Small businesses with employees have a distinct honor once per year of being part of a worker’s compensation audit. Worker’s compensation is an insurance program that covers employees in the event they get hurt on the job. In North Carolina, worker’s compensation insurance is mandatory if a business has one or more employees.
Entrepreneurs who are being “audited” are likely notified by mail, email, or phone asking about the company’s payroll numbers and employees for the prior year. We put the word audit in quotes because it has a negative connotation; the purpose of the worker’s comp audit is not to look for wrongdoing or cheating, rather it’s designed to true-up the exposure (salaries & wages) to ensure the appropriate premiums and coverage is in place. Meaning if a business paid less admin salary and more field wages than estimated, they likely will have an audit adjustment that requires an additional payment. However, the reverse is also true – a business that didn’t hit growth goals likely will see a decrease in their premium and be entitled to a refund.
While this type of examination can be stressful, disruptive, and time-consuming, there are ways to make it as painless as possible. Lucrum Consulting suggests using the following tips and tricks as a guide.
Employee Classification Codes are Vital
Typically, small business owners who have hired anyone throughout the year give a description to their insurance agent about the work that the employee will be doing. The agent or underwriter will assign each employee a classification code that describes the type of work they do. The insurance company has hundreds of rates based on this classification and its risk factors. The more risky the job, the higher the rating (and cost) will be.
If an employee performs one or more job duties, they typically are charged at a higher rate. For this reason, it’s important to be as specific as possible in assigning job descriptions to various employees. For example, one Lucrum client is always careful to specify which employees climb trees to perform tree-trimming duties vs. those who do work on the ground. The rate for tree climbers is about 10 times that of the ground crew, and this client makes it clear that only certain employees are allowed to climb trees.
Subcontractors are not immune either. If a business uses subs who cannot provide proof of workers' compensation insurance, they will also be included in the exposure and the business will have to pay to cover those subcontractors as well. For this reason, it’s important to either require subs to provide certificates of insurance or to adjust the rate they are paid to factor this coverage in.
Sync the Numbers
The audit form will typically ask for gross payroll numbers by an employee or by category or location of employe. That’s easy enough, but seldom does the policy coincide with the company’s fiscal year. To fix this issue, prorate the payroll figure to match the policy period. Most auditors handle this adjustment as part of the audit so don’t over-think it prior to the audit day.
In addition, the business’s numbers need to tie back to the numbers reported on the quarterly payroll reports for both state and federal. The provider may also want copies of the business’s 941s and state payroll reports.
The Check’s in the Mail
Once the numbers are submitted, the insurance provider will calculate whether they owe the business or the owner owes them additional premiums. Rather than wait until year-end, Lucrum recommends business owners (or their accounting staff) update the exposure mid-year to catch six months of actual salary, wages, and uninsured subcontractor costs, as well as gain an estimate for the following six months. This helps businesses minimalize any shortfall or excess, thereby reducing the audit adjustment.
Be Prepared
On the day of the audit, it’s important to be prepared. The auditors have a job to do and while they are not typically allowed to let things slide, they do have some flexibility. An organized, polite client is much more likely to catch a break than one who has inconsistent, inaccurate, or simply missing data. Be sure to have any and all requested documentation ready and available in advance and be prepared to find information quickly if necessary.
Finally, if there are some missing certificates of insurance or other documentation is not available, it’s not the end of the world. Most auditors or insurance companies give a grace period to obtain and provide the missing information. This is especially true if the employee working with the auditor is polite and organized. Be sure to obtain whatever is missing fast and provide it to the auditor so the file can be updated and additional premiums are not assessed on the previously missing data.
