Workers’ Compensation audits are required to ensure that employers pay the correct insurance premiums. Insurance companies perform these audits to verify that the employer’s payroll and classification of employees are accurate.
Workers’ Compensation audits are typically performed annually, although the specific timing may vary depending on the insurance policy and the jurisdiction’s regulations. The audit period usually covers a specific period of time, such as one policy year. It is common for the audit to be conducted shortly after the policy year ends or at the renewal of the policy. For example, if an employer’s Workers’ Compensation policy runs from January 1 to December 31, the audit might be scheduled in the first few months of the following year.
During the audit, an insurance company representative or an independent auditor will review the employer’s records, such as payroll records, employee classifications, and other relevant documentation. They will assess the accuracy of the reported information and determine if any adjustments need to be made to the premiums based on the actual exposure and risk.
Monthly Self-Reporting
Monthly self-reporting for Workers’ Compensation involves the employer reporting certain information monthly to the insurance carrier. Typically, the report includes the payroll, broken down by employee or job classification; employee count; and updates on workforce changes, such as hiring or terminating employees, job role changes, or business structure modifications for the reporting period.
Although monthly self-reporting allows for more frequent reporting, audits serve as a check to ensure that the reported data aligns with the actual operations and payroll of the employer. A Workers’ Compensation audit will identify the following:
- Payroll Errors: There are several reasons payroll could be incorrect. For example, employers occasionally include the overtime amount as part of the payroll when only a portion should be included. Depending on the state, the excluded amount varies, however, most states exclude one-third of overtime from payroll. If an employer overreports the overtime amount, a return premium is due.
There are also instances where a business purchasing a Workers’ Compensation policy elects to exclude its officers from coverage. However, in completing the monthly report, HR erroneously includes the officers’ payroll. This could result in significant overpayment of premiums.
Sometimes reports are run for the wrong period, which impacts payroll amounts. Other paperwork errors also occur.
- Misclassification: Class codes are used to calculate Workers’ Compensation insurance premiums. Employees with a higher risk of injury on the job are assigned class codes and insurance rates that reflect that risk. An employer may assign payroll to the wrong class code, which will change the premium – higher or lower. During the audit process, the insurance company reviews the job performed by each employee to ensure the correct class code applies.
Be Prepared at Audit Time
When undergoing a Workers’ Compensation audit, employers should be prepared to provide various documents and records to support the accuracy of their reported information. While the specific requirements may vary depending on the state and carrier, here are some common documents that employers may be asked to provide as backup during a Workers’ Compensation audit:
- Payroll Records: Detailed payroll records should be available for the audit period, including records of wages paid to employees, hours worked, overtime pay, bonuses, commissions, and any other forms of compensation. These records should ideally include individual employee information and be organized by pay period.
- Timesheets or Timekeeping Systems: If the employer uses timesheets or a timekeeping system, these records should be available to demonstrate the hours worked by employees. This can help validate payroll calculations and ensure accurate reporting of wages.
- Certificates of Insurance: Employers may be asked to provide certificates of insurance for any subcontractors or independent contractors they worked with during the audit period. This helps ensure that the appropriate coverage is in place for all workers.
- Tax Forms: Tax-related documents such as W-2 forms, 1099 forms, or payroll tax filings can serve as additional evidence of wages paid and employee classifications.
- Financial Statements: Employers may need to provide financial statements, such as profit and loss or balance sheets, to support their reported payroll figures.
- Business Records: Other relevant business records may be requested, such as general ledgers, sales records, contracts, invoices, or work orders, especially if the business operates in multiple lines of work or engages in subcontracting.
Our goal at Prescient National is to ensure that our clients pay accurate Workers’ Compensation insurance premiums. Our audits help to promote fairness and accuracy in the Workers’ Compensation system.
