Workers’ compensation coverage is a must for employers, which means the workers’ compensation audit is a necessary process as well. Regardless of the size of your payroll or how long you have been in business, there are 4 important things you need to know about workers’ compensation audits:
1. Workers’ Compensation Audits are Mandatory
Workers’ compensation audits may not be at the top of an employer’s list of favorite things to do, but no amount of avoidance or procrastination will absolve you of your audit responsibilities. Audit requirements are specified right in the workers’ compensation coverage form.
Why is it so important to audit the actual exposures? In the highly regulated environment of workers’ compensation insurance, audit data is reportable to various state regulatory bureaus, who use the data for a number of purposes, including:
- Calculating experience modification factors
- Developing classification rates
- Industry research
Failure to comply with a workers’ compensation audit may result in negative consequences, including the following:
- Delayed or inaccurate calculation of experience modification factors
- Inaccurate classification of operations
- Audit non-compliance charges
- Fines for delinquent regulatory reporting
2. Workers’ Compensation Audits Require Specific Information
Workers’ compensation rating involves complex rules regarding various types of employee compensation and these rules can vary by state. That’s why it’s best to keep detailed payroll records that include:
- Total unadjusted gross wages for the policy coverage term by:
- Employee
- State of employment
- Entity of employment, if multiple
- Job description
- Classification code
- Separate wage categories for overtime earnings, severance payments and Section 125/Café (necessary for CA only)
- Identification of Owners/Officers/Partners & Members as applicable, including:
- Title
- Ownership percentage, if any
- Job duties
- List of contract labor, including:
- Name
- Work state
- Description of work
- Dates worked
- Total amount paid
- Certificates of Insurance, if applicable
- Payroll tax reporting documents for 4 quarters closest to the coverage term, including:
- Federal 941s and/or state unemployment reports
3. Your Auditor is Your Ally
There is no reason to dread working with a workers’ compensation auditor. Although their purpose is to ensure the completion and accuracy of audits, they may also provide the following assistance:
- Addressing questions
- Reviewing information needs
- Confirming entity and location operations to ensure the use of accurate classifications
- Supporting communications with the insured’s payroll providers and/or in-house records team to obtain the best payroll reports
- Sharing and evaluating the audit payroll findings to address any concerns and help facilitate agreement
4. Proactive Steps Can Make the Audit Process Much Smoother
If the audit process is daunting for you, there are a few things you can do proactively to make things easier:
- Keep your policy current – use accurate classification and payroll estimates at policy inception (the latest audit is always a good starting point)
- Inform your insurance representative of any changes in a timely manner (adding or deleting any entities or locations, changes in operation or legal status, etc.)
- Keep detailed payroll records – make sure you differentiate between all the different types of remuneration
- Use your auditor as a resource when attempting to classify employees
As they say, knowledge is power, and now you know 4 things that can help make your workers’ compensation audits less bothersome and more beneficial. As always, don’t hesitate to contact your agent, broker or insurance carrier with any questions regarding your workers’ compensation policy or audits.
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