Workers Compensation Audit

Monday, September 29 2008 - premium-audit, workers-compensation

Introduction:

Workers Compensation Insurance is a necessary evil, trumped only by the associated annual audit.  Since States require all businesses to have insurance for employees, they also set WC standards and prices, which is important to remember when blaming the Insurance Company for the high prices.  There is no way to avoid an audit, so it is far better to be well prepared and informed than slightly complacent in the hands of a well trained auditor.

The Auditors:

Certain insurance companies employ their own auditors, in which case you will be dealing directly with the Insurance Carrier.  Others outsource their auditing to smaller, independant auditing firms.  There is a good possibility that the auditor representing your insurance company works for a different company entirely.  This is not cause for alarm, auditors employed by smaller companies use the same discretion as those that work for the insurance company.

Purpose:

Insurance rates depend on two key factors:  The employee's job description and overall compensation during the policy period.

Job Description:  An Employee's rate is determined by the hazards associated with the job being performed.  For instance, a Tree Trimmer who climbs trees and operated heavy machinery, is going to cost substantially more to insure than an office clerk who sits behind a desk and operates a stapler.  (Positions are categorized by industry and almost all types of employees have already been accounted for by the state.  The auditor will have a more in depth knowledge of codes associated with employee positions).

Compensation:  The determined rate is then associated with the employees overall compensation.  Rates are usually based on the hundred and calculated accordingly.  For instance, if the rate for tree trimmers is $20.00 on the hundred and the employee has made $30,000.00 for the period, insurance is going to cost roughly $6,000.00.  However, an employee classified as clerical, with a rate of $.25 on the hundred will only cost $300.00 to insure.  (Rates mentioned are fictional and used only for example purposes).

Planning:

The audit process typically begins with a phone call from the auditor or a notice in the mail.  Either way, an appointment will be scheduled for slightly after the policy period.  There are steps that can be taken to help improve auditor relations and the audits efficiency. 

1.  Determine the audits primary contact.  This tends to be someone who deals with Employee relations/employment and/or compensation.  An intimate knowledge of the employees, their duties and access to payroll records is ideal.  Many businesses simply refer the auditor to their accounting firm by-passing the need for a contact within the office.  It will still be necessary for the auditor to contact the Human Resources department so that each employee can then be classified, but this can be done via telephone and is substantially quicker than the whole audit process. 

2.  Prepare the necessary documentation.  Records needed must accomodate the entire specified policy period unless otherwise requested by the auditor.  Documentation can include but is not limited to:  Payroll records, General Ledgers, Quarterly Payroll Tax reports or State Unemployement, Sales/Gross Receipts and Subcontractor Costs/Insurance Certificates.  Pre-gathering and assembly of these records will greatly reduce the overall time of the audit, creating electronic copies for the auditors will further expedite the process. 

3.  Outline the companies employees and include their department, job title and duties.  Where applicable, specify the amount of time each employee spends performing the duties listed.  With this information complete and distributable, the auditor will need very little of the contacts time. 

4.  Lastly, prepare explanations for any substantial variations in payroll from year to year.  The auditor needs to be aware of any downsizing, or significant loss in revenue.  Typically an explanation is good enough, this is so that the insurance company can get an esitmate as to the businesses overall size.  Events such as a significant loss will not modify the rates associated with the policy, they are required by the insurace company for informative purposes only.

Completion:

Because of the annoyance associated with the word audit, it is common that people be less than enthusiastic with reponses to the auditors attempts for contact.  At a certain point, the auditor is no longer required to make contact, rather can send the audit back due to lack of cooperation.  Insurance carriers require that all of their customers be audited regularly, therefore, penalties are common when cooperation concerns exist.  It is recommended to comply with the auditors requests as quickly as possible, making sure that all objectives of the audit are met.  Dealing with the insurance company in a quest to be re-audited because of lack of cooperation will undoubtedly be more painful.