve ever visited the repair department of a typical car dealership you’ll find that when the mechanics working in the shop and need a part they will go to the parts department’s counter to order and collect the parts they may need. And the temptation when assigning employees to classification codes would be to put the parts department employees under some type of retail store code. Parts departments are often found sequestered in a locked room with limited access. So in this situation we may have a clear separation of work spaces yet the basic manual and scopes indicates those parts department and counter help are to be classified in 8380 or 8391 with few exceptions. Those exceptions will be state specific directives along with the concept that the entire operation of the employer be classified into the predominant operation. No real change there. Think about it. If the predominant business operation is repair with some parts sales then repair is the classification used. Of course other state rules and normal classification procedures are to be followed.

The take away for this post is to be cautious when classifying workers of auto repair business operations. You should follow the code descriptions carefully. And if you find yourself facing a 8380, 8391 and 8810 class code problem, reach out to a workers compensation consultant for assistance!

Thanks for reading!

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Workers Compensation Issues for Small Business Owners

Have you ever thought about the small business owners in your community? Coffee shop owners; druggists; local grocery stores; auto repair and body shops; contractors of every kind; floor covering stores; appliance stores; local owned manufacturers; car dealerships; music stores; machine shops; doctors; janitors; local owned restaurants of every kind all play a vital role in your community. These businesses, and many more like them, employ a ton of local workers! Many local business owners face a daily challenge of providing their services to their communities while eeking out some kind of small profit to make it all worth their while. At this point I should cite some government study that gives you proof of the value these kinds of employers provide but I’m not going to do that because you already know their value. In this blog we’re going to take a look at the burden workers compensation issues play in the operation of a small business.

For some employers, workers compensation insurance is expensive. For some, it may not be that big of a deal. If you run a carpentry contacting business your rate per 100 of payroll, depending on the state where you operate, may be as high as $26. Yep! That means that you are paying $26 in premium for every $100 of payroll that you give your workers. If you run a coffee shop your rate per 100 or payroll may be $2 which means that you are paying $2 in premium for every $100 of payroll that you give your workers.

Now on the surface you might see that as unfair. But it’s at this point that you need to understand the concept of risk, exposure and cost. If there’s anything that an insurance company knows it’s risk and exposure. The carpentry contractor has a much greater chance of having workers injured on the job while the coffee shop workers have a much less chance of incurring on the job injuries. Workers compensation rates are generated by detailed statistical computations based on very specific loss data reported to individual state rating bureaus. You can learn more about how rates are developed by visiting our website.

So there’s a big difference between a coffee shop and a carpentry contractor when it comes to how much they pay in workers compensation premium. But what kind of burden does this cause and what are some of the problems they may share?

To understand the burden that workers compensation insurance may cause an employer you should know something about the reason workers comp insurance exists. Prior to the implementation of the workers compensation concept in our country in the early 1900’s the only recourse an injured employee would have against an employer would be through the court system. An injured worker had several issues to overcome in order to win compensation in court from their employer. They included having to overcome:

  • Contributory Negligence – Regardless how slight an incident, if the employer could prove the worker was responsible for their own injury the worker would not receive any compensation.
  • Assumption of Risk – In order to get a job workers were forced to sign work contracts where they accepted the hazards of the job and where they agreed not to sue their employer for injuries.
  • Fellow Servant Rule – If a workers injury was in any way caused by another worker the employer would not be held responsible.

And frankly workers could not afford the expense to seek payment through the court for injuries suffered on the job. You bet the system was rigged in favor of the employer.  An injured worker would basically have no rights. The consequences for an injured worker and their family could be catastrophic. Think about that…your father works for some giant industrial company; he suffers a serious life threatening injury; is out of work for a year; receives no compensation from his employer…what happens to your family?

