13 costly mistakes employers make on Worker Comp audits

At the Institute of WorkComp Professionals (IWCP) we have found that approximately 75 percent of audits have errors that result in overcharges. This figure is even more alarming when you realize that employers are responsible for most mistakes because they do not understand how to keep records properly to ensure that the audit is correct. While preparing for an audit can be tedious, employers can take control and avoid these 13 common mistakes and costly charges:

Classification mistakes

1. Inadequate payroll records. Electronic payrolls generally include a class code, but it’s important to be more specific and include a description of job duties. Generally, your business will be assigned a governing class code that most represents your business operations or work. However, there are standard exceptions, such as clerical and outside sales, which have lower risks of injury. Since the auditor must list the workers that fall outside of the governing class and explain why they qualify, it’s best to identify them with a job description, rather than leave it up to the auditor.
2. Failure to identify executive officers. In most states, executive officers are subject to an upper and lower weekly payroll limit rather than a set annual payroll. Without proper records, the auditor may fail to identify all the executive names and not cap the payroll. Remember, not all officers are executive officers. Executive officers are limited to those that are defined by the articles of incorporation.
3. Don’t understand separation of payroll rules. Specific rules may allow an employee’s payroll to be divided over more than one class code. This varies by state so it is important to know the rules. Most states allow it in construction and oil fields and some have specific rules for agriculture and staffing agencies. If allowed, detailed records of the specific hours worked for each Workers’ Comp class code must be kept separately – percentages or estimates of this work are not allowed. Without adequate records, the entire payroll for the employee will be placed in the highest-rated classification, increasing costs unnecessarily.
4. Not contesting a change in classifications. During recent audits, IWCP has seen many instances where classifications, which have been in place for years, are being questioned by premium auditors who are being more aggressive in their search for additional premium. Even if the auditor is correct, there are few circumstances where an auditor is allowed to add a higher-rated code to the audit. While generally auditors can reallocate payroll from one code to another that is already on the policy, a new higher code can only be added to the renewal policy. Agriculture, construction, oil field services, and staffing are exceptions to this rule.

Excluded remuneration mistakes

5. Aren’t diligent in identifying excluded remuneration. Not everything that is paid to employees is included in the Workers’ Compensation calculation and excluded remuneration can be a significant factor. While deductions vary by state, overtime, severance pay, tips, payments to group insurance or pension plans, expense reimbursements, employer-provided perks, and the value of a special reward for individual invention or discovery are some examples. It’s critical to know the state’s regulations and provide error-proof documentation for each exclusion. Unless employers are diligent in identifying excluded remuneration, the payroll will be inflated.

Subcontractor mistakes

6. Don’t get updated certificates of insurance for every job. Even employers that make painstaking efforts to obtain certificates of insurance can get caught off-guard by audit findings of uninsured subcontractors. Auditors now are routinely checking state coverage with online verification databases and finding gaps in coverage. Get a new certificate every time a sub is hired for a new job. Don’t assume that the coverage has continued uninterrupted.
7. Don’t monitor expiration dates. The coverage effective and expiration dates on the certificate must span the entire length of time that the sub performed work. There should be a system in place to monitor expiration dates and require updated certificates of insurance before the policy lapses.
8. Don’t require labor and material invoices. While the best solution to avoid uninsured contractor charges is to obtain valid certificates of insurance, employers can minimize these charges by having a complete payroll record so the charge will be based on the payroll, not the contract price. Documentation is key and will simplify the discussions with the auditor if there is an unexpected lapse in coverage.

Independent contractor mistakes

9. Don’t consider responsibility if an independent contractor is injured. The issue of who is, and who is not an independent contractor is complex, subject to both federal and state law, and is generally only fully resolved in a courtroom. However, IWCP has seen more auditors taking the position that even if they think the person is a legitimate independent contractor, they are including them as employees in the audit. If that person suffered an injury and filed a claim, they believe the insurance company would be responsible for the costs. It’s important to document if independent contractors have worker comp coverage, understand the state rules, and discuss potential liability with your agent.

Audit-day mistakes

10. Failure to prepare an audit package. Being organized is key to a successful audit and sends a positive message to the auditor. Know exactly what the auditor is looking for and be prepared with complete and accurate records. Don’t volunteer more information unless it is asked for. More auditors are asking for P&L statements to determine if there are any exposures not included in your payroll records. If this is something you don’t want to provide, be prepared to explain why.
11. Failure to assign a knowledgeable person to work with the auditor. There are three ways an audit can take place: mail/online, phone, or a physical audit. Some employers receiving the mail or online audit pass it along to a finance officer or bookkeeper and that’s it. If the person completing the form is not knowledgeable about workers’ comp, you will end up paying more than necessary. Similarly, a phone audit doesn’t always ask the right questions and errors can result from communication issues and misinterpretations. When a physical audit is conducted on your premises, assign a knowledgeable, professional person who understands your operation and what employees do to work with the auditor. Be sure they’ve cleared their calendar so the audit can be conducted efficiently.
12. Allows the auditor to roam. Provide a clean, well-lit workspace for the auditor to work, answer questions, and don’t argue. It’s best to review the full audit and address issues with documentation. Be sure a knowledgeable person escorts the auditor if there’s a tour of the facility.
13. Does not obtain a copy of the audit worksheets. Never accept an audit on face value or summary report – always look at the worksheets and findings themselves. It’s the only way to confirm that the audit was completed correctly and the information is critical if there are disputes.

Many factors influence the accuracy of a work comp audit. Making a conscious effort to thoroughly understand the audit process and prepare for it in advance will avoid unpleasant surprises. We are available to help. As Certified WorkComp Advisors, we are trained to prepare employers for audits, spot errors, get them corrected, and help clients minimize their cost.