Understanding Your Workers' Comp Audit Report

Workers' compensation is essential for protecting your employees and your business, but it comes with some administrative responsibilities, including the workers' compensation audit process. For many, this business part may feel like navigating uncharted territory. From gathering the correct records to interpreting the final audit report, it can seem overwhelming if you don't know what to expect.

This guide will walk you through the essentials of preparing for, understanding and addressing your workers' compensation audit report to ensure compliance, avoid penalties, and streamline the process for future audits.

What Is a Workers' Compensation Audit and Why Is It Important?

A workers' compensation audit, or "workers comp audit," is a review conducted by your insurance provider at the end of the policy period. Its primary purpose is to ensure that your premium accurately reflects your business's actual payroll, employee classifications, and associated risks during that year.

Why does this matter? Workers' compensation insurance operates on estimated figures at the start of the policy. The audit ensures accuracy by comparing estimates to actual data. If discrepancies exist, your premium may need to be adjusted, resulting in a refund or additional payment.

Understanding the audit and acting on its findings protects you from compliance issues, helps you manage costs, and ensures adequate coverage for your workforce.

Preparing for the Workers' Compensation Audit

Proper preparation is half the battle regarding workers' comp audits. Organizing your records and maintaining compliance will set the stage for a smoother review process.

Key Steps to Prepare for Your Audit

1. Organize Payroll Records

Your payroll records are a critical component of the audit. Incorporate detailed information, including employee wages, overtime, bonuses, and deductions. Ensure you distinguish between employees and independent contractors, as they're classified differently under workers' comp policies.

2. Keep Employee Classifications Accurate

Correctly classify employees based on the nature of their work. Misclassifications can lead to inaccurate premium calculations and potential penalties. Refer to state or NCCI (National Council on Compensation Insurance) classification codes to verify that you use the appropriate categories.

3. Maintain Certificates of Insurance (COIs)

If your business hires subcontractors, ensure their COIs are on file. This proves they carry their insurance, and you're not liable for their workers' comp premiums.

4. Review Policy Terms

Take some time to review your existing workers' compensation policy. Understand its nuances, such as approved classifications, exclusions, and the conditions under which adjustments may apply.

5. Stay Fully Compliant

Adhering to workplace safety regulations and maintaining compliance with labour laws minimizes surprises during the audit. This includes maintaining documentation of safety protocols and training.

Understanding the Workers' Comp Audit Process

The workers' comp audit process typically follows a structured procedure. Here's what you need to know about each stage.

Notification of the Audit

Your insurer will notify you when the audit is due. Depending on the insurer and your preference, this could be an on-site, mail-in, or online/phone audit. The complexity of your business often determines the type.

Submission of Records

You'll be required to submit the necessary documents for review. These typically include payroll records, tax filings (such as Form 941), financial statements, overtime logs, and any certificates of insurance. Prepare these materials promptly to avoid delays.

Review by the Auditor

The auditor examines the provided information, focusing on payroll figures and employee classifications. They may ask clarifying questions or require additional documents to understand your business's unique elements.

Receiving the Audit Report

Once the review concludes, you will receive the completed audit report. This document highlights the auditor's findings and outlines any adjustments to your premium.

How to Review Your Workers' Compensation Audit Report

Receiving the audit report is only the beginning. It's essential to review its findings carefully to ensure accuracy.

Focus on Key Components

• Payroll Adjustments: Verify that the reported payroll numbers match your records.
• Employee Classifications: Check that all employees are correctly classified according to their job roles. Misclassifications, such as listing a high-risk employee as low-risk, can lead to inaccurate premiums.
• COI Records: Ensure subcontractors who provided their Certificates of Insurance aren't accidentally listed in your payroll figures.
• Policy Compliance: Confirm that the adjustments align with your workers' comp policy terms.

Spot Potential Errors

Look for anomalies such as duplicate entries, incorrect wages, unaccounted-for bonuses, or misplaced classifications. Even a minor error can significantly impact your premium calculations.

Addressing Discrepancies

If you find errors or discrepancies in your workers' comp audit report, don't panic—there are steps you can take to resolve them.

1. Contact the Auditor

Start by contacting the assigned auditor to explain your concerns. They can clarify ambiguities, investigate potential errors, and verify the accuracy of their findings.

2. Provide Supporting Documents

If you believe an error, prepare and submit records supporting your claim. For example, payroll logs or corrected employee classifications can make your case stronger.

3. Appeal the Findings

If the discrepancies aren't resolved after contacting the auditor, your insurance provider will likely offer a formal appeals process. Please familiarize yourself with their timelines and requirements so that your appeal can be heard.

4. Seek Professional Assistance

If the process becomes too complex, enlist the help of an accountant, bookkeeper, or workers' comp specialist. Their expertise can save time and help ensure a fair outcome.

Implementing Corrective Actions

A workers' compensation audit isn't just about identifying mistakes—it's also an opportunity to improve business processes in the future.

1. Update Payroll Systems

Automate payroll systems to maintain accurate data and classification records for employees. This reduces human error and ensures compliance.

2. Train Your Team

Educate your management team on proper employee classification and record-keeping practices. This minimizes inconsistent reporting.

3. Conduct Internal Audits

Perform internal audits periodically to catch errors before the following workers' comp audit. Regular reviews provide peace of mind and reduce surprises in the official process.

4. Proactively Review Certificates of Insurance

Maintain a clear, up-to-date record of insurance certificates for any subcontractors you work with. This will simplify the audit process in future scenarios.

Why Thoroughly Understanding Your Audit Report Matters

Workers' compensation audits are vital to maintaining a compliant and cost-effective business. Being proactive, transparent, and thorough in your approach can ensure an error-free audit process and avoid unnecessary costs.

Remember, a successful audit starts with preparation and ends with actionable insights. The more diligent you are about maintaining accurate records and addressing discrepancies, the smoother future audits will be.

For businesses navigating workers' compensation audits, knowledge is power—and now, you're well on your way to mastering the process.