A workers’ compensation audit is a standard review by an insurance carrier to verify the accuracy of the information used to calculate your premium. This process is a contractual obligation, and often a legal requirement, that ensures the premium you paid aligns with your business’s actual operations. The audit confirms you paid the correct amount for the coverage you received.
The Purpose of a Workers Compensation Audit
Workers’ compensation insurance premiums are initially calculated based on estimates. When you purchase or renew a policy, the price is determined by your projected payroll and the job classifications of your employees. Each classification has a rate based on the level of risk associated with that work.
The primary purpose of the audit is to reconcile these initial estimates with what actually occurred. A company’s payroll can change significantly over a year, so an audit examines the actual payroll figures and confirms employees were classified correctly. This “true-up” process ensures the final premium accurately reflects the risk the insurance carrier covered. This protects you from overpaying and ensures the insurer is compensated if your risk exposure was higher than estimated.
The Workers Compensation Audit Process
Your insurance carrier will initiate the audit process within 30 to 60 days after your policy term expires. The audit method depends on the size of your business and the complexity of your operations. Insurance providers will contact you to arrange the review and specify the format it will take.
For many small businesses, the process may be a mail or voluntary audit. The insurer sends a form requesting your payroll information for the policy period, which you complete and return. Another common method is a phone audit, where an auditor will schedule a call to review your records and ask questions about your business operations and employee duties.
Larger companies or those with more complex risk classifications may undergo a physical or on-site audit. In this case, an auditor will visit your place of business to review records in person, observe operations, and verify that employee job classifications align with their actual day-to-day tasks.
How to Prepare for Your Audit
Gathering all necessary documents before the auditor’s request allows you to respond promptly and ensure the information is complete.
Payroll Records
Accurate payroll records are the most significant factor in determining your premium. You will need to provide a complete payroll journal for the policy period. Auditors will also require copies of your quarterly state unemployment tax (SUTA) reports and your federal payroll tax filings, such as Form 941, to cross-reference the payroll figures you report.
Employee Job Descriptions
Your premium is also influenced by employee job classifications, as different jobs carry different premium rates. Be prepared with detailed job descriptions for each role in your company. An auditor will review these to ensure that the classification codes assigned to your employees accurately reflect their duties.
Contractor and Subcontractor Information
An area of review involves payments to independent contractors or subcontractors. You must provide all 1099s issued during the policy period. For every subcontractor you hired, you must have a valid Certificate of Insurance (COI) on file proving they carried their own workers’ compensation insurance. Without a valid COI, the auditor may classify that subcontractor’s payroll as your own, increasing your premium.
Cash Disbursements
Auditors may examine records of cash disbursements or payments made to individuals not on your formal payroll. This review ensures that individuals are not being misclassified as casual labor to avoid including them in payroll calculations. Clear records explaining these payments, such as invoices or contracts, can prevent misunderstandings.
Understanding the Audit Results
Once the auditor has reviewed your records, the insurance carrier will send you an audit summary. This document explains whether your premium for the completed policy period has been adjusted.
The most common outcome is that an additional premium is due. This occurs if the audit determines your actual payroll was higher than what you initially estimated, or if some employees were moved into higher-risk job classifications. You will receive an invoice for the difference, which should be paid promptly to keep your policy in good standing.
Conversely, the audit may find that your actual payroll was lower than your estimate. This could be due to having fewer employees or lower wages than anticipated. In this scenario, the insurance provider will issue a refund or a credit to your account for the overpayment.
In some cases, the audit may conclude that your initial estimates were accurate. If your actual payroll and classifications match the original estimates, there will be no change in your premium and no further action is required.
How to Dispute an Audit Finding
If you receive your audit results and believe there is an error, you have the right to dispute the findings. First, carefully review the audit report and identify specific points of disagreement, such as incorrect payroll figures or inaccurate changes in employee job classifications.
Contact your insurance carrier in writing to state which parts of the audit you are contesting and why. Most insurers have a formal dispute process and will provide instructions on how to proceed.
To support your claim, you must provide documentation that proves the error. This could include corrected payroll reports, detailed job descriptions, or Certificates of Insurance for subcontractors. The insurer will review your submitted evidence, so be prepared to follow up on their process.