Workers compensation premium audits are an essential part of managing insurance costs for businesses and one of the many items that we help our insureds with. These audits determine the premium that a business owes based on their employee payroll. However, there are several common mistakes that are made during these audits, which lead to large additional premiums. It is then our job to find and correct the issues. Here are some of the common mistakes that we correct.
Incorrect Employee Classification
One of the most common mistakes made during workers compensation premium audits is incorrect employee classification. Every employer generally has at least three class codes per state; Governing class, Clerical, and Sales. The Governing Class is the classification that best encapsulates the type of work that your company does. Every employee is classified as the governing class unless there is an exception. The common exceptions are employees who only work in the office (clerical) or who are engaged in outside sales. Employees can also be classified outside of your governing class if they are engaged in a different type of work and there is a physical separation, like Drivers.
Manufacturers, distributors, and contractors can easily have 4 to 6 different class codes. For example, many manufacturing companies have different codes for employees who work in the facility and for those who install/service at customer locations. Each classification has a different rate, and many times those differences are substantial. The average wholesale distributor will have a Drivers code, Warehouse Code, Sales, and Clerical. The Driver code costs 78 times more than the Clerical code! Just misclassifying one or two employees can lead to significant overcharges.
Owners/officers
Another common source of audit mistakes is the auditor adding the full owner/officers payroll to the governing class. Depending on the state and business entity (LLC vs Corp), you can choose to include or exclude the owners/officers in coverage. When you choose to or are required to include the owner/officer, you are allowed to cap the wages that are included in your WC audit. Since owners/officers are typically the highest paid employees or may take a large distribution, this is another potential source for getting overcharged on your WC audit.
Subcontractors and Vendors
Another mistake that we often correct on audits is including payments made to subcontractors or vendors to your payroll. The Workers Comp policy provides coverage to uninsured subcontractors as ‘statutory employees.’ If your subcontractor does not have their own Workers Comp insurance, then you are getting charged for them on your audit. When you complete your audit, you need to highlight payments made to subs/vendors and provide proof of their Workers Comp coverage. Many auditors simply add up all payments made to third parties and include with payroll, unless you provide the WC proof up front. The auditor then assumes those payments are treated as uninsured subs and issues the audit with a large increase. This is another reason why it always important to get Certificates of Insurance from subs and vendors.
Overtime
Businesses that pay overtime have an extra step they need to take when completing their audit. The purpose of the WC audit is to accurately quantify your workplace injury exposure. Since payroll is used as the best metric to quantify work hours, it would not be fair to charge you based on paying overtime hours at higher hourly rate. The audit needs to factor in overtime work, but charge you based on regular rate, and not the overtime rate. Essentially, if you pay time and a half then you should be dividing your total overtime pay by 1.5 and adding that to your regular pay. If you are not breaking out overtime payments in the reports sent to the auditor, then you may be overpaying for your Workers Comp insurance.
COVID Pay
This is a new source of audit confusion but since 2020 most states adopted temporary audit rules to classify payroll you were required to pay an employee under the Families First Coronavirus Response Act as a separate “COVID/Telecommuter” class code at a minimal rate. During their audit, employers needed to specifically highlight these payments to their auditor in order for them to get reclassified. Employers who failed to do so were getting charged at a much higher rate than they should have bee.
Severance
Lastly, severance is one of the more rare audit issues we come across. Many companies that pay severance pay it out of payroll so these payments show up in the reports sent to the auditor. However severance should be excluded because it doesn’t quantify workplace exposure, since it is payment made to an employee who is no longer working there. Since severance is rare, it will always be up to the employer to highlight it on their payroll reports. Auditors will very rarely, if ever, ask an employer if the payroll reports include severance pay.