As if paying copious amounts of money for workers compensation coverage wasn’t enough, to add insult to injury many carriers send out what seem to be the least peasant people they can find to perform an annual work comp audit of your payroll books. Most employers I speak with feel as though these auditors sole purpose in life is to find some way to charge them more for last years policy than they have already paid. It doesn’t have to be this way though, and with a little planning your next audit might just be your smoothest ever.
For this article we are going to assume that you are getting a physical work comp audit. This is the worst kind of audit, and if you are prepared for a physical then a phone or self audit will be a cake walk. No matter which of the three type of work comp audit you receive, the preparation is going to be the same.
You Know What Time It Is!
Your work comp audit comes at the same time every year. Its not a surprise. They can’t catch you off guard like a random visit from an OSHA inspector. They aren’t just going to forget about it this year either.
There is nothing worse than spending hours of your time looking for documents or weeding through banking records while an auditor is sitting in front of you peppering you with more questions and requesting more documentation. You need to be prepared for when that auditor walks in the door.
Have an Accountant?
If you don’t use an accountant to keep your books, you might consider speaking with one to see if they would fit within your budget. Most accountants are accustomed to helping their clients prepare for audits, both comp and IRS related. They will without a doubt make the process run smoother, and also can be a help in other areas to reduce the cost of your workers comp coverage. (You can read more about that here).
The main objective you want your accountant for is to make sure that all of you documentation is in one nice neat little package that you can hand to the auditor. Having everything they need to verify labor payroll which should be rated for premium in one place will expedite your favorite part of the show…showing them the door.
Do not, I repeat DO NOT just point the auditor in the direction of your bookkeeper and wash your hands of the situation in its entirety. While they can provide the raw numbers, they don’t know your business inside and out like you do and can not properly field questions about your operation during a work comp audit.
The Work Comp Audit Document Package
Whether you choose to use an accountant or not, you need to have “The document package” ready to go, sitting on your desk, waiting for the auditor to show up. They walk in, you hand them the stack, and it contains everything they need to do their job and get out of your hair. The less things you leave to question the better off you are going to be.
Here is a sample list of what should ALWAYS be in your work comp audit document pack:
- Accounting ledger
- 941 and 944 quarterly and annual Federal Tax Returns
- Records showing any cash disbursements, or lack thereof
- Payments to non-labor independent contractors
- Payments to 1099 subcontractors who provided labor services
- Certificates of insurance for each subcontractor you paid
- W-2 and 1099 Forms
- Job descriptions for each of your workers duties
- A general description of your day to day business operations
- Complete payroll records for the term coinciding with the policy effective dates
- Payroll to excluded officers, partners, or sole proprietors
- Your experience rating worksheet
Once you have everything on the list checked off that applies to your operation the next thing you are going to do is put it in an order that makes sense. Remember, we want this over quickly, and with as few questions as possible.
Put the W-2 payroll information with the job descriptions and payroll records. Put all of the information related to subcontractors including their certificates and 1099’s together in a separate folder. Et cetera.
Know What Is Considered Ratable Payroll
There are some costs like tips and reimbursed business expenses which are generally excluded when calculating payroll which is ratable for premium. These vary by state, and by carrier, so be sure to confirm with your agent.
Be sure to account separately for labor and materials with all of your sub and independent contractors. Many business owners will lump 1099 payments into one ledger entry, and we have seen this create huge issues for insureds.
Loose Lips Sink Ships
Make no mistake about it, the auditor is looking for anything during the work comp audit that may create a situation where they can hit you for more premium. You should be polite and cooperative with the auditor, but never offer more information than what is being requested.
They are not your buddy, you are not going to go have beers and shoot darts when the meeting is over. Wait to have a conversation with someone else and just answer with concise answers to their specific question.
I once had a client tell an auditor that they were considering putting a bid in on a project that would take place in another state. Within days of the meeting we were fighting to keep the policy from cancelling for work performed in a state which they did not service. They had not even submitted the bid yet, but the auditor returned to the home office and reported that “Work was being performed in other states.”
This type of thing happens all the time.
Mistakes Happen, But Most Can Be Fixed
As I just mentioned there are situations that arise out of audits that can be a pain to deal with, but on the bright side they can usually be straightened out. Just because an audit goes sideways doesn’t mean that you are stuck with whatever the outcome is. You can file a dispute or your agent may be able to step in and speak directly with the auditor or underwriters to clear up misunderstandings. In the end though, it is best to take a little bit of time ahead of time to be prepared so you can focus on your business.