No business ever wants to be audited, but in the world of workers’ compensation insurance it’s a regular occurrence that does not need to be a stressful event.
A workers’ comp audit by your insurer is common for most mid-sized or larger employers, and the audit threshold in California is $16,000 or more in annual premium.
While many employers are used to audits and have their procedures and policies in place to ensure a smooth experience, some of you may be growing concerns that now are large enough to be subject to audits.
The key to a workers’ comp audit is preparation and having your paperwork (and electronic files) in order, so you can produce the required documents swiftly. We’ve prepared the following seven ways to prepare for an audit, and if you follow this advice it can save you stress and perhaps money.
1. Understand why you are being audited. Workers’ comp carriers base your premiums on your number and cost of any previous claims, your industry and your payroll. At the end of the policy, the insurer needs to audit your payroll to make sure that the payroll and class codes that you reported at the inception of the policy were correct and if they’ve changed during the last year. Remember that an audit can go both ways. The insurer’s auditor will be looking to see if you either owe or are owed money. You may have underestimated your payroll or incorrectly classified employees, or you may have overpaid due to similar classification errors.
2. Gather all records and paperwork requested by the auditor, and ensure that your documentation is in order. You’ll most likely be asked for the following:
• Employee records
• Payroll records
• Cash disbursements
• Certificates of insurance
• A detailed description of your business operations
3. Review prior audits. When you are preparing for an audit, go back further than your current policy year’s documents. Categorizing your employees correctly is what’s most important to ensure a smooth audit and not be hit by surprises. Knowing how your employees have been categorized in the past can help you make sure they’re categorized correctly in future audits.
4. Double-check the categorization for employees of subcontractors. This is one of those situations in which many small businesses have been overcharged by thousands of dollars in a single year because of an error. If your subcontractors carry their own workers’ compensation insurance, you aren’t responsible for paying premiums for them. If they don’t, you could be responsible for the exposure under your policy.
5. Don’t forget to keep track of overtime for your employees. Premiums are not calculated against the full overtime pay rate. Your workers’ compensation premiums aren’t calculated at a full overtime pay rate. Typically, the auditor will break out overtime pay and discount it to straight time. This is another situation that can cost you unnecessarily if your records aren’t accurate.
6. Don’t volunteer more information or records than the auditor asks for. This will help keep the audit focused and moving along, and avoid adding confusion and more questions that aren’t relevant to the audit.
7. Ask the auditor for the worksheet when the audit session is done, and then have us review it for accuracy. If you suspect there are mistakes in the worksheet, it’s your right to ask for a corrected audit.
Spending some time preparing for your next workers’ compensation audit is a worthwhile investment. With workers’ comp being one of your biggest expenses, you should not be paying any more than you need too, especially due to a small mistake.