Your workers’ compensation policy might include a provision that allows your insurer to conduct a workers’ compensation premium audit. The results of the audit will affect your premiums, so it benefits you to be prepared!
Your workers’ compensation premiums depend on two factors: your payroll and your classifications. Insurers assign a classification code to the employer based on industry. Your employees will also have occupational codes. These codes reflect the relative risks of the industry and the job. For example, in a relatively high-hazard industry like heavy construction, most employees will have high-hazard jobs; their occupational code would reflect that risk. But the bookkeeper and other office staff would have a lower risk of injury, so they would have different job codes.
Unless you’re a smaller employer with a “minimum premium” policy, your workers’ compensation policy likely includes a provision that allows your insurer to conduct a workers’ compensation audit. That’s because your premiums are based on an estimate of your payroll and employees’ job classifications. At the end of the policy period, an audit will determine the insurer’s actual risk exposure based on exact payroll and classifications. This “audited exposure” determines whether you owe additional premium or whether the insurer owes you a refund.
Insurers may conduct an audit shortly after a policy starts to ensure the accuracy of their premium estimate. More commonly, they will conduct an audit at the end of the policy term. You might get audited annually or less frequently. If your policy has a three-year “look back,” for example, the insurer reserves the right to audit premiums for the past three years. When it does, it can collect premiums owed for that time, but it will also refund you any overpayments you might have made.
Audits have another important function. The information on your organization’s payroll, classifications and loss experience will be pooled with data from other employers. These statistics help insurers more accurately predict their risk and rate their policies.
What Does an Insurer Look for in an Audit?
The insurer will look for three types of information:
- Payroll information: You’ll want a list of all employees and the hours they work, along with their payroll information. Payroll for workers’ compensation purposes may differ from payroll you report for tax purposes. This can include: wages or salaries; commissions; bonuses; overtime; and sick, holiday and vacation pay. Some states allow employers to count overtime pay as straight time, and you can generally exclude tips.
- Job descriptions: These should include a list of daily duties and where employees perform those duties. Be as accurate as possible. Job descriptions will determine the employee’s occupational class, which determines the rate you’ll pay for coverage.
- Independent contractors and subcontractors: Be prepared by having pay information on any of your independent contractors. Your insurer might request it to ensure you are not avoiding paying workers’ compensation by misclassifying workers who should be classified as employees.
You might also need information on subcontractors’ employees, including occupational class and payroll. In some industries, particularly construction, a sub’s employees might not have adequate coverage, leaving the employer liable for claims. To avoid this, obtain certificates of insurance from your subcontractors, showing that they had workers’ compensation coverage on their employees during the time they worked for you.
To perform the audit, the insurer might simply send you a form to complete. If you get a paper-based (or web-based) audit request, respond as quickly and completely as possible.
Sometimes an insurer will want to do a physical audit, in which the auditor visits the employer’s location. If there are questions on your audit, or if you think the insurer has misclassified some of your employees, you might request a physical audit.
We can help you prepare for a workers’ compensation audit. For more information, please contact us.