Worker’s compensation insurance is a requirement in most, if not all states, when a business has employees. Depending on the nature of the business and the duties of the employees, the cost of this insurance can represent a significant expense for the business.
The premiums for Workers Compensation policies are set by estimating an annual payroll amount and then assigning these estimated payrolls to a class code. The class code is determined by the duties and industry of the employer, with high risk professions, such as restaurants and traveling salesmen having a higher premium rate than inside only clerical workers.
Each year, as part of the policy, the insurance company will perform an audit on the employer, reviewing the following:
- The estimated vs actual payroll to adjust the premium accordingly
- Proper class codes of employees based on job descriptions / responsibilities
- Any uninsured casual labor (such as independent contractors) paid during the audit period
- A general review of the business, mostly to ensure they can continue to pay the premium
It is during these audits where employers can either face a large exposure or have the opportunity to gain a credit for insurance that was overpaid. During the audit process, the insurer will typically review the following:
- Payroll tax returns
- Cash disbursements/general ledger
- Most recent filed tax returns
- Inquiry of duties of employees
- Certificates of insurance for any subcontractors
When the auditor is doing this review, there are several opportunities and risks for the insured. During this process, the employer can dispute the classification code of certain employees, stating that they should be in a different class code which is more representative of their duties (resulting in a lower premium). On the flip side, the employer must also make sure that the employee is in the right code relative to risks they may face, as having someone improperly classified can lead to uninsured claims, fines and penalties. Employers must also make sure that the auditor is not picking up any casual labor for which the hired party has their own insurance, such as sub-contractors.
While not as invasive nor controversial as an IRS or state examination, a worker’s compensation audit still poses a risk of exposure to the employer. As always, good guidance and experience in this area will often serve to the employers benefit, making sure that their worker’s compensation policy is fairly priced and covers the appropriate risk.
Edward McWilliams, CPA
Partner
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.