Workers’ compensation is one of the most complex and regulated types of business insurance around. It’s designed to protect businesses and their employees from the expenses that result from workplace injuries. This coverage may include medical expenses, loss of work due to leave of absence, or the legal costs involved when a worker gets injured. Employers pay an insurance premium and their insurance provider pays medical and other costs (depending on the policy terms) to injured workers for valid claims.
Each state has different workers’ comp insurance regulations that include whether or not a business requires workers’ comp—and the premium to be charged for the policy. However, one requirement most states have in common is that insurance providers must conduct a workers’ compensation audit to ensure businesses are paying the right amount for their coverage.
What is a workers’ comp audit?
A workers’ comp audit, or a workers’ compensation audit, is an end-of-year review of records. It’s conducted to ensure that your business has paid the correct premium for workers’ comp insurance. It may be done by mail, phone, or in-person, depending on the auditor and the business type.
During the audit, your insurance provider usually verifies that the payroll and other records quoted at the beginning of the policy reflect the actual payroll and scope of work performed during the policy period. If the records don’t match, the price of the workers’ comp insurance is adjusted for the policy year.
The audit also assesses whether any subcontractors you hired had their own coverage in place. If not, policyholders may be charged based on payments to uninsured subcontractors as well.
Why is a workers’ comp audit needed?
When you purchase workers’ comp insurance, you’re typically required to share an estimate of total payroll and the different types of work your employees will do during the policy period. Your insurance provider uses your estimate to calculate your workers’ comp insurance premium, along with other factors.
However, your payroll estimates for a policy period, which is typically one year, don’t always match the actual payroll and scope of work for your business. The work needed during the year may be more than expected, or unforeseen circumstances might reduce your actual payroll compared to the estimate. Therefore, most state regulators require an annual audit so that appropriate adjustments to the initial premium can be made.
What happens after a workers’ comp audit is conducted?
A workers’ comp audit ensures that you paid the right amount for the coverage you received. An audit may result in several scenarios. Common examples include:
- If your actual risk exposure or payroll matched your estimate, it’s likely there won’t be a cost difference.
- If your actual risk exposure or payroll was lower than your estimate, your premium for that policy period may be less than what you paid initially, and your insurance provider may owe you a refund for the difference.
- If your actual risk exposure or payroll was higher than your estimate, your premium may be more than what you paid initially, and you may need to pay the insurance provider the difference.
Note that it’s typical for premiums to change after an audit. Common reasons the estimate and actual payroll or risk exposure may not match include:
- Your business scaled or expanded and you had to hire more people, increasing your payroll;
- You let go of some of your employees, decreasing your payroll; or
- Your job responsibilities, or those of your employees, changed during the year and became more or less risky.
In the first case, your premium would increase. In the second, it would decrease. In the third case, the new premium would depend on the actual responsibilities and their risk levels.
To avoid any surprises or questions during your audit, you can keep your payroll estimate updated as changes occur in your business. Your estimate will then be accurate and you’ll be prepared for the audit.
What to expect during a workers’ comp audit
The process followed during a workers’ comp audit differs somewhat depending on your insurance provider, but the steps are typically similar to our process at Pie Insurance.
When it’s time for your audit (usually at the one-year mark of your policy, or if you cancel the policy), we email you with a heads up that our audit partner will contact you shortly by phone. Your auditor will walk you through the process and forms, and can answer any questions you have.
Before the call, gather information you’ll need to answer questions about employees’ activities and their payroll during the policy period.
A virtual assessment of your records will then be conducted, followed by submission of documents to verify your payroll. The auditor might contact you by phone or visit you in person to ask questions about the documents or your records. Once this process is complete, we’ll verify your information and use your updated records to adjust your premium, if necessary.
We’ll then send you an audit summary that explains whether your premium has increased, decreased, or remains the same. Based on the result of the audit, you may need to take required actions accordingly.
How to prepare for a workers’ comp audit
Though an audit is a standard procedure, it can be daunting. So it’s better to be well prepared. That being said, it’s a good practice to provide the auditor only with the items they ask for to ensure they can finish your audit quickly and efficiently. There’s no need to give them any additional information unless requested.
The best way to prepare yourself for an audit is to do the following:
1. Gather your records
The auditor needs your financial data for the policy period. The specific documents and records might differ based on your provider and auditor, but it’s best to keep these on hand:
- Description of company operations
- Detailed job descriptions (if available) for each employee
- Number of employees at each location
- Owners/officers’ names and titles
- Description of contractor/subcontractor work
- Payroll journal or register
- Business checkbook
- Accounting ledger
- W-2 and 1099 forms
- Other tax forms
- State unemployment insurance tax reports (forms vary by state)
- Number of hours, days, and weeks worked annually
- Overtime records
- Individual earnings
- Salaries, wages, and commissions
Cash disbursement records
- Payments made to independent contractors and subcontractors
- Payments to casual laborers
- Receipts for materials purchased
- Certificates for every subcontractor’s workers’ comp coverage
Once your data is ready, keep it all organized. Put all your payroll records together so they’re easily accessible. Similarly, keep all your subcontractor-related information (like payment amounts and insurance certificates) together to make the audit easier and faster.
2. Update your job descriptions
Your workers’ comp costs are calculated based on two factors: your payroll, and the risk your employees face on the job. The auditor will confirm your business operations and everyone’s duties to make sure your estimates of risks match with the actuals.
The auditors may review your job descriptions or ask you to complete a form listing what each employee does. Either way, the key here is to have a strong understanding of what your employees do. A good way to do this is to update your job descriptions and make them more detailed—or create them if you haven’t already.
3. Make the auditing process easier
Be prepared with complete and accurate records to make the process smoother. Only provide what’s asked of by the auditor. Volunteering more (or less!) information than required makes work harder for both you and the auditor. Also, make sure that an owner or employee who is familiar with the company’s administrative practices is available to talk to the auditor.
All this preparation will make things easier for both you and the auditor.
Finally, it’s always good to engage the auditor throughout the process and review any documents they prepare. Don’t sign off on incomplete audit documents, and ask questions about anything that doesn’t make sense to you. Always review documents carefully.
If you have any questions about Pie’s auditing process in particular, visit our About Your Workers’ Comp Premium Audit page.
Thanks for reading! Please note that this content is intended for educational purposes only. As laws change regularly, you should refer to your state legislation and/or an advisor for specific legal counsel. If you’re a small business owner, learn more about workers’ compensation insurance or check your current rate in 3 minutes.