Most insureds are not familiar with the ins and outs of a Workers’ Compensation premium audit. Providing them with guidance on why an audit is performed, what’s involved in an audit, and navigating them through the process will go a long way to eliminate any surprises and unexpected additional charges.
Workers’ Comp premiums are based in part on estimated payrolls and exposures at the beginning of a policy period. An insurer prior to the policy’s expiration will perform an audit to determine if the payroll and class codes quoted at inception reflect the actual payroll and scope of work performed during the policy period. If there is a difference, insureds will either have to pay an additional premium or will receive a credit. Audits also ensure that any subcontractors the insured used had their own coverage in place.
For this reason, it’s important that clients be as accurate as possible with their payroll, including knowing what is and isn’t charged as payroll for Workers’ Compensation; properly classify employees; and obtain certificates of insurance from subcontractors. In addition, clients should be prepared in advance with the appropriate documentation for the audit.
What’s Considered Payroll in Workers’ Comp
Be sure your clients understand what constitutes payroll for Workers’ Compensation premium charges. Wages or salaries; commissions; bonuses, including stock bonus plans; holiday, vacation and sick pay; Social Security; and many other items are included. Overtime wages are included but they may be capped at a certain percentage depending on the state.
Payroll exclusions for Workers’ Comp include but are not limited to: tips and other gratuities received by employees; payments by an employer for (1) group insurance or pension plans and (2) payments into third-party pension trusts for the Davis-Bacon Act or similar wage law (the pension trust must be qualified under IRS Sections 401(a) and 501(a); dismissal or severance payments, except for time worked or accrued vacation; payments for active military duty; employer-provided perks such as the use of an automobile; and others. It’s important that the employer have a complete list of what is and isn’t considered payroll for accurate estimates and audit documentation.
Guidance for Employee Classifications
For most states, the NCCI has determined a classification code for each occupation based on the type of work performed and the perceived level of risk associated with the work, which is then tied to specific classification rates. The riskier an employee’s job, the higher the rating. It’s important for employees to be properly classified. Employee misclassifications can be costly once discovered during the audit. Perform a review of your client’s NCCI classification codes to ensure everything is in order.
Ensure Clients Are Ready for an Audit
Workers’ Comp audits may be performed remotely, by mail or onsite. The auditor may be the insurer’s employee or a third-party hired by the carrier. He or she will ask to review the following documentation:
- Tax Information: W-2, 1099-forms, Form 941, Form 944 and the company’s federal tax returns.
- Payment and Payroll Records: Accounting ledger, payroll journal, overtime payroll records, material and labor payments, state unemployment tax reports, and individual earnings records.
- Employee Information: A detailed outline of job duties for each employee, their classification rate and work schedules.
- Certificates of insurance for subcontractors.
- Additional Business Information: General ledger, sales journal, cash receipts, sales tax records, E-Mod worksheet, a detailed summary of business operations and information on each of the company’s owners and partners.
Be sure the client’s documentation is organized and detailed. If the client is unsure about anything, discuss potential pitfalls for clarification prior to the audit. Audits can be very stressful, which is why helping clients navigate the process brings real value to the broker-client relationship.