Starting Jan. 1, 2015, all policies with more than $13,000 in annual premium will be subject to yearly payroll audits.
The Workers’ Compensation Rating Bureau made the change – from $10,000 in annual premium, a threshold that’s been in place since – means that fewer employers are likely to be audited next year. However, all roofing companies, regardless of their premium, will be audited annually. In addition, construction firms with employees in high-wage classifications in the state’s dual-wage system will be subject to audits every three years.
Premium audits explained
Your insurer will review your records and operations to gauge if the premium it charged at the start of the policy period was correct. It does this by checking employee numbers, hours worked and if you have put your employees in the proper workers’ comp classification. It then compares that information with what you reported when the policy was written for the year.
An audit is usually performed shortly after your policy expiration, but the insurer can also perform it earlier.
What to do
It is important to keep detailed payroll records. It is even more significant if you wish to divide your wages between classification codes. This is often referred to as “payroll segregation”. If you have an employee who does more than one type of work during the day, you must detail that information.
In general, if an employee divides time between two or more activities that are separately classified, you can divide the employee’s wages if you maintain detailed payroll records documenting the number of hours they spend in each separately classified activity.
These records may include time cards or a daily log that tracks employee hours by activity or classification code.
If you do not maintain detailed time records, then you must assign the employee’s entire gross earnings to the highest-rated classification to which they are exposed. Please note that for some industries and classifications, including Clerical Office (8810) and Outside Sales (8742), payroll segregation is not allowed.
If you are going to be audited, you should prepare:
- Payroll records (registers, journals, earnings cards, etc).
- Payroll, overtime and Section 125 Cafeteria Plan (if any), which must be summarized by month, quarter or policy period for each classification code.
- State tax reports (EDD: DE9 and DE-9C).
- Payroll records associated with Waiver of Subrogation and/or Owner Controlled Insurance Policy, if endorsed on your policy.
The following records may be required to complete the audit and must be sent to the auditor if requested:
- Federal tax reports and schedules (941s/940; 1099s/1096; W2s/W3; schedule C, K, E, F, etc.).
- Check register and cash disbursements journal.
- General ledger.
For all construction policies, insurers will typically also require:
- Employee time cards with daily start/stop times, necessary to validate the use of a high-wage classification.
- If independent contractors and/or sub-contractors were used, provide the Contractors State License Board (CSLB) number with expiration date for all contractors. If no CSLB, provide name, amount paid, date and work performed. (You may check licenses at www.cslb.ca.gov).