6 Common Mistakes on Workers Comp Audit That Can Cost You

If you’re a worker’s compensation insurance payer, you know that a Workers Comp audit can wake you up, especially if you’re faced with a stifling bill. Unfortunately, there is no magical way to make a Workers Comp audit go to waste. But you can make it easier and less difficult. ‍Let’s take a closer look at how to track employee compensation for successful insurance audits.

What Is a Workers Comp Audit?

Before we help you review your insurance, it’s important to understand what it’s all about. If you take out Workers’ Compensation Insurance, you will be given an estimate of how much you will have to pay. Your reward is determined by:

• Employee wages including bonuses and tips
• Employee class codes which are three- or four-digit numbers insurers use to determine the risk of each job. Class codes are determined by third-party bureaus and can differ depending on the state you’re in or an employee’s wage in some cases.
• Cost of uninsured independent contractors

Your insurance company may require a worker’s compensation inspection to ensure the quote is correct. This check verifies that the premium quote meets the insurance coverage requirements.

Any discrepancy between the quoted amount and the amount you actually need means you are either paying too much or too little for your insurance coverage. In this case, the insurance company will request an adjustment of the premium. An adjustment means you have to pay more or less in premiums.

If you overpay for workers’ compensation (and the premiums are too high), you’ll get your money back…in theory that’s great (and arguably better than other options), but the I could have invested the money in my own insurance. Do business or pay off debt early this year. And if the premium is too low, you will be obligated to return it, but we all know that’s not ideal.

After completing the exam, you will receive a final exam bill. The Workers Comp audit report details the premiums owed to the insurance company (unpaid additional premiums) or reimbursements due to the insurance company (repaid premiums). Adjustments are typically caused by payroll errors or misclassification of an employee’s work type or class code.

Types of Workers’ Compensation Insurance Audits

Although all audits have the same goal — to make sure you’re paying the right amount for your compensation — not all Workers Comp audits are created equal. The types of work-related injury assessments a company receives depend on the size and type of business, and the amount of insurance premiums. In general, he has four categories of occupational injury assessment: physical assessment and voluntary assessment.

• Phone audit: The insurance company will check your payslip and other relevant documents over the phone.
• Email Audit: You will receive a confirmation form in the mail to verify your payslip and other relevant information, please fill it out and return it.
• Physical examination: Larger companies with higher insurance premiums may require a physical examination. This means that premium audits are conducted at headquarters.
• Voluntary Audit: If you run a small business, your insurance company may only require a voluntary audit. In the case of voluntary inspection, the insurance company will mail an inspection form. You must complete an audit form and provide supporting documentation.

What an Insurance Company Looks for in a Workers Comp Audit

So what are insurance companies looking for? As you might have guessed, to make sure the salaries and classification codes are correct. Some of the documents that insurance company auditors review and verify during audits are listed below.

• Payroll records such as payroll journals and summaries, overtime payments, IRS federal tax returns, state tax returns, and state unemployment tax reports
• Insurance policies for subcontractors and contractors
• Employee data such as Form 941, job responsibilities for each employee, hours worked and total number of employees
• Payments to subcontractors, cash payments for materials and labor
  Description of business

Please note that the insurance company wants all these documents because they want to make sure the quote matches the actual payslip. This list also includes subcontractors. Insurance companies want to make sure you are actively insured. Failure to do so may result in additional insurance charges being billed to uninsured subcontractors.

When Should You Expect a Workers’ Compensation Premium Audit?

Most states and the National Compensation Insurance Council (NCCI) require insurers to review most workers’ compensation policies. When your workers’ compensation insurance expires, your insurance company will notify you of an audit within 60 days. In most cases, your insurance company will notify you by email or phone.

These checks are mandatory as part of workers compensation insurance. Just like filing tax returns or renewing your license, you need to be prepared for an insurance audit when your insurance period ends.

Why Is it Important to Comply with the Workers’ Compensation Audit?

Industrial accident inspections are usually required by law, so it is in your best interest to act in the best possible way. Even if you’ve always wanted to kick and yell, of course, there are serious consequences if you don’t comply.

For example, insurance companies have a set period of time for executing checks. Failure to complete the review within this period may result in the cancellation of your insurance and may require you to pay an additional fee for uncooperative behavior. In some cases, additional charges can exceed the original estimate by 25–50 percent.

Non-compliance is also a red flag for future insurers. They see you as a risk, which can lead to higher rewards.

Common Workers’ Comp Audit Pitfalls to Avoid

It’s clear that following a workers’ compensation insurance premium audit is extremely important to protect your wallet and your business. To keep things running smoothly, consider the six most common mistakes to avoid when auditing employee compensation.

1. Incorrect Payroll Estimates

You want to make sure your salary estimate is as accurate as possible. Accurate estimates ensure a smooth audit process. It also helps you avoid expensive bills after the exam.

Work with a licensed insurance advisor who understands your business operations and is aware of the changes that may occur during your policy term. Transparency simplifies the review process.

