Workers Compensation Audits: An Essential Guide

This guide will help you collect the necessary documentation and statistics required during a payroll audit. Because of the nature of the required information, it is recommended that this guide be completed by the accounting department, unless your organization has someone specifically responsible for these documents and the workers’ compensation policy. 

STEP 1: Collect Necessary Materials

  • Payroll records (employee specific)
  • Unemployment tax returns
  • Form 1040 Schedule C (if sole proprietor)
  • Tax reports (Federal Payroll 940s or 941s)
  • General ledger, subcontractor ledgers and journal (or 1099s)
  • Certificates of insurance for subcontractors
  • Workers’ compensation (WC) insurance policy
  • Employee information (compiled here)
  • Corporate officer information (compiled here)
  • Audit package totals (compiled here)
  • Subcontractor information (compiled here)
  • Certificates of insurance for each subcontractor
  • Additional materials upon auditor request

STEP 2: Employee Information

Record the payroll information and classification of all employees except corporate officers. Class codes generally define the business and not the employees, with the exception of standard class exceptions (e.g., clerical, outside sales, other certain sales). This is a large potential problem area—if your business has a large WC rate, but you can put some of your employees in a standard class exception (like clerical), you can drastically lower premium to pay. In bold or italics, make sure to note that these standard class exceptions vary from state to state. The manual rate can be found on your WC policy.

Note: A portion of overtime can be subtracted from the total gross payroll. For example, if your firm pays time-and-a-half, you can take the total gross overtime amount paid and subtract .33 percent of that number from the total amount paid over a given year. This number counts as an excluded remunerations, which is further instructions in Step 4. 

STEP 3: Corporate Officer Information

In many states, officers have the option to remove themselves from coverage. States also have a maximum coverage, which needs to be located. Certain states, rather than a max, represent corporate officers as all earning the same (i.e. for workers’ compensation purposes they are all compensated $50,000).

STEP 4: Excluded Remunerations

Excluded remunerations vary from state to state so the list below may not be accurate for your location. Determine a complete list for your state by asking your agent, ratings bureau or insurance provider.

  • Tips and other gratuities received by employees
  • Payments by employer to group insurance plans
  • The value of special rewards for individual invention or discovery
  • Severance payments, except for time worked or accrued vacation
  • Payment for active military duty for reservists called to active duty
  • Employee discounts on goods, property, or services purchased from the employer
  • Expense reimbursements to employees for legitimate business expenses (requires some record or receipt)
  • The value of an employer-provided vehicle (e.g., a car or airplane)
  • The value of an incentive vacation (for example, a sales leader might win a vacation)
  • The value of a ticket to an entertainment event that is provided by the employer
  • Supper money for late work
  • Work uniform allowances

“Time-and-a-half” overtime is included as one of the columns under Employee Information. Overtime is therefore not listed above, but you will need to add it if your company determines overtime pay using a different—or multiple—calculation.

If the payroll amounts you entered under Employee Information or Corporate Officer Information include any of the following types of payments, then total such payments by employee and enter these values in the Excluded Remunerations column under Employee Information or Corporate Officer Information, as appropriate.

STEP 5: Audit Package Totals

Review the information you compiled in Steps 2 through 4, checking to make sure all areas have been addressed and all figures are correct. Organize the information in a list arranged by class code. Include payroll information along with any excluded remunerations that apply.

STEP 6: Subcontractor

This is only for subcontractors that do not have workers’ compensation of their own. Be sure to capture only the cost of payroll for the contract—as opposed to total quarterly cost of the contract—in order to prevent overpayment. 

STEP 7: Source Materials Checklist

Use this sheet to ensure that you have completed and compiled all necessary materials. Clip or bind them together and have it on hand to provide to your auditor upon arrival.

A Complimentary Review

Contact Tooher-Ferraris Insurance Group for a review of your classifications and exposures. Our specialized Workers Compensation experts will review up to three years of policy data to ensure your company has been accurately classified and charged. Call today 203-834-5900.

Workers Compensation Insights

The Important of Prompt Claims Reporting

The rising cost of claims presents a significant challenge for employers today. However, there is a simple strategy that can significantly reduce your claims costs: report all claims promptly.

In fact, the sooner a claim is reported, the lower the cost is likely to be. Beyond cost, reporting claims promptly can help avoid unnecessary conflict with insurance companies, ensure a proper investigation, preserve employee morale and maintain compliance.

Minimize Cost

It’s no secret that delayed reporting of claims can add up to unnecessary costs for employers. Studies show that the longer it takes to report a claim, the higher the cost tends to be. For example, the National Council on Compensation Insurance (NCCI) conducted a survey and found that claims costs began to climb significantly after a lag time of just seven days. A reporting lag of 29 days or more after the incident resulted in costs that were 49 percent higher than costs of claims reported within a week.

In addition, by promptly reporting claims, day-to-day operations will be able to return to business as usual much faster, which can also save your company money associated with lost productivity.

Reduce Friction with Insurer

Many policies have reporting requirements, so it is possible that a late claim could void your coverage altogether. When your company delays reporting a claim, the process is much more difficult for a claims adjuster – making it less likely that your company will receive the most advantageous settlement or outcome.

It is also important that the insurer is able to conduct a thorough investigation as soon as possible after the incident. When reporting is delayed, the investigation can be much less conclusive due to faded memories and unpreserved evidence.

Preserve Employee Morale

Certain incidents can be upsetting for employees, and it is important for your company to demonstrate that you take the matter very seriously and care about your employees. Promptly reporting any claim can go a long way toward preserving employee morale and trust in your company.

Maintain Compliance

There are certain types of incidents that need to be reported not only to the insurer, but also to the Occupational Safety and Health Administration (OSHA). When a recordable work-related illness or injury occurs, the employer has seven calendar days to record it on their OSHA log, Form 300.

Contact Tooher Ferraris Insurance Group at 203-834-5900 to assist you in establishing effective claims reporting procedures so you can reduce lag time and protect your bottom line.