Nobody likes audits, especially Workers’ Compensation audits. However, the reality is, they can be one of the most important aspects of your company’s insurance program, and if not handled appropriately, they can be huge cash flow killers. Luckily, like many aspects of your risk management program, a little proactivity can go a long way.
Use this article as a guide on how you can avoid unexpected additional premium bills during your next audit.
1. Discuss Expectations
Your broker should be setting expectations about the workers’ comp audit process. As your business grows, enters new markets and offers new services, the risk associated with your employees fluctuates. If your payroll goes from $1,000,000 to $2,000,000 it only makes sense that you’ll end up paying a higher premium. If you hire 10 new employees in California, you’ll likely pay more than if you hired those same employees in Indiana (California is known to have some of the highest workers comp rates in the country). If you decide you want to start a roofing division at your construction company, expect to pay high rates for those employees. There are many intricacies in how your premium bill is calculated at the end of the year. “If your payroll goes up, your premium goes up” is not a good enough explanation as to how the audit process works. Your broker should be getting more detailed than that.
2. Understand Payroll & Job Classifications
Employee misclassification is one of the leading causes of unexpected additional premium. Sit down with your broker before your renewal and discuss all the different job functions at your company and the expected 12-month payrolls for each classification. It’s important for your broker to ask detailed questions about each category of employee to classify each worker under the most accurate workers comp class code. Ultimately, the insurance company’s audit team determines the final classifications and NCCI and other state specific workers’ compensation bureaus frequently change class code qualifications. However, it is important to be as proactive as possible.
3. Plan Periodic Check-Ins
The conversation should not stop after setting your payroll estimates for the upcoming policy period. You should meet with your broker at least semi-annually to discuss your actual payroll activity. If you’ve taken on a big new job or hired a new team to handle a complex project, your broker can typically endorse your policy mid-term to account for the premium the additional payroll will generate. Depending on how your payment plan is structured, you can likely spread the additional premium across multiple billing cycles as opposed to being hit with a large additional premium at audit. Even if you can’t endorse your policy mid-term, your broker can at least give you an estimate as to what additional premium you can expect at audit. That way you’re not surprised and you’re able to effectively manage your cash flow.
4. Maintain Your Recordkeeping
Make sure you are keeping your payroll and job classification information up to date. Your insurance company will likely want to review financial information such as tax returns, W-2 and 1099 forms for your employees and/or contractors. It’s very helpful to have a system provider that allows you to break down your payroll by state and job classification. The more detailed you can get, the easier it will be to pull data for your audit.
5. Pay Attention to Subcontractors
If you use subcontractors in your business, be sure that you collect and maintain their certificates of workers’ comp insurance. Make sure you do this before every job and ask for updated COI’s each year before their policy expiration date. If your subs do not have their own workers comp insurance, or you cannot prove to the auditor that they do, you will likely pay for them under your own policy. You don’t want to be on the hook for uninsured subcontractors.
6. Explore Pay-As-You-Go Options
The pay-as-you-go workers’ compensation option allows employers to pay their workers’ comp premiums based on actual payroll figures rather than estimates. This method integrates premium payments with the payroll process, making it easier to manage and potentially more accurate.
Here are some key benefits:
- Improved Cash Flow: Payments are spread out over the year, reducing the need for large upfront payments.
- Accuracy: Premiums are calculated based on real-time payroll data, which can help avoid overpayments or underpayments.
- Simplified Administration: Combining workers’ comp premiums with payroll can streamline the payment process
Having a comprehensive strategy on how to proactively manage audits should be an integral part of your company’s risk management program. Make sure you have a broker shares responsibility in that proactivity.
About the Author
In his role at HWP, Jack acts as a commercial property & casualty risk advisor focusing on the Private Equity, Construction & Contracting and Commercial Real Estate sectors.
Prior to joining HWP, Jack spent 7 years at global insurer, Chubb. He most recently led the New York City- based Middle Market Private Equity Underwriting team.
Jack holds an Insurance Risk Management degree from the University of South Carolina and an MBA from New York University’s Stern School of Business. He is also a Chartered Property & Casualty Underwriter (CPCU). He is a current member of ABC Chesapeake Shores and the Association for Corporate Growth (ACG).
jcauley@hwphillips.com
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