Many businesses accept on “good faith” that the Workers’ Comp audit is done correctly. Yet, the audit process is complex and prone to many errors and omissions.
Since a Workers’ Compensation premium is estimated initially, the actual cost is determined through the premium audit, which can result in higher and unexpected costs. There are two important things to remember about Premium Auditors. First, their objective is to maximize your premium, after all they work for the insurance company. Second, overworked, they have tight time constraints. The more organized you are and the easier you make the job for the auditor, the more likely you are to have a favorable audit.
The best way to begin is to create your own audit package. When you compile the information needed and then present it in a format the auditor is familiar with, you will:
- Simplify the auditor’s job
- Reduce probing questions
- Know beforehand what to expect
- Control the data the auditor observes
- Help manage the ultimate cost of your workers’ compensation insurance
It is important to remember that the more detail you provide to support the audit, the better. Detail not only makes data more reliable, it makes the auditor look better in the eyes of his or her supervisor. Many auditors will even accept a well-documented audit as their own. Begin by creating a summary worksheet:
Step one: Take the time to place classifications into the payroll records
In most states (PA, DE and CA are notable exceptions), with the exception of construction, agriculture, and staffing, the overall business operation, not individual duties, is assigned a governing classification that best identifies the type of work being performed. This is typically the classification that contains the most payroll and the first critical step is to be sure that it’s correct. There are nearly 700 classifications in NCCI states and the definition and scope can change. It’s a red flag if an auditor attempts to change classifications to a higher rate, as there are strict limitations when an auditor can do so.
Once the governing class is determined, the next step is to identify standard exclusions, typically workplace functions that are common to all businesses, such as clerical, clerical telecommuters, drafting, sales and driver classifications. If your records do not clearly identify these employees, the auditor may include them in the higher governing classification.
It’s also important to identify executives, because in most cases, their payroll is capped. Without proper records, the auditor may fail to identify all of the executive names and not cap the payroll.
Specific rules may allow an employee’s payroll to be divided over more than one class code. Some states only allow this in construction, while other states have broader applications. If allowed, detailed records of the specific hours worked for each Workers’ Comp class code must be kept separately; percentages or estimates of this work are not allowed. Without adequate records, the entire payroll for the employee will be placed in the highest rated classification, increasing costs unnecessarily.
Step two: Adjust for excluded remuneration
Not everything that is paid to employees is included in the Workers’ Compensation calculation and excluded remuneration is a significant factor. While rules and definitions vary by state, overtime, tips and gratuities, dismissal or severance payments except for time worked or accrued vacation, active military duty, payments into a qualified third-party trust for the Davis-Bacon Act or similar prevailing wage law, valid business expense reimbursements, bonuses for innovation, employer-paid perks, such as automobile, airline tickets, incentive vacation, club memberships, property or service discounts, and event tickets, and employer contributions to employee benefit plans are just some of the types of excluded remuneration.
Unless employers are diligent in identifying excluded remuneration, auditors miss some and payroll is inflated.
Step three: Organize information on contractors
For all insured contractors, copy certificates of insurance. Confirm the period of the audit is included in the coverage period. For all uninsured subcontractors, ask the sub to break out the cost of the materials for the job, which can be excluded. Without this information, the auditor adds the uninsured subs, uses full contract price, rather than payroll costs. Ka-ching!
Step four: Put your best foot forward on the day of the audit
- Assign a knowledgeable, friendly staff person to work with the auditor.
- Treat the auditor as a welcomed guest – provide a clean, well-lit workspace.
- Present the auditor with your Premium Audit Package:
- Summary worksheet
- Copies of payroll report
- Copy of payroll tax returns (941, NYS-45-ATT, W-4-B)
- Copies of certificates of insurance
- Contracts with bills/invoices showing breakout of materials
- Cash book/check book/general ledger
- Offer no information unless the auditor asks for it.
- Escort the auditor if he/she asks to tour facilities.
- Schedule audit for Friday afternoon.
- Wear appropriate attire: Clerical people in clerical attire, etc.
Our Overcharge-proof Checklist gives you an idea of audit complexity. We are available to help. As Certified WorkComp Advisors, we are trained to prepare employers for audits, spot errors and get them corrected.
For Cutting-Edge Strategies on slashing Workers’ Compensation Costs visit www.PremiumReductionCenter.com