Working the Audit Premium for Workers Compensation

Have you ever had to pay an audit premium for workers compensation coverage? If so, you’d likely find it difficult to swallow the fact that over 75% of premium audits are incorrect. However, in most cases the audits are not incorrect because of the auditor, even though many auditors are not well trained on the rules. Most of those errors occur because the employers don’t keep the records that they should keep to validate the original premium amount.
Unfortunately, auditors are busy and have little interest in educating you on how to better substantiate the premium. Therefore, following some fundamental disciplines can assist you in avoiding unnecessary adjustments to your premium.
Since workers compensation follows payroll records, it’s important to keep detailed records, including class code and a simple job description. Classifying employees properly and understanding those classifications is very important. If someone is classified as a clerical employee, then 100% of their duties must be clerical. If an employee has 70% clerical duties and 30% non-clerical duties, you cannot classify the employee as clerical. In a nutshell, you’re either 100% clerical or 0% clerical according to the rules.
For instance, if Jane is classified as a clerical employee and periodically delivers paychecks to people on the production floor, make sure that if questioned by the auditor as to whether she ever goes to the production area, she properly answers yes, but only to deliver paychecks. If she were to answer the question as, “Yes, I go out in the production area all of the time” and doesn’t qualify the statement with the specific purpose of delivering paychecks, you could run the risk of that employee being re-classified from a clerical code to a production code, carrying a higher rate. 
Following are some helpful tips to keep in mind:

• Overtime: The ½ time paid (Assuming OT is paid at time and a half) over the standard wage is excluded from the premium audit if you have the records. (Excluding Pennsylvania)
• Tips and other Gratuities: Excluded from the audit premium. Show the gratuities separately on the payroll records.
• Bonuses: They are included for audit purposes. Therefore, bonuses paid to assist someone in acquiring personal health insurance or to reduce the regular wage base would be included, unless you had a properly set up Individual Care Health Reimbursement Arrangement for Individual Health care reimbursement purposes. Setting a bonus up to increase regular earnings indirectly will not alleviate the workers comp premium.
• Severance Pay: Can be excluded, however, accruals for vacation time and time worked are included.
• Expense Reimbursements: Generally excluded from the audit, but this area becomes more complicated when you have expense allowances, such as an auto allowance or per diem allowances. You will have to substantiate the actual use is entirely related to business for the amount to be excluded. And for general expenses, documentation of the expenses and business purpose should be maintained.

Subcontractors deserve a more thorough conversation. Follow some general rules when working with subcontractors:

1. Never hire uninsured subcontractors.
2. Always request and maintain the subcontractor’s certificate of insurance and make sure that the certificate specifically shows workers compensation coverage.
3. Obtain a new certificate every time you hire a subcontractor for a job. Also, make sure that the policy term covers the time necessary for the completion of the job.

Uninsured subcontractors will be included up to 100% in the audit. In fact, if you are the general contractor, the sub is determined to become an employee of yours and will be classified under your class code, which is at a much higher rate. In the case that you do have an uninsured subcontractor, try to get only the labor amount for the audit. If the labor is at least 50% of the total invoice, you can separate the labor from the total. Of course, the invoice would have to appropriately separate the materials and labor and you will need to maintain the invoice for substantiation.
There are certainly other things to consider. Keeping meticulous records and making sure there is a friendly and knowledgeable person available to work with the auditor is vital. Treat the auditor as a welcomed guest. Be prepared and present a package to the auditor. Don’t go above and beyond by offering gratuitous information. Stick to the fundamental questions. And finally, don’t allow the auditor to roam around the workplace unaccompanied. It only raises the risk of someone volunteering information that might not be favorable to the audit (Remember the “Jane” example above.)
If you follow the guidelines and assist the auditor in substantiating the original premium, if a grey area becomes present, the auditor will likely favor you. Most importantly, you will save time for your team and the auditor.
Remember, preparedness is the key. Being prepared means keeping good records in a system that allows you to present them in an organized format. The premium audit does not have to be difficult and, depending upon how prepared you are, might even be rewarding.