Navigating your yearly workers’ compensation audit doesn’t have to be stressful. Many employers are surprised when they receive their audit notice because they didn’t know what to expect. Take the guesswork out of audits by learning how they work. You’ll prevent cost overruns, late fees, and compliance penalties. With preparation and accurate records, your next audit will go smoothly.
Partner with Bowthorpe & Associates Insurance Producers and we’ll help you stay organized and control your workers’ compensation premiums.
Why Do Workers’ Comp Audits Occur?
When you buy a workers’ comp policy, your premium is an estimate based on your projected payroll and job classifications. Before your policy renews, your insurer will review your business during an audit.
Your auditor will verify your actual payroll and exposure. If your business grows or you misclassified employees, your premium will increase. If your estimates were accurate, the audit is typically quick and administrative. Either way, audits are a simple process to verify you paid the proper premium.
What Happens When You Receive a Workers’ Comp Audit Notice?
Audits typically start with a letter from your insurance carrier. It will identify the audit period and documents required.
Auditors can perform audits in person, virtually, or over the phone. No matter how they conduct your audit, you can prepare for it. Plan to complete the audit when your payroll or HR department has the time to gather information. Audits take longer when you don’t schedule enough time to get the job done.
If you ignore the letter, the carrier will conduct a default audit. During a default audit, your payroll is estimated at a higher rate which increases your premium.
Documents Needed for a Workers’ Comp Audit
Your auditor will want to review your payroll records. Make sure you have documentation on all gross wages paid to employees. Overtime, bonuses, commissions, and any other additions to salary should be readily available.
Copies of tax filings, payroll summaries, and general ledger reports will also be needed. Insurers use these documents to cross-check accuracy. Make sure your totals match and that there are no discrepancies.
If your company uses subcontractors, have their certificates of insurance available. This proves they have their own insurance coverage. Without it, the auditor may count their payroll when calculating your exposure.
Job Classifications Are Important
Your workers’ comp premium is determined by class codes for every employee. These codes are based on job duties and risk of injury.
Misclassification is a common mistake found during audits. For instance, one auditor discovered an employee who split his time between clerical work and fieldwork.
The employee could not be classified as clerical because he also spent time installing equipment. This employee’s job duties should have been separated by four-digit job classifications.
If there is any question about where an employee spends their time, try to track it. Some businesses track job duties by department or specific job codes. If records are kept poorly, insurers will always rule in favor of the higher classification.
Workers’ Comp Audit Process
Once your auditor has the documents they need, they will review your records and ask questions. Some prefer to tour your facility to personally assess the job duties of your employees.
Auditors may also interview employees to determine their exact job responsibilities. These interviews are not performance reviews. Your employees should understand that the auditor is there to match classifications with job duties.
Final Premium Adjustment
Once your auditor has finished, they will evaluate your books and submit their findings. Your insurance company will then issue your final premium adjustment.
If your payroll was greater than expected, or your classifications changed, you will be billed for the difference. But what happens if your actual exposure was less than estimated? You should receive the difference as a refund.
Even small differences can impact your premium. If you work in higher-risk industries such as construction, accurate estimates are especially important. Review your findings carefully before you pay any additional premiums.
Reduce Your Audit Exposure
The best way to handle your workers comp audit is to prepare all year long. Keep up-to-date records of your actual payroll instead of estimated wages. Ensure your subcontractors have up-to-date certificates of insurance on file.
Review your employees’ job classifications and adjust them when job duties change. Stay organized by keeping documents sorted by policy period.
When it’s time for your audit, your records will be easy to find which speeds up the process.
When to Fight an Audit
If your audit doesn’t look right, you don’t have to accept it as-is. Provide copies of any documents that support your case. That includes payroll reports, contracts, and job descriptions.
An auditor’s job is to research and analyze the information they have. If you can provide more accurate information, they will use it to recalculate your audit.
The longer you wait, the more your business will pay for incorrect classifications.
Final Advice
Most employers dread workers’ compensation audits. But when you understand how they work and why they occur, audits are simple.
Keep your business organized, track your payroll as it happens, and always classify employees correctly. When you do your part, audits aren’t a hassle. When you don’t, your audit could result in a large bill.
Partner with Bowthorpe & Associates Insurance Producers and we’ll keep you covered every step of the way. Whether you’re in the middle of your audit or just starting your business, we’re here to help.
Frequently Asked Questions
What causes a workers’ comp audit to occur?
An audit occurs at the end of a policy period to verify your estimated payroll and classifications.
What will happen if I don’t respond to an audit notice?
Your insurance carrier will perform a default audit which always results in higher premiums.
Will subcontractors cause issues on my audit?
Yes. If subcontractors cannot prove they have their own workers’ comp coverage, their payroll will be counted against your exposure.
Can I dispute the results of a workers’ comp audit?
Yes! You can dispute an audit by sending in documentation that proves you’re right.
How can I avoid paying higher premiums due to an audit?
Maintain accurate payroll records and employee classifications throughout the year.