Your Workers’ Compensation Final Audit

The ultimate cost of your workers’ compensation audit program is decided by a variety of things, not the smallest amount of which is your final audit. The workers’ compensation audit process is often confusing, complex, and, if done incorrectly, expensive. It doesn’t help that the audit process is about up in order that most errors benefit the insurance firm.


The company may simply ask you to send the information needed to perform the audit or may choose to conduct a physical audit in your office. In either case, the auditor will probably want to see your State quarterly wage and withholding reports (DE-6s), payroll journals, and any previously filed payroll reports for the period being audited. Occasionally, other records that relate to your workers’ compensation policy could also be requested also.

Regardless of which records are requested, it is imperative that the payroll is placed in the appropriate classifications and that any rules that could work to your advantage are employed.

Understanding the Audit Process
The following information will help you better prepare and understand the audit process.
Premium Basis – Your premium is based on gross payroll, not net payroll. Gross payroll includes salaries, commissions, bonuses, vacation and holiday pay, sick pay, overtime payments (which can subsequently be deducted), the value of gifts, all substitutes for money earned or paid during the policy period, including meals and lodging in lieu of wages, automobile allowances, and any amount by which an employee’s salary is reduced to fund a pension or deferred compensation plan.

Appropriate Classifications – Don’t overlook clerical and sales classifications.  In addition, if you have several classifications on your policy with various rates, make sure you understand the differences so you can classify your employees in the most favorable category.

Split Payroll Classifications – Some payroll classifications allow you to split an employee’s payroll among various class codes (recognize that many codes, including clerical, do not allow this split). In order to require advantage of such a split, proper payroll records must be kept that specifically identify time worked in each classification.

Dual Wage Classifications – Some construction and erection operations divide employees into two separate classifications based on an employee’s hourly wage rate.  Premium rates are higher for the lower hourly wage rate.  In order to take advantage of the higher wage rate classification, the law requires that time cards or time logs must be kept that show actual hours worked and start and stop times for each employee for each day.  The time keeping requirements apply even if you pay prevailing wage or have union employees.

Executive Officers and Partners – Executive Officers and Partners are capped for payroll purposes.  For 2014, the minimum amount that an executive officer or partner can be charged is $39,000, and the maximum amount is $101,400.  If you have elected to exclude executive officers or partners, make certain that their payroll is not included in the audit.

Overtime – You are not required to pay workers compensation premium on the overtime portion of a wage.  In other words, if somebody who normally makes $10 an hour works an hour of overtime and is paid $15, you would pay premium for the overtime hour based on a rate of $10 per hour, not on a rate of $15 per hour.  It is important that your payroll records be maintained to show the regular rate of pay, the overtime earnings by employee, and a summary by type of operation performed so the auditor can give you credit for overtime excess.

Severance – If you have paid severance to anyone in the past year, you can deduct this from your audit.  You are not required to pay workers compensation premium on severance pay.

Payments to Inactive Employees – Payments to inactive employees are not counted when calculating your workers compensation premium.

Third Party Sick Pay – Were there any employees hurt on the job that received disability payments (short or long term) from a disability carrier or provider?  If this third party sick pay was included in the employee’s W-2 and/or payroll register, you can deduct it.

Travel Expense Offset – Did any employees receive additional funds to offset travel expenses?  This is not chargeable as payroll.

Form 1099 – If anyone was paid by Form 1099 through your payroll, was this amount deducted for workers compensation purposes?

Uniform Allowance – Was anything added to individuals’ payrolls to compensate for required work clothes or safety equipment?  If so, this can be deducted.

Any Other Additions or Exclusions – Other than base pay, bonuses and commissions, were there any other additions or exclusions to payroll?

Subcontracted Work – If you subcontract work you will be asked to supply basic information about your subcontractors and verification that they have appropriate insurance.  Recognize that if they do not carry the appropriate insurance, you will be charged a premium based on their exposures (see attached explanation of how that premium will be charged).

Owner-Controlled Insurance Programs (‘Wrap-Up’ Policies) – Were you involved in any owner-controlled insurance programs (‘wrap ups’) that extended to workers compensation?  If so, you can deduct the payrolls included under the ‘wrap’ from your payrolls submitted for the audit.

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