How Contractors Can Avoid A Costly Workers Compensation Audit

There’s nothing worse than receiving a large unexpected workers compensation audit bill. And for contractors there are two recurring mistakes they make that almost always lead to high cost additional premium and audit disputes. It’s usually after the mistakes have been made and the audit bill has been delivered that we receive a call asking for help. So if you are a contractor, please read on…

  1.  Use of Uninsured Subcontractors – Speaking in general terms. If you are a contractor or in another business and in any way hire or contract work to another contractor or subcontractor and that subcontractor does not carry workers compensation, you will be charged on your policy. Now this may vary somewhat from state to state as to how the rules apply in your specific situation but as a general rule when you use an uninsured subcontractor to perform work as far as your workers compensation insurance carrier is concerned that contractor has just become your employee, if injured your carrier would have to pay a claim and if they would have to pay a claim you have to pay a premium! Again there are some rules that may apply to your specific situation that may help mitigate the total effect of using uninsured subcontractors but you should be prepared to pay the full premium for their exposure.  
  2. Improper Payroll Record Keeping – Again speaking in general terms, contracting risks are, for the most part, allowed to use multiple classification codes or codes that may be more descriptive of the work. This is commonly known as separation of payroll. Non-contracting businesses are not allowed to do this. However in order to take advantage of using separation of payroll proper record keeping is required. Again, this may vary somewhat state by state but in general you must keep accurate records showing the employee and actual documented time performing a certain duty. This must be in documented hours worked and will not be allowed as a percentage of their pay. Some states have specific statutes or department of labor rules that are used as a guide for proper record keeping. I guess the best advise I can give here is to make sure you direct specific questions about payroll separation to your insurance carrier or the rating authority in your state. Since they are the ones who will perform the audit and will apply the rules, make sure you know how they want to see the records, make sure you follow their guide to a “T” and get it in writing! You’ll probably have to justify with the auditor how and why you used a particular method of record keeping sometime in the future.

There you go. Two items a contractor should pay attention to that will help eliminate many audit disagreements, potential high additional premiums and costly disputes!

 If you find you are having a problem with a premium audit or need assistance in working through an audit dispute be sure to contact our office, we may be able to help!

Hope this helps you out! Thanks!