It’s the world we work in every day, that of workers compensation audits. We get focused on what we do and it’s sometimes easy to forget that for normal folks workers compensation audits just seem like they’re from another world! Let’s talk about bridging the gap between business owner employers and the workers compensation audit process.
A workers comp policy is auditable. That means the premium you pay at the beginning is just a deposit premium and the final premium will be calculated at the end of the policy after an audit is completed. When your insurance agent provides you with a policy they should explain the audit process. They should inform you, the employer policyholder, that at the end of the policy period an auditor from the insurance company will knock on your door and ask to see your accounting books. They will gather payroll information, along with all other compensation provided to subcontractors and others, from your books and provide that information to your insurance company. The insurance company will then compare it with how your policy was originally set up. If your original exposure, payroll, was to low then the insurance company will send you a bill for the difference. If your original payroll exposure was to high then the insurance company will return the overpaid premium to you.
It’s not a complicated process until something goes wrong. And when something goes wrong, confusion takes over.
Classification code changes are a big contributor to confusion with audits. Most employers don’t understand the classification system and have only a vague understanding about the impact codes have on premium until an auditor changes the codes on their policy and the premium goes up. Sometimes codes are difficult to get right. Agents, underwriters and auditors can all make mistakes in proper classification. And mistakes in classification can lead to confusion and misunderstanding. Codes themselves sometimes seem shrouded in secrecy. Every try to find one on the web? If you have a code problem give us a call, we may be able to help out.
Payroll and payroll allocation is another area that often provides confusion at audit time. What really constitutes payroll or remuneration? I guarantee it includes more than you think! What about overtime, sick time and vacation time or health and welfare or fringe benefits for employers working under the CSA? Are they included or not? Are the Owner, Partner, LLC Members or Executive Officers included or excluded and if included what is used as a rating payroll? All of these cause audit problems at one time or another.
And the uninformed use of subcontractors continues to cause problems at audit. Is an uninsured subcontractor considered an employee? Can you use payroll separation for uninsured subcontractors? Do you have to include the total amount paid to a subcontractor as remuneration or can you separate out the cost of materials? All important questions that need to be answered before audit!
Why do employers get confused at audit time? Consider these points:
- They are not properly informed about critical points that may impact their audit results when they buy a policy.
- They are not made aware that, under certain circumstances, an auditor may change or correct class codes on their policy at audit which may result in much higher premiums.
- They are not schooled in the concept of statutory employees and/or how the use of independent and/or subcontractors may impact their premium at audit.
- They are unaware of common audit mistakes and how they may effect their premium.
- And finally, they are not aware of the workers compensation pricing mechanism or the responsibilities and duties each of the participants; employer, insurance company, agent and auditor, may have on the final cost of their policy.
- As an employer, you should find and work with a good agent who’s schooled in the ways of workers compensation policies.
- Be sure to ask questions about those critical points; payroll, inclusions-exclusion, classification codes, and the use of independent contractors and subcontractors.
- Take advantage of Workers Compensation Consultants when a problem comes up at audit time!
Hope this helps you out! Thanks!