Workers Compensation Audits are Important to Understand for Businessowners

If your business has workers compensation insurance, a workers compensation audit is a routine and required part of your policy.  Yet many business owners are surprised when they receive an audit request from their insurance carrier at the end of policy term.

Understanding how the audit process works can help you avoid unexpected premium changes, policy complications and unnecessary stress.

What Is a Workers Compensation Audit?

A workers compensation audit is a review of your company’s payroll and business operations.  The purpose of the audit is to confirm that your business paid the correct workers compensation premium based on your actual payroll exposure.

When your policy begins, your premium is typically based on estimated payroll figures.  At the end of the policy term, the insurance carrier performs an audit to compare those estimates against your actual payroll numbers.  The carrier will also confirm that employees are correctly classified and adjust the premium accordingly.  For example, office workers are billed at a lower rate than that electricians.

If your payroll increased during the year, you may owe additional premium.   If your payroll decreased, you could receive a return premium or credit.

Why Are Workers Compensation Audits Required?

Yes. Workers compensation policies are subject to audits.  Workers compensation insurance is heavily regulated at the state level.  Each state had its own laws and requirements regarding workers compensation coverage and premium calculations.

To ensure fairness and accuracy, insurance carriers conduct audits to help verify that businesses are paying the appropriate amount of their level of payroll and employee exposure.

What Information Will Be Requested?

During the audit, the insurance carrier may request documents such as:

• Payroll reports
• Quarterly 941 tax filings
• W-2 and 1099 records
• General ledger reports
• Cash disbursement journals
• Certificate of insurance for contractors/subcontractors
• Employee job descriptions or classifications

The carrier may conduct the audit by phone, email. Mail or in some cases through an on-site visit.

What Happens If You Do Not Respond?

Most carriers provide a limited timeframe to respond to the audit request. It is important to read all notification that the insurance carrier may send to you.

If the carrier does not receive a response, they may process the audit as a “non-responsive audit”. This can create several problems for your business, including:

• Automatic premium increases
• Estimated payroll calculations that may be higher than actual payroll
• Additional balance due
• Possible policy cancelation or non-renewal
• Difficulty obtaining coverage with future insurance carriers

A non-responsive audit can become expensive very quickly.  That is why it is important to respond promptly and provide accurate documentation.

How to Prepare for a Smooth Audit

The best way to simplify your workers compensation audit is to stay organized throughout the year.

• Keep accurate payroll records. Maintain clean and detailed payroll reports for all employees.
• Track Subcontractors carefully. If you use subcontractors, collect certificate of insurance before work begins. Without proof of coverage, the carrier may include uninsured subcontractors in your payroll calculations.
• Review employee classifications. Workers compensation rates vary significantly by job classification.  Make sure employees are classified correctly to avoid overpaying or underpaying premium.
• Respond quickly. Do not ignore audit requests.  Prompt communication can prevent delays and penalties.
• Ask questions. If you do not understand a request or disagree with audit findings, contact your insurance agent or carrier immediately.

A knowledgeable insurance agent can help guide you through the audit process, explain document requests, and help resolve disputes or classifications issues.

Workers Compensation audits are a normal part of doing business, but they should not feel overwhelming.  Proper preparation and timely communication can make the process straightforward and help ensure your premium accurately effects your business operations.