Tax and License

Navigating a workers’ compensation insurance audit can feel daunting, especially if it’s your first time. Yet, these audits are vital to ensuring businesses maintain the correct coverage while protecting employees. With proper preparation and a clear understanding of the process, employers can confidently approach an audit and avoid common pitfalls.

This post will guide you through the essentials of a workers’ compensation audit, including its purpose, what to expect, how to prepare, and what happens afterwards.

What is a Workers’ Compensation Audit?

An audit for workers’ compensation is a review conducted by your insurance company to verify that you’ve been correctly classified and paid accurate premiums for your coverage. When an insurance policy is written, your premiums are often estimated based on projected payroll. The audit helps determine if those estimates align with your payroll and business operations over the past policy year.

Why does this matter? Ensuring you’ve paid accurate premiums prevents underpayment, which could leave your employees inadequately covered, or overpayment, which unnecessarily strains your business finances.

Purpose of a Workers’ Compensation Audit

Workers’ compensation coverage is essential to keeping your business compliant with labour laws while protecting your employees in case of injury or illness. An audit fulfils several key purposes for insurance providers:

1. Verifying Payroll

Payroll is among the most significant factors in calculating workers’ compensation premiums. An audit ensures that your declared payroll matches actual figures.

• Confirming Employee Classification

Different roles carry varying levels of risk. For example, a warehouse worker may have a higher classification rate than an office administrator. Auditors check that your employees are appropriately classified according to their job duties.

• Determining Policy Accuracy

Insurance companies use audits to determine whether adjustments to your policy are necessary. This could mean catching missed details that require corrections or recalibrating coverage levels to match business growth or operational shifts.

Ultimately, the audit ensures fairness and accuracy in insurance pricing while reducing the risk of disputes in the event of a claim.

Preparing for an Audit

Preparation can make all the difference in streamlining your audit process. Taking these steps ahead of time will help you stay organized and confident.

1. Review Policy Details

Ensure you understand the classifications and payroll projections outlined in your policy. If anything seems unclear, contact your insurance agent for clarification.

2. Gather Required Documents

Compile the necessary paperwork auditors might request, such as:

• Payroll records (e.g., payroll journals or tax filings like Form 941)
• Overtime records, if applicable
• Job descriptions and employee classifications
• Certificates of insurance for subcontractors
• Financial statements relevant to your business operations

3. Double-Check Classification Codes

Classification errors are among the most common issues found during audits. Confirm that each employee’s job duties match the classification assigned in your policy.

4. Coordinate with Subcontractors

If you work with subcontractors, ensure you have their certificates of insurance on file. Failure to provide proof of their coverage could result in you being charged for them under your policy.

5. Establish a Point of Contact

Designate a knowledgeable individual to coordinate with the auditor and provide documents as needed. This is typically a payroll supervisor or HR manager, but it could also be you.

What Happens During an Audit?

A workers’ compensation audit typically involves five key steps:

1. Scheduling

Once your policy period ends, your insurer will contact you to schedule the audit. Depending on the insurer, audits may be conducted in person, virtually, or via mail requests.

• Initial Inquiry

The auditor will ask for specific details about your business and employees, including classifications and total payroll.

• Document Review

The auditor will review the documents you provide, such as payroll records and subcontractor certificates, to verify that they match your declarations.

• Employee Classification Analysis

They’ll assess the accuracy of your employee classifications. For example, they will check if high-risk roles are correctly categorized or if any employees are misclassified under a lower-risk category.

• Audit Summary

After the review, the auditor will summarize their findings, which may include adjustments to your premiums based on the discrepancies identified.

Common Audit Findings and How to Avoid Them

Understanding the common issues uncovered during audits can help you avoid common missteps:

1. Misclassified Employees

Employees performing high-risk duties but classified as low-risk may lead to significantly underpaid premiums. Ensure employee classifications are accurate and reflect their primary job duties.

2. Omitted Overtime

Overtime pay is considered part of an employee’s payroll for premium calculations. If you exclude overtime records from your documentation, your premiums might be miscalculated.

3. Uninsured Subcontractors

Using subcontractors without proof of insurance opens the door to potential liability. Always obtain certificates of insurance from contractors you work with to avoid being charged for their coverage.

4. Failure to Update Policy

Notifying your insurance company about operational changes (e.g., hiring new employees or expanding services) could result in inaccurate estimates.

What to Expect After the Audit

Once the audit concludes, your insurance company will provide a detailed report of their findings. This report will outline any changes to your premium and whether you owe additional payments or qualify for a refund. Common outcomes include:

• Premium Adjustments

If your payroll or risk profile is significantly higher or lower than estimated, your premiums will be adjusted for the next policy term.

• Corrective Recommendations

The audit may highlight areas where you can improve compliance or efficiency, such as updating employee classifications or maintaining better records.

• Payment or Refunds

If you underpaid premiums, you’ll need to settle the difference. Conversely, you’ll receive a refund or credit toward your next billing cycle if you overpaid.

Master Your Workers’ Compensation Audit Today

Navigating a workers’ compensation audit doesn’t have to feel overwhelming. By understanding its purpose, preparing effectively, and avoiding common missteps, you can complete the process with ease and confidence. To take your preparation to the next level, consider contacting a professional advisor or accessing employer resources tailored to workers’ compensation compliance. These small steps can help protect your business and keep your insurance premiums fair and precise.