Updated: Apr 27
A Workers’ Compensation Audit refers to the inspection of the company’s payroll and financial records upon expiration of the policy period. This Workers' Comp Audit help article explains the Dos and Donts of Workers' Comp Audit Process.
Table of Contents
1. Workers and Compensation
2. Workers’ Compensation Law
3. Workers’ Compensation Claim
4. Workers’ Compensation Insurance
5. Workers’ Compensation Premium
6. Workers’ Compensation Audit
7. Breakdown of the auditing process
8. Workers’ Compensation Auditor
9. Workers’ Compensation Audit Checklist
10. Workers’ Compensation Audit Rules
11. Workers’ Compensation Audit Subcontractors
12. Workers’ Compensation Audit Worksheet
13. Workers’ Compensation Audit Report Form
14. Workers’ Compensation Audit Penalties
Workers and Compensation
A worker is an individual who works on payroll, for an employer. And Workers’ Compensation is the benefits that the said worker will receive for his liabilities.
Now, what liabilities are we talking about here?
Liabilities, in this context, mean the monetary losses and health impairments that the worker has sustained. This mostly includes things like the wages for days when he did not come to work, the fee that he paid for appointments with his attorney, and the expenses that he incurred to pay his medical bills.
Workers’ Compensation Law
Every workplace has its own set of safety rules. And the reason they exist in the first place is so that nobody gets injured. But we are not living in a utopian world and humans will always make mistakes and somebody will get injured. Mildly or severely. In an unsafe work environment, people can get injured even if it is not their fault.
Before the time when the Workers’ Compensation system did not exist, if a workman got injured at his workplace, then things would get complicated for him and his employer. Apart from the pain of his injury, he would also have to bear the loss of time, money, and in some cases, his ability to earn.
As for the employer, he would also be in a very vulnerable position as he is now exposed to litigation and can have a lawsuit from his employee coming his way. The settlement amount of the lawsuit in which the employee and the employer are tied-up can be manyfold higher than the actual amount of money that the employee will lose during his sufferings.
If the employee loses the settlement then he would have lost even more money in the court proceedings and to his attorney and he would still be miserable. If he wins, then the employer will have to pay a ridiculously large amount of money. This puts both of them in hot waters.
Fortunately, ever since the Workers’ Compensation law came into play, both the employee and the employer can get away with a relative win if ever a workman is involved in an accident at the workplace.
Workers’ Compensation Claim
A Workers’ Compensation Claim protects both the employee and his employer.
If a workman ever gets injured while carrying out his employment duties, then he can file for a Workers’ Compensation Claim. The workers’ compensation will compensate for their losses. Workers’ Compensation covers everything from the cost of medical treatments to death benefits.
If you are an employer, then you are in a legally safe place in more ways than one. Your employer can not sue you under the Workers’ Compensation Law. Also, it will become mandatory for you to buy a Workers’ Compensation License, not doing which is equivalent to committing a felony if you have a business, with employees on the payroll.
But exceptions can always arise, and there can be a case where an employee can get around the Workers’ Compensation Claim and still file a lawsuit against his employer if he thinks that his employer deliberately hurt him. You can effectively reduce claims cost by using an AI-powered workers comp claims management software.
Workers’ Compensation Insurance
Workers’ Compensation Insurance works just like any other insurance policy. If someone wants to claim insurance money, then he needs to buy insurance first. Simple as that.
Workers’ Compensation Insurance is the insurance that needs to be purchased so that an employer can pay for the Workers’ Compensation claims. Most employers try to get away with it because they need to keep paying for the insurance, even if there is no injury.
The legal obligation to buy a Workers’ Compensation Insurance has been administered by the state government and the reserves for the Workers’ Compensation Claims are funded by various insurance companies and employers.
One thing to note is the different types of frauds and abuse that occur with the workers’ compensation claims. This insurance, if anything, serves as a legal reminder that says ‘you have been warned’, to anyone who tries to take advantage of the system.
Workers’ Compensation Premium
This is what you pay, or rather, keep paying for having a Workers’ Compensation Insurance. Workers’ Compensation Premium is calculated by considering many factors like the type of business you own, the safety of the workplace, the safety of the location of the workplace, the categories of workers’ and payroll. Payroll is the most important factor in deciding the premium.
All of the above factors aside from the payroll are used to determine the value of the Rate. There is a mathematical formula for getting a precise value of premium and the value of Rate is used in that formula.
The product of rate and payroll, upon division by hundred, gives the value of Workers’ Compensation Premium. This value can be moderate to extremely expensive for employers, who need to be very careful in classifying their business in any category.
Workers’ Compensation Audit
One of the terms in the Workers’ Compensation Insurance is the Workers’ Compensation Audit. Audit, in general, means an official inspection of any organization’s account, typically by an independent body. A Workers’ Compensation Audit refers to the inspection of the company’s payroll and financial records upon expiration of the policy period.
There could be a possibility that a company with its premium set at $1200, after an audit, has its revised premium up to $30,000. A 2400% increase in premium. This is a true story actually.
It is also called a premium audit, payroll audit, or shock audit. It can be difficult to understand why it is called in so many ways. And also understanding what exactly is an audit, based only on its definition, can be confusing. So here is a breakdown of the process.
Breakdown of the auditing process
Whenever an insurance company issues an insurance policy to an employer, in this case, the Workers’ Compensation Insurance, a premium amount is determined for that insurance. The value of the premium is based on many factors but the employers’ payroll is the decisive factor.
