Imputed Wages – Uncompensated Employees and how they determine workers compensation rating payroll.

We were recently contacted by a business owner about her workers compensation audit. She was sure what the insurance company did was wrong and wanted to talk to someone about it. Here’s what she told us about her business:

She operates her business, a roofing contractor, as a sole proprietor. Her company does all types of roofing on residential homes. Most of the work is limited to repair however a occassional complete re-roof will be done. Her business falls under the workers compensation classification code 5551 – Roofing All Kinds. Relatively new in business she is in her third year. She has no employees however her boyfriend is the only one who does the roofing. He is not paid a salary or hourly wage. He is not compensated. She picked up a casual laborer for a job or two last year but only paid them a couple of thousand dollars.

The insurance company auditor requested to review her books and was supplied with her check register and payroll recap which only showed wages paid to the casual laborer.

As a sole proprietor in her state she was automatically excluded from coverage by state statute. She did not make an election to be included in coverage so her compensation was not considered in the audit. The causal laborer compensation of a couple of thousand was picked up and included in the audit.

Now for the problem. The business owner was under the impression that if no payroll was paid then there would be no effect on the workers compensation premium. When the auditor discovered the boyfriend had been paid no wages they calculated an average wage based on the type of work industry. This is called imputed wages.

Imputed wages are a calculation made to determine a rateable payroll for uncompensated employees. It goes something like this:

  1. Determine an average wage for the type of industry;
  2. Multiply that average by an acceptable number of hours per week;
  3. Multiply that resulting number by an acceptable number of work weeks per year;
  4. Use the resulting number as rating payroll for the employee.

Here’s an Imputed Wage calculation:

Hourly Rate $15 x Average Hours 35 x Number of Weeks 44 = $23,100 Imputed Payroll

So when the audit was completed and the imputed payroll was used to calculate the business owners premium, it generated an additional premium in excess of $9,000!

Needless to say the business owner was not expecting that! Good thing is that she paid it, learned a lesson and moved on to bigger and better things!

The Take Away: Be aware of imputed wages. Don’t assume your interpretation of workers compensation rules is correct. Be sure to ask you agent or a workers compensation consultant for help!

Hope this helps you out. Thanks!