As an entrepreneur, you also need to ensure that your in-house payroll is consistent with your audited payroll. To do this, you must ensure that the information you provided to the examiner is correct and review the work of the examiner.

Bonus Tip: An employee compensation platform like Hourly takes the guesswork out of it. Hourly ties salary data directly to employee compensation, so bonuses are always based on actual (rather than estimated) wages.

2. Not Classifying Employees Correctly

The class code is used to calculate workers’ compensation insurance premiums. Employees at high risk of injury at work are assigned a class code and rate that reflects their risk.

Most states use class codes set by the National Compensation Insurance Council (NCCI). You can use this alphabetical list of her NCCI codes to find the correct class code for your employee. Some states have their own classification system for employee comparison codes (or use modified versions of the NCCI Employee Comparison Codes).

Click here to see if your state is eligible. These bodies have the final say on correct classification. Always contact a qualified insurance advisor. This advisor will guide you through the process and help you figure out the correct class code for your team members.

Incorrect job classification may require a lump sum payment at the end of the process with the exam invoice. Some employers in the construction industry are allowed to use a separate payroll for calculating insurance premiums.

Separating salaries means that an employee’s salary can be split between different class codes based on different job functions. For example, let’s say you’re a home builder and your employees are currently spending their time doing carpentry, pouring concrete, and installing drywall.

In this case, wages are spread across different tasks (for example, carpentry can earn $10,000, pouring concrete $8,000, and installing drywall $5,000). Workers Compensation benefits are based on these wages and their corresponding grade codes. This saves costs as employees are paid less for some tasks compared to others.

Payroll segregation is a smart choice if you maintain accurate timekeeping and payroll and operate in NCCI state. You can always contact a certified insurance advisor if you have questions regarding a specific country.

Bonus Tip: Hourly allows teams to change class code on the fly to suit the type of work they do. This will help avoid large charges due to incorrect class codes during audits.

3. Failing to Include Deductions

Not everything on your payslip is taken into account when calculating workers’ compensation insurance premiums. For example, you can deduct part of your severance pay and overtime (if you’re paying more overtime than you normally work).

Bonus Tip: See your state’s employee compensation regulations for a complete list of deductions that apply to your business. Common deductions include bonus payments, tips, employee benefits, and dismissal of officials.

4. Paperwork Errors

Maintaining an organization is critical to a successful employee compensation audit. Streamline processes by organizing and archiving all payslips and other documents for the duration of the contract. Note that the audit should have the following items available:

• Payroll records such as payroll journals and summaries, overtime payments, IRS federal tax returns, state tax returns, and state unemployment tax reports
• Insurance policies for subcontractors and contractors
• Employee data such as Form 941, job responsibilities for each employee, hours worked and total number of employees
• Payments to subcontractors, cash payments for materials and labor
  Description of business

If you use a checkbook as your record keeping method, you may need to turn it over to your insurance company. But if you have another way to track your paycheck, you can keep it where it belongs: in your pocket.

Also, please include the overtime pay separately. Some insurance companies offer discounts on overtime premiums, so you should check to see if there are any discounts available. Make sure all the information you have is true. Even if the mistake was an honest mistake, it could result in cancellation of your policy or a fine. And who would need such a headache again?

Bonus Tip: As a best practice, we recommend creating a work injury documentation checklist in preparation for an audit. Preparing the examiner with the proper documentation can help ensure a speedy review process.

5. Not Confirming All Subcontractors and Contractor Have Certificates of Insurance

A prerequisite for a premium audit is to prove that the subcontractor or contractor is insured. This is because insurers only want to cover their own employees, not contract employees.

If you do not have your insurance card and supporting documentation, your insurance company may charge you additional premiums for your coverage, which is undesirable.

Bonus Tip: Always check that the contractor’s insurance certificate and insurance date match the date the contractor worked.

6. Not Checking State Requirements and Deductions

Unfortunately, workers’ compensation requirements and exclusions vary by state. A small business operating in one state shouldn’t worry too much about changes in other states, but a multi-state business should. You cannot assume that the rules of one state apply to another state.

Bonus Tip: If in doubt, consult your state’s workers’ compensation regulations or contact a qualified insurance advisor who can answer your questions.

Be Proactive with Your Workers’ Comp Audit

To ensure that the exam runs as smoothly as possible, please be proactive in the exam process.

Communicating with the proctor ensures that you have everything you need for the exam. Also, remember to check the accuracy of the auditor’s worksheet after the audit is complete. If you need to adjust your premiums, make sure you understand the impact this change will have on your business. After signing the worksheet, make a copy for your records.

However, if you have not completed the Employee Compensation Policy Worksheet, do not sign it until you have completed it. They want to understand what you are signing before you sign.

Understanding the most common audit pitfalls and using these tips can streamline your audit process. Combining your business knowledge with the expertise of a licensed insurance advisor increases your chances of success.