But it is quite a challenge to come up with an accurate value for the premium and the premium that is quoted at the time of inception of the policy is only an estimate.
As it turns out, the factors that determine the premium, including payroll, are not constant and they may change throughout the policy period. This means that the premium value that was determined initially can be different from the actual premium.
So, by conducting an audit, the insurance company is checking if the initial value of the premium was correct. In most cases, it is not. If the premium determined after the audit is more than the premium at the time of the policy’s inception, then the employer will have to pay that excess premium cost.
Workers’ Compensation Auditor
He is the person who will conduct the audits. The premium amount determined by the audit is totally in his hands. He works for the insurance company and if he makes any mistakes in the audit worksheet then they are most likely in favor of the insurance company.
Workers’ Compensation Audit Checklist
Now there are 2 ways in which an audit can be conducted by the auditor. It can be a physical audit or a voluntary audit (one via email). Usually, insurance carriers require an audit to be carried out within the first 2 months after the expiration of the policy period. Once assigned with an audit, the auditor must return the completed audit to the carriers within a month.
Some obvious boxes need to be checked before an audit occurs. For starters, do not voluntarily give information to the auditor. Speak only when spoken to and give straightforward answers that address the point of the question.
A list of mandatory documents for a smooth flow of the audit process is listed below:
1. Workers’ Compensation Classification Codes
2. Payroll Records
- Summary of Payroll
- Overtime Payroll records
- Individual Earning Records
- 941s for the policy period (Federal Tax Record)
- State Unemployment Tax Reports
3. Employee Data
- Categories of Employees with their description and job duties individually
- Average working hours – daily, weekly, fortnightly, monthly
4. Insurance Certificates
- Of independent contractors during the policy period
- Of subcontractors during the policy period
5. Disbursements records of cash and payment
- Labor expenses
- Material expenses
- Subcontractor fee
6. Experience Modification Worksheet for cross-checking correct application of E-MOD by the auditor
Workers’ Compensation Audit Rules
Workers’ Compensation Audit is one of the terms in the insurance policy and not upholding it is a direct violation of the insurance policy. There are some do’s and don’ts that need to be strictly followed if one wants to avoid legal action against him and financial losses down the road.
- Ignoring audit requests
- Underreporting of payroll
- Misrepresenting employee job description
- Presenting forged or false documents of any sort
- Not reporting the sub-contractors
- Acknowledging audit request
- Assign a POC (Point of Contact) to the auditor
- Cooperate with the auditor
- Verify auditor’s audit worksheet
- Ask questions
Workers’ Compensation Audit Subcontractors
Sub-contractors are people or a group of people who provide their services to a client for a fee. They can have multiple clients and they work on their terms and regulations. Contracts with these independent contractors should not be kept a secret from the auditor. Employers are charged for having independent contractors if those sub-contractors do not have Workers’ Compensation Insurance.
The terms subcontractor and independent contractor have been used interchangeably here.
Workers’ Compensation Audit Worksheet
Workers' Compensation Audit Worksheet is like a tool that the auditor uses to gather all the information that has been collected from the employer during the audit process. Important information like payroll, classification codes, and independent contractors are included here. It is a blueprint of the data that the auditor has gathered.
Workers’ Compensation Audit Report Form
Workers' Compensation Audit Report Form is provided to employers who are involved in a voluntary audit. They have to fill this form with all the details that they would have given to the auditor during the physical audit. It is basically an alternative for physical audits.
Workers’ Compensation Audit Penalties
There are consequences if you try to ignore a Workers' Comp audit or provide misleading information
- Large Premiums
- Being served with a Workers’ Compensation Audit non-compliance
- Renewal fee of Workers’ Compensation Insurance
- Cancellation of Insurance
How do I get around a Workers’ Compensation Audit?
There is no way you can unless you lose your insurance. But you can reduce the premium by regularly reporting payroll, appropriating the class codes, and making sure that your sub-contractors have Workers’ Compensation Insurance.
Q- What do Workers’ Compensation Auditors look for?
They look for anything that makes the auditing process easy for them. It includes:
- All the necessary documents for the audit
- Accurate information in those documents
- A POC (Point of Contact) who is well caught up with the policies and finances of the company
- Any information that has a bearing on the premium
- A suitable meeting place
- Full cooperation from the POC
Q- How do I dispute a Workers’ Compensation Audit?
More often than not, employers are compelled to file disputes. This is done by approaching the insurance provider with an explanation on why the new premium is incorrect, what should be the new premium and all the necessary documents.
A good practice is asking your insurance manager, agent or a broker to do that because they have more expertise in this area. But an insurance manager should be given preference as he has good technical knowledge on the subtleties of insurance and also, he is less inclined towards protecting his relationships with the insurance company, in comparison to a broker.
Q-What happens if you ignore a Workers’ Compensation Audit?
Since an audit is one of the terms in the insurance policy, not upholding it will be considered a violation of the policy. This will lead to the employer being slapped with a Workers’ Compensation Audit non-compliance charge.
This means that the employer will be charged with an additional 25% to 50% of the premium of the initial policy. There will also be penalties for mere failure to acknowledge the audit request.
Q-How far back can a Workers’ Compensation Audit go?
An audit can be conducted as late as 3 years from the Policy Period.