Workers’ Compensation insurance premiums are in part based on estimated employee wages (including bonuses and vacation, holiday and sick pay), employee classification codes, and the cost of uninsured subcontractors. At the end of the policy period, the insurance company will conduct an audit regardless of how the premium is paid, including via self-monthly reporting. The audit is utilized to verify that the payroll estimates and classification codes when the premium was originally quoted reflect the actual payroll and scope of work performed during the policy period. Audits also ensure that subcontractors have their own coverage in place.
When the Workers’ Compensation audit is completed, the insurance carrier will send the insured a final audit statement, which will show whether the insured owes any additional premiums or if any credits must be returned or applied to the next policy. These credits or debits are typically due to payroll adjustments made by the auditor during the year-end audit. Additionally, changes may be the result of incorrectly classified employees.
Keep Insurance Agent/Insurer Up to Date with Operational Changes
In order to avoid any surprises or variances at the end of the year when the audit is performed, Prescient National recommends that clients notify their insurance agents of any operational changes that would impact their Workers’ Compensation premium. Operational changes include opening or closing a new location, which may involve an increase or reduction in payroll, or the addition of a new operation, which could result in a different class code for the company.
It’s also important that employees are classified correctly and to notify an insurance agent of any job changes. For example, an employee classified as a clerical worker who is promoted to a traveling salesperson is classified differently and would impact the Workers’ Compensation premium. Make sure what people are doing and where they are doing their job is classified correctly. Partition employee payroll by class code.
In addition, insurance agents along with Prescient National’s underwriters are available to help ensure that employees are properly classified.
If the company hires subcontractors, keep a record on file of each subcontractor’s certificate of insurance to present at the end-of-the-year audit. If a certificate of insurance is missing, the subcontractor’s payroll will be included in the insured’s payroll.
All overtime and double-time work must be handled correctly within the payroll amount. Be sure these amounts are separated out for the auditor.
Insureds may want to consider meeting with their insurance agents on a quarterly basis to ensure all their documentation is correct and that nothing has changed in the business that would impact the audit. Prescient National often performs midterm audits on new policies to ensure payroll and classification accuracy.
Be Prepared the Day of the Audit
To help the Workers’ Compensation audit process go smoothly, make sure everything is ready for the auditor.
Be prepared with all required documentation. The auditor will send a list of the documentation required, which includes the following, among other information:
- Payroll Records
- Payroll journal and summary
- Federal tax report: 941s, 1099s that cover the period
- State unemployment tax reports
- Cash Disbursement Records
- Employee Records
- Detailed explanation of job duties of each employee (if available)
- Number of hours, days, and weeks worked annually
- Certificates of Insurance for all subcontractors and independent contractors used during the policy period
- Detailed Description of Business Operations/Functions to justify Workers’ Compensation classification used
Prescient National offers a variety of Workers’ Compensation insurance products tailored to an employer’s risk profile and appetite, backed by expertise, analytics, loss control, risk management, and technology. Our goal is not only to provide coverage to policyholders but also to assist employers in preventing injuries, controlling costs, getting workers back on the job after proper treatment, and ultimately benefiting from our services for a more profitable bottom line.
