We received a call this past week from an employer who operates a small business that employs himself, his wife and two other part time helpers. He secured a workers compensation policy and it was set up using a rating payroll of $10,000 to cover the two part timers. After the policy expired the employer received an audit bill from the insurance company for over $3,000! Why?
This is a classic workers compensation problem. It has everything to do with business entities, how they work, and how a workers compensation policy responds. It’s important to have at least a basic understanding of business entities and their effect on workers compensation rating. In this case the employer continually mentioned the fact that his business was a partnership and that he and his wife were partners in the business.
When the employer secured his policy he told the agent that he wanted to make sure both he and his wife were not included in coverage. The agent, armed with the knowledge that his new client operated his business as a partnership with his wife, used the payroll information the employer provided for the two part timers and calculated the deposit premium for the policy which was a little over $900.
Once the policy expired a self audit form was sent to the employer to complete and return to the insurance company for audit processing. The employer correctly completed the form including both his and his wife’s salary for the policy period along with that of their helpers. The auditor correctly removed the owner’s payroll from rating but included his wife’s $40,000 and processed the audit billing.
You see this business was in fact operated as a Sole Proprietorship and not a Partnership! In this case the wife was in fact an employee whose entire compensation then became rating payroll.
Where did this go wrong?
- The employer did not properly communicate with his agent the correct business entity under which he operated.
- The agent did not question or verify the business entity when placing the policy.
- The insurance company underwriter did not verify the business entity before issuing the policy.
The lesson learned is that business entities do make a difference on the pricing of a workers compensation policy. And for the small employer they can have a drastic effect!
Hope this helps you out! Thanks!