In 1908, Congress passed the Employers Liability Act (FELA) of 1908 which helped to establish comparative negligence and addressed how injured railroad workers could receive compensation. This action helped changed how restrictive doctrines affected injured workers and began to place more responsibility on employers to provide safer work places. In 1911, Wisconsin passed the first workers compensation law in this country which placed a value on work related injuries, paid medical expenses and replaced lost wages of the worker. The trade off for the employer and worker is that the worker would give up their right to sue the employer for the security of receiving a guaranteed benefit through the workers compensation law and the employer would give up the uncertain outcome of facing an injured worker in court for the certainty found in the workers compensation law. After Wisconsin, other states slowly started coming on board by passing similar workers compensation statutes for their individual states.

So individual state workers compensation statutes provide protection to both the employer and worker. They also provide direction as to who must comply with their statutes. Most states require any employer who employ workers to comply. Sure, there are a few states who may have numerical exceptions that must be met before compliance is required but for the most part if an employer has a worker they must come under the statute.

Falling under state statutes and being required to comply is one thing but the ability of an employer to pay the benefits required to an injured worker is another! This is where workers compensation insurance comes into play. A standard workers compensation insurance policy will stand in the shoes of an employer. The insurance company takes over the employers responsibility for paying the injured worker the required state benefits including medical expenses and lost wages for a premium the employer pays to the insurance company.

An often overlooked point is that when an employer is not required to come under the act they often may elect to freely do so. Typically, an election to come under the work comp statute is accomplished by the employer securing a workers compensation policy. When this is done an injured employee will look to the insurance company to take care of any work related injury sustained.

But what happens if the small employer does not secure coverage? Keep this in mind. Just because some employers may not fall under a state workers compensation statute doesn’t mean that an injured employee will not have recourse against the employer. It often means that the employer will be subject to exposure to litigation on the part of the injured employee. It doesn’t mean that an employer is still not responsible for their injured worker.

Here’s a list of some workers compensation related burdens small employers face:

  • The Cost of Coverage – As mentioned above, the premium paid for workers compensation policies are based on an associated rate/100 of remuneration (payroll) that an employer pays their workers. Different types of business operations will pay different premiums. A carpentry contractor with $50,000 in payroll may pay a premium of $11,000 while a coffee shop with $50,000 in payroll may pay a premium of $1,100. Both will affect their respective employers as a business expense. Workers compensation insurance is not cheap! More on that later.
  • Required Compliance – For many employers it’s not an option. They must secure coverage for their workers. And for some small employers even if they are not required to have coverage it is often in their best interest to do so.
  • Trouble Securing Coverage – “New in business” is a hard concept for many insurance carriers to grasp. For a small business owner who has just opened up shop they will often find it difficult to secure a workers comp policy from the standard markets. Their only recourse to secure coverage may be to turn to the assigned risk plan for the state in which they operate. And while the assigned risk plan or “pool” may be the only choice for some, it’s not the place you want to stay.
  • Trouble Maintaining Coverage in Place – Standard market insurance carriers often change their rules. Sometimes these rules will affect how they treat small employers. We’ve seen a trend over the past several years where workers comp insurance carriers have tightened up their rules by establishing minimum employee payroll levels for acceptance into their coverage programs. This often means that an employer, who in the past had been eligible for coverage by a certain standard market insurance company, now finds themselves non-renewed by their insurance company and having to search around for a new insurance company to place their workers comp coverage at renewal. This can be a real problem!
  • Deteriorating Experience Mod or EMR – Small business owners who qualify for experience rating often face huge swings in their EMR when they incur losses or claims. Thresholds for being experience rated are based on premium size and in many states a premium around $3500 will force an employer into the experience rating plan. We’ve posted many examples of how a single claim can drive an employers EMR through the roof. With a small employer you’re looking at smaller payrolls and the resulting effect claims will have on their EMR will be much larger than an employer who has larger payroll.

There’s no doubt that workers compensation insurance and the associated premium that small employers pay can be a burden. That’s an easy one. But the behind the scenes issues that small business owners face in securing and maintaining their workers compensation coverage can be just a troublesome.

Hope this helps you out and thanks for reading!

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