What Is a Workers’ Comp Audit?

Workers’ compensation insurance protects your employees and your business. A workers’ comp policy provides a safeguard against unforeseen and uncontrollable risks in the workplace. You may be held liable for medical costs or lost wages for an employee who has gotten injured or ill at work without it. 

Workers’ compensation insurance helps to provide benefits to employees who are injured or get sick on the job. Workers’ compensation benefits cover a wide range of expenses directly related to injury or illness, including:

  • Medical bills.
  • Lost wages.
  • Ongoing health care.
  • Disability benefits.
  • Funeral expenses.

Premiums are determined in part by how much your employees were paid throughout the life of the policy. Insurance companies request annual workers’ comp audits to verify payroll records and classification codes. The process for a workers’ comp audit can be completed in-person, in a phone call, or through the mail. 

Premiums for workers’ compensation policies are also determined by job classifications that reflect your employees’ risk factors. If the roles and risks of filing a claim for specific jobs change from year-to-year, your premium will be affected. 

A workers’ comp audit ensures your policy coverage and premium payments match. An accurate appraisal of payroll records will show whether you are paying a satisfactory, less-than-satisfactory, or more-than-needed amount for coverage. Failure to accurately complete an audit can lead to your insurance company canceling your policy and applying any penalties to the premium payments. 

Types of Workers’ Comp Audits

Three basic types of workers’ comp audits can be performed after a completed policy period. 

1. Field Workers’ Comp Audit

A physical audit involves an auditor visiting your place of business and conducting a thorough review of the company’s operation. A field audit is a deep examination that will include a review of your records and how your workers perform their jobs. A workers’ compensation auditor will verify payroll records and applicable tax documents. 

2. Phone Workers’ Comp Audit

A workers’ comp audit can often be completed over the phone. Your auditor will supply you with information and a list of requested documents to collect for the phone audit. This is ideal for smaller businesses with less complicated records and documentation. 

3. Self-Audit

A self-audit will take more effort on your part to fill out and file all forms accurately and completely. You have a specified amount of time to return the completed forms to the auditor for review. 

Workers’ Comp Audit Requirements

Whether your audit is performed in-person, on the phone, or on your own, there is a specific list of workers’ compensation audit rules and requirements to follow. It is essential to find a way to gather and organize the documents you will need for your workers’ comp audit to ensure a speedy and accurate process. 

Payroll Records

The auditor will request your complete payroll records during the policy term. You will likely be asked to supply copies or data from the following:

  • Payroll journal and summary, including employee salaries, wages, commissions, overtime pay, and bonuses. 
  • State unemployment reports.
  • Individual earnings records.
  • Federal 941 tax reports.
  • Your checkbook.
  • Overtime payments broken down by employee.

Employee Records

You will also need to provide detailed records for all employees who worked during the policy period. Employe records include:

  • Total number of employees.
  • Total hours, days, and weeks worked during the year.
  • Detailed explanation of job duties and responsibilities for each employee. 

Payment Records

You will need to present information for all cash disbursements and payments, including

  • Payments to subcontractors and independent contractors. 
  • Purchases of materials. 
  • Payments for casual labor. 

Job Code Descriptions

Every job in your organization is assigned a classification code based on that position’s risk factors and the likelihood of injury. You will need to provide the workers’ comp auditor detailed descriptions of each employee that justified their classification. 

Certificates of Insurance

Independent contractors and subcontractors can affect workers’ compensation premiums in some states. Be prepared to present current certificates of insurance for all supplemental workers that were paid during the policy period. 

What Happens If You Ignore a Workers’ Comp Audit?

Your workers’ compensation insurance policy is a contract in which you agreed to have workers’ comp audits performed. Ignoring a workers’ compensation audit can result in severe consequences for you and your business. Failing to comply with workers’ compensation audit rules is a violation of the terms of your contract with the issuance company.

The following are potential consequences for failing to complete a requested workers’ compensation audit.

Cancellation of Current Coverage

Failing to comply with an audit is seen by the insurance company as uncooperative. Your current policy may be canceled or not set for renewal. 

Financial Penalty

An insurance company can also assess a stiff monetary penalty if you are considered an uncooperative participant in a workers’ comp audit. Penalties are set as a percentage of the original premium deposit, depending on the state and the specific circumstances.  

Inability to Secure Future Coverage

If you are deemed uncooperative with one insurance company, your reputation will follow you to other carriers through the local advisory jurisdiction organization. Once you are listed as uncooperative with a previous insurance company, it can be difficult to secure coverage with another provider. 

Lawsuit

A workers’ compensation policy is a contract that can draw legal action if broken. A civil action can be brought against you if you are not living up to the terms of the workers’ comp insurance contract. Suspected fraud can bring criminal charges that carry more severe penalties and consequences. 

Workers’ Comp Audit Tips

A workers’ comp audit is necessary to protect the insurance company and make sure you are not paying too much for your policy. The following are some tips to help make your next workers’ comp audit go as smoothly and painlessly as possible. 

Payroll Class Separation

Employees that perform multiple job duties are assessed with multiple class codes. If payroll records do not reflect the work performed in differing codes, the employee is automatically classified in the highest-rated code. 

Separate Overtime Pay By Employee

Rates are reduced for overtime wages. It is important to separate and summarize all overtime pay by job code to avoid overpaying premiums for overtime hours. 

Know What Not to Say to Workers’ Comp Adjuster

It is almost as important to know what not to say as it is to understand the documents you need and the questions to ask. Keep the process moving and avoid adding unnecessary stress or burden with irrelevant questions to your audit. 

Make Auditor’s Job Easy

Anytime you meet or speak with your auditor, come prepared with any needed or requested documents and information. Be as cooperative and forthcoming as possible without volunteering information that is not explicitly requested. 

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