“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” ― Abraham LincolnWorkers Compensation Audit

As with any compliance based audit, the workers compensation audit can be a thorn in your side, especially if you are not prepared.  Many people who have not been through an audit of their workers compensation insurance program my “freak out” the first time they get a Notice of Audit letter in the mail. Honestly there is no need to worry.   The audit process is straight-forward.  In fact, it is a great road map to use when establishing internal record-keeping processes going forward.  Many times, we engage with clients that are having difficulty navigating an audit.  In order to get them through the process successfully, we recommend that they provide the information listed below.  In addition, we ask that they make it policy to maintain this information on an ongoing basis.  By implementing solid record keeping practices on the front-end, you will save both time and money in the long run.

Payroll Summary for the time period broken down by company, department/job activity and State

This information is important because you want to be sure you are paying the correct amount of premium.  In fact, this information is the basis for the entire audit process.  Workers compensation is based on the duties that each of your employees performs in the normal course of their work.  It is imperative that they are classified correctly so that the premium paid is accurate.  This does not mean that the insurance company is coming to your place of business with a “hired gun” to hook you for more money.  We have seen just as many audits go in favor of our clients due to employees not being classified correctly.  Some of this is able to be thwarted by the use of “monthly self reporting” policies that require businesses to report payroll by class code on a monthly basis.  However, monthly self reporting does not remove the existence of an annual audit altogether.

Total amount of Overtime separated by company and department

This is another area where business owners may get confused.  Many people are under the impression that overtime pay results in higher workers comp premium.  That is not accurate.  Workers Comp premium is derived from the standard hourly rate, not overtime.  It is an assigned rate per $100 of standard payroll.  By having accurate records of overtime hours worked, the auditor will be able to convert the overtime pay into standard payroll which results in a lower overall premium obligation for the insured.  Accurate overtime records are an absolute must.

State and Federal Unemployment forms, i.e. Federal Form 941

These are a great way to validate the total overall payroll dollars that were paid for the audit period.  These forms will show the exact wages that were paid to the various levels of government, so they are typically considered the most accurate “cross reference” for workers compensation auditors.

List of Sub-contractors, Contract Laborers and Independent Contractors employed during the audit period

This is where things can get a little sticky.  If your company uses sub-contractors, contract laborers or independent contractors, it is vital that you not only have a list, but also how much you paid them along with a copy of their certificate of insurance (or state exemption).  If you are not able to show that these entities have their own workers compensation insurance coverage in place, the auditor will attempt to put their wages on your policy.  This is a very simple snag for any company to avoid.  Simply don’t use people who don’t have workers compensation in place.  If they do have the coverage, make sure you have a copy of their certificate of insurance prior to allowing them to perform work on your behalf.  Anything outside of that suggestion and you are opening yourself up to heartburn and higher premiums.  Not only is it the correct thing to do financially, but it is the correct thing to do from a risk management perspective as a whole.  Why would you want an uninsured subcontractor working on your site?  This same methodology also applies to General Liability and other lines of coverage.  Transfer the risk as much as possible.  Retaining it in-house is always more expensive when you are dealing with subs.

List of all Corporate Officers, their titles, percentages of ownership and job duties.

This is important due to the rules around officers being included/excluded from workers compensation coverage.  In addition to the list above, it would also be prudent to provide dates of any Officer that may have joined or left the company within the audit time period.

Financial Records

You are going to have financial records for your company anyhow.  Make sure that you have them readily available to validate any audit findings at the time of the audit.  It is always much more painful to have to prolong an audit by providing information after the fact.  We realize that many privately held companies want to keep things as “private” as possible.  However, save your self the headache and keep some coin in your pocket.  Give the auditor what they need so they are able to get in and out as quickly as possible.

DavidRC150David R. Carothers, CIC, CRM has a decade of experience providing clients with creative solutions to more effectively manage their Total Cost of Risk.  He specializes in commercial property and casualty insurance placement for middle market companies of all types and specifically in the technology and life sciences industries. He holds general lines insurance licenses in Florida and other states.  He also holds the Certified Insurance Counselor and Certified Risk Manager designations from The National Alliance for Insurance Education and Research and is currently pursuing the Chartered Property and Casualty Underwriter designation from the Insurance Institute of America.  You can contact David by email at drc@praxiom-rm.com.  You may also connect with David directly on Linkedin by clicking here.