Audit Assistance

Yes; During a policy term, the premium is calculated based on the estimated payrolls you or your agent provide. Once a policy has expired, the audit is used to establish the actual payrolls for the term, which is a requirement of every state workers’ comp law. In addition to finalizing premium, the results are reported to the state for rate-making purposes. Thus, failure to comply with the audit carries a state-mandated penalty called the Audit Noncompliance Charge (ANC). This penalty can be very severe, up to an additional 200% of your policy’s estimated annual premium.

Gross Payroll; A WC payroll audit evaluates all compensation types, so it is important to report all compensation for review. This typically includes regular pay, overtime, bonuses, tips, commissions, employee retirement contributions (Simple IRA, 401k, 403b, etc.), severance and any fees or payments made to contract or subcontract laborers. The auditor will evaluate which payroll types are included, which are adjusted, and which are excluded in accordance with the applicable state laws.

Principals typically consist of corporate executive officers, partners of partnerships, managers/members of LLCs, sole proprietors. The legal status of the company determines the type of principal involved.

*NOTE: The principals of nonprofit corporations are usually volunteer boards, and we recommend reporting this terminology at audit.

We find that the best source for payroll information is a payroll summary (either 3rd-party or internal) for the policy term. In addition, we recommend providing the tax documentation that most closely corresponds to the policy term being audited. This could be a W3 or 940 for calendar-year policies or Federal Quarterly 941s for those policies that expire mid-year. Also reports for contracted laborers and/or 1099s will help confirm amounts to contractors. Any certificates of insurance, certificates of noncoverage, affidavits of independence or other documents establishing a contractor as independent should be provided to keep an auditor from incorporating contractor fees.

Contractors and subcontractors are individuals or companies that provide business-related services to your organization that are not directly employed by your company. Contract laborers typically receive fees rather than taxable wages. You will not be charged for contractors that are deemed independent, as they will either have their own WC insurance or documentation supporting their independence. Contractors that are not deemed independent are considered statutory employees and their fees will be included in audit calculations.

Independent subcontractors should provide you with either a certificate of insurance showing workers comp coverage, a certificate of noncoverage granted by the state, or a signed and completed questionnaire supporting their independence. Other evidence can be weighed by an auditor, such as the contract agreement, but agreements do not always specifically excuse the WC obligation.

Yes; Audits can be erroneous for a myriad of reasons, from misreported payrolls to included independent contractors. Both auditors and policyholders are capable of errors that can lead to an audit mistake, and you may dispute any error, no matter the culprit. Often, audits can be corrected with a simple explanation or a corrected submission, and we recommend discussing this process with your agent and/or Comp Risk before pursuing a correction so that a hold can be placed on any open balance.