The premium for most Workers Compensation Insurance Policies are based on a payroll “estimate” for the upcoming 12 month period from the effective date of the policy. This is made as accurate as possible during the workers compensation payroll audit. In addition, each business type is assigned one or more workers’ compensation classification codes. Each of the workers comp class codes are assigned a percentage rate factor. Payroll is than multiplied by the percentage rate factor for each class code. This is what determines the amount of the premium. After the policy period is complete, EVERY standard workers compensation carrier will perform a payroll audit for the previous 12 months of coverage.
During this payroll audit process the auditor can require either a physical or mail audit. Mail audits are fairly simple. They require completing a worksheet and submitting the requested payroll verification documents. Physical audits require the auditor to meet with the business owner, collect and verify payroll documentation and inspect the business to determine proper classification. Payroll documents usually include year-end tax reports, payroll ledgers and 1099 payroll information.
The purpose of an audit is to determine the “actual” wages paid to employees and to make sure the employees are classified correctly. After the payroll audit process is complete, the auditor reserves the right to change the workers compensation class code however they interpret the business based on their inspection. The auditor will report to the insurance carrier, the “actual” wages paid to employees and uninsured 1099’s per class code. The insurance carrier will than adjust the payroll figures and class codes. IF need be the auditor will than send the business owner a refund or an invoice for the additional amount due. If the business owner fails to complete the audit as requested it will cause difficulty purchasing a workers compensation policy in the future.
After the business owner receives the audit results, the business owner has the right to dispute the results if they feel something is incorrect. Business owners can go directly to the audit department to capture the auditor’s report/notes or business owners can involve their agent to assist with this process. If a classification code is changed and the business owner doesn’t agree the business owner must request an inspection by the appropriate state workers compensation bureau. Typically this request costs the business owner a few hundred dollars. The bureau inspection and classification code determination is final.
