Workers’ comp compliance issues can lead to fines from regulators, increased premiums billed retroactively, lawsuits, and even stop work orders. Employers must manage compliance around class codes, accurate payroll reporting, policy coverage and limits, and injury response.
Simply having workers’ compensation insurance is not enough. Reactive remediation won’t prevent fines and penalties.
Workers’ comp Insurance Coverage is governed by state law
Workers’ compensation coverage is regulated at the state level by governments with sizable enforcement budgets. All 50 states plus D.C. require employers to comply with their state’s benefit formula, coverage mandates, reporting deadlines, and regulatory investigations.
Employees covered under federal workers’ comp law:
- Federal employees (they have a separate administrative system)
- Maritime employees/workers hurt on the waterfront
- Seamen who are injured under maritime law
Need a refresher on state-specific requirements? Download our free Workers’ Comp State Requirements cheat sheet.
Outside of those narrow categories, if you employ someone, your business is likely required to cover their injuries under that state’s workers’ compensation statute.
Carrying Coverage + Following Posting and Reporting Requirements
Employers who are covered under a state’s workers’ comp system must:
- Maintain workers’ compensation insurance coverage or qualify as a self-insured entity
- Post required notices around the workplace
- Have claim forms available for injured employees
- Report serious injury within a specified timeframe
Requirements under Federal OSHA include reporting:
- Fatalities within 8 hours
- Inpatient hospitalizations, amputations, or eye loss within 24 hours
Most states also require you to report these injuries to the workers’ comp board within 24–72 hours.
Failing to follow posting and reporting requirements can increase the cost of a claim and result in administrative fines.
6 Common Workers’ Compensation Compliance Risk Areas
Every state’s system varies, but penalties for misclassification can include:
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Incorrect Classification of a Worker
Employers who intentionally or negligently misclassify workers to avoid buying workers’ compensation insurance open themselves up to negligence lawsuits.
Many states use a control test, economic dependence test, or ABC test to determine if a worker is an independent contractor or employee.
If you misclassify a worker and they are later found to be an employee, you could be assessed:
- Back premiums (states commonly use a 3–6 year lookback window)
- Interest on unpaid premiums
- Statutory penalties
- Lose immunity from tort lawsuits
- Become subject to payroll audits
Can’t depend on a contractor agreement form. The insurer will look at payments, who provides equipment, who controls the work being done, etc.
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Payroll reporting and classification issues
Insurance audits regularly identify:
- Incorrect class codes being used
- Underreporting of payroll
- Bonuses or commissions not being reported
- Dangerous job classifications being reported as generic clerical work
- Use of uninsured subcontractors
Audit adjustments average between 10% and 40% but can be much higher. Every audit adjustment increases your experience modification factor, which increases future premium costs.
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Policy Lapses
If your policy has lapsed for nonpayment, been unscheduled for a multi-state operation or a new job class has been added without endorsement, you have exposure.
Filing a claim without coverage could lead to stop work orders, civil fines, and personal liability.
If you don’t validate the subcontractor has valid workers’ compensation coverage (Certificate of Insurance), you could be liable if a worker gets hurt on the job.
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Subcontractors and Third-Party Workers
The line between employee and subcontractor is blurry in many industries. General contractors hire subs to perform work on-site, and many employers use staffing agencies to fill open positions.
If an injury occurs on your premises, and a subcontractor does not have workers’ comp coverage, the regulator may decide you are the “statutory employer.”
You could be liable for back premiums, receive a stop work order, and even find yourself in a contract dispute with the business over indemnity language.
Tip: When reviewing a subcontractor’s COI, employers should validate the policy number matches the bill of sale and confirm WC coverage is afforded in your state of operation. Tracking COI expiration dates is also critical.
Tracking when COIs expire and coordinating renewal with your subcontractor is one of the most common reasons claims are found to be uncovered.
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Premium Audit Violations
Premium audits occur after policy expiration dates. Your carrier will want to review:
- Payroll reports
- IRS Form 941 filings
- Job classifications
- Payments to subcontractors
If your numbers do not match, you may be billed for retro premium. You may also be charged interest and audit fees.
