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  • Writer's picturejoseph retcho

Annual Workers' Compensation Audit

audit report

It's an unavoidable fact of business: if you don't want to pay extra or unexpected premiums, you must prepare for annual workers' compensation audits. Few things are more surprising and unpleasant for a business owner than having to pay premiums after a policy year has expired.

Such unanticipated costs or increases are typically incurred for one of three major reasons:

  • During a policy year, no one at the company checked the projections for accuracy.

  • The company did not have anyone familiar with the workers' compensation premium audit process to assist the auditor.

  • Those in charge of the company were unaware of the dangers of hiring contractors who did not have workers' compensation insurance.

So, how do you prepare your company for its annual audit and, more importantly, avoid the pitfalls that could cost you a lot of money later on?

Keep an eye on your forecasts.

It's easy to overlook the importance of having someone monitor your projections during a policy year. Your insurance agent could use diaries quarterly and contact each client to determine what the payroll is. A company can then adjust its workers' compensation premium payments.

When projecting payroll, each entry for workers' compensation class codes must be close to what payroll will be at the end of the year. Guesswork will not suffice. Guesswork will result in a company having to pay additional premiums. Businesses with highly rated class codes will be hit the hardest, because rates influence how much premiums cost.

Select the Best Person to Deal With the Auditor

It is costly to not have a knowledgeable person to deal with an auditor. This occurs frequently. To determine the actual amount of payroll, an auditor must examine the books of a business owner. He or she must then assign a workers' compensation class code to each employee. This will have an impact on how much a company will pay for workers' compensation.

When employees are not coded correctly, an auditor may rate them incorrectly, resulting in a higher rate. Someone in the company must understand the various class codes, as well as all of the employees' job functions. If this is not done correctly, an auditor is frequently forced to guess, giving the insurance company an advantage.

If applicable, always consider independent contractors.

When a company hires independent contractors who do not have workers' compensation, an auditor will request a certificate of insurance for the contractors. If the contractor's compensation is not available, it is added to the audit.

Prepare Your Paperwork

Of course, there isn't a single type of audit that can go smoothly without proper documentation. The following are some of the records required for an audit:

  • Payroll records include a payroll journal as well as a summary. Federal tax returns, 941s for the period, overtime payments shown individually, individual earnings records, and state unemployment reports are also required.

  • Cash disbursements for materials, casual labor, and subcontractor payments.

  • Employee records that show the number of employees, the number of hours, days, or weeks worked annually, and a detailed explanation of each employee's job duties.

  • A comprehensive description of your company's operations.

  • Insurance certificates for all of your independent contractors and subcontractors.

Best Practices for Audit Preparation

Make the auditor's job easier. He or she will have a strict timetable. Avoid rescheduling to make the job easier. Prepare all of the information he or she has requested, and ensure that the records are complete and accurate. Be prepared to answer any basic questions he or she may have about your company, and be prepared for the owner to answer questions rather than someone in a lower position. Give only the information requested and do not question the auditor.

On payroll records, separate overtime paid to employees by job classification. Maintain payroll records in dollar amounts rather than percentages that reflect actual work done.

If an auditor's worksheet is incomplete, do not sign it. Many auditors prefer to collect data and then complete it in an office or at home. Request and keep a copy for your records.

If you have any questions about annual workers' compensation audits, or if you want to ensure that the policy you have in place is appropriate for your company's unique circumstances, please contact us or schedule a free insurance assessment with one of our experts.

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