Proper Documentation Is Required During Workers Compensation Audit – Tips you should know

Let’s talk about the importance of proper documentation and the workers compensation audit.

Time and time again we’ve seen employers lose opportunities to significantly reduce their workers compensation audit bills because they followed an incorrect method of documentation. They may have been told by someone that because of the type of work they do they could take advantage of certain workers compensation rules but were never schooled on the proper way of documenting how those rules apply to their operation. Rather thinking all along they were following a path that would keep their workers comp cost down only to be surprised at audit by the reverse. Most of the times these types of surprises are very costly.

Here’s a few items to consider and tips on proper documentation to watch out for:

  • Payroll Separation – The act of applying more than one classification code to different work processes, allowed in most states and generally only for construction type risks. If workers comp rules allow payroll separation for your business operations you must keep accurate payroll records which show actual hours worked by employee by classification code. A percentage or guesstimate of time worked will not be allowed.  Many employers who may have been told they could use payroll separation have been disappointed at audit to learn the documentation presented was not accurate enough to allow the separation to be used, causing the auditor to apply the payroll into the highest rated category and leading to extreme additional cost to the employer.
  • Improper use of Classification Codes – Interpretation of classification codes and assignment of employees into those codes is a constant source of workers comp audit problems. An employer may mistakenly apply a code to certain work processes found within their business operations only to find an adjustment at audit. We see this problem frequently occur with the application of code 8810, clerical. Very specific rules apply to the use of 8810 and when improperly used an employer will generally suffer a large additional premium due at audit. The best protection for proper classification of employees is the use of job descriptions. It’s in the details of specific job descriptions that proper classification can be achieved. Verification of the work processes as apply to specific job descriptions by an independent outside source will help an employer maintain proper code assignments and eliminate the improper use of classification codes.
  • Use of Subcontractors – Subcontractors are another consistent source of audit errors and mistakes having to do with proper documentation. If you use subs proper record keeping is of the utmost importance. Do you use insured or uninsured subs? The use of uninsured subs seems to always lead to problems. Do you secure accurate invoices from your subs? Accurate invoices should include a specific break out of materials supplied by the sub for the job along with the labor costs associated with the job. The more details on the invoice the better. Without proper documentation of invoices you may find the total cost being picked up and included on your audit. Do you maintain proper certificates of insurance secured from your insured subs? Do you maintain state specific licensing information from your subs? 
  • Payroll Records – Payroll records should show a breakdown by employee for items such as benefits, contributions to retirement, overtime, sick time and vacation time along with paid bonus and any per diem or travel cost paid. All payroll records should be verifiable with proper tax document support.
  • Cash Disbursements – For an individual or sole proprietor operating a business payments to third parties may be picked up at audit. We’ve worked on many cases where payments as silly as ones made to a hairdresser through the company checking account were picked up and included in the audit. Be careful of these types of situations as certainly cash disbursements to day laborers and others providing services will be picked up and included in your audit. Proper documentation of these transactions are required.
  • And there’s more…

So you can see the importance that proper documentation plays in the audit process and final cost of an employers workers compensation program. At audit is not the time to be made aware of these situations. Be sure to ask your agent for help and if they don’t know seek out an independent workers comp consulting firm for assistance!

Hope this helps you out! Thanks!

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