Your rates may go up during renewal, and your carrier may even refuse to renew your policy.
Intentional fraud could land you in criminal court depending on the state.
Employers with good audit trail practices (maintain accurate payroll journals and classification worksheets) have fewer audit adjustments.
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Failure to Continually Manage Risks
Consequences of workers’ comp compliance failures can include:
- Back premiums
- Penalties assessed by regulators
- Six-figure premium audits
- Stop work orders which can cost you $1,000 – $10,000+/day for most contractors
- Contract terminations
- Loss of bonding capacity
- Civil lawsuits if immunity is lost
- Liens that hurt your credit rating
Keeping policies current, managing changes in your operations, and ensuring subcontractors have coverage is an important but often overlooked compliance requirement.
For contractors in the construction and service industries, uncovered claims often lead to stop work orders that cost businesses thousands of dollars every day.
How to Prevent and Monitor for Compliance Risks
Below are controls that help prevent and monitor for common workers’ comp compliance failures.
Maintaining a written program and documenting your internal training are your first line of defense against fines and penalties.
Demonstrating to regulators you have comprehensive controls will limit their investigation.
Written Program
Assign someone on staff to manage compliance efforts. Implement quarterly internal audits of payroll reports and annually utilize a third-party to review your compliance practices. Train supervisors on injury response protocols. Retain your payroll records and supporting documentation for the length of the state’s lookback period (minimum of 3 years).
Note: Mid-size employers with 100+ employees should consider annual third-party reviews.
Training
Ensure supervisors know how to report injuries within the deadlines mandated by your state. Correct classification and return-to-work practices should also be reviewed with HR and Supervisor teams. Lastly, ensure your supervisors know about OSHA injury reporting requirements as well. Many workers’ comp claims are also OSHA recordable incidents.
Measuring the number of injuries that go unreported before and after implementing a training program is a great way to measure efficacy.
Controls to Implement
Utilize technology to reconcile your payroll to your policy weekly. Conduct internal audits of job classifications quarterly. Use technology to track COIs on subs and ensure coverage is present. Perform random internal audits (review 10% of your quarterly payroll) and document your supporting rationale when classifying contractors.
If you find an issue:
- Reclassify the worker immediately.
- Contact your carrier to self-report.
- File amended payroll reports with your carrier.
- If back premiums are assessed, see if you can payment plan repayment.
- Document what controls you implemented to prevent future issues.
Self-reporting and correcting the problem goes a long way with regulators.
Things to Monitor
There are several key risk indicators you can monitor to ensure you aren’t exposing your business to unnecessary risk.
Tracking how long it takes to report a work injury, any changes to your EMR, audit exception rates, and subcontractor COI expiration dates will help you identify issues before they become costly.
Summary
Correctly classifying workers, maintaining accurate payroll records, ensuring proper insurance coverage, and training supervisors to report injuries promptly are critical components of a workers’ compensation compliance program.
When you build a system to prevent, monitor, and audit for common compliance issues your exposure to negligence lawsuits and fines decreases.
The alternative is costly and could put your business at risk of shutting down operations.
Workers’ comp compliance should be active, not passive.
FAQ
Q1: Which states impose the largest fines for uninsured claims?
A: While California has some of the highest penalties assessed ($100,000 for a third violation), Texas can assess penalties of up to $50,000 per violation.
Q2: Are workers’ comp insurance audits negotiable?
A: Yes, many insurers will work with you on payment if you are assessed back premiums. It’s always best to discuss with your broker or carrier ahead of time.
Q3: How long do states audit workers’ comp payroll?
A: Every state has a different lookback period. States commonly audit between 3-5 years of payroll history.
Q4: Can my employees sue me if they’re injured on the job?
A: If you do not carry workers’ comp coverage, then your employee can sue you for negligence. Even if you do carry insurance, you may open yourself up to lawsuits if you misclassify employees.
Q5: Is voluntary workers’ compensation coverage audit-proof?
A: Having volunteers covered under workers’ comp does not prevent insurance audits. Employers should regularly audit internal payroll reports and ensure job classifications are accurate.