Workers’ Compensation Audits: What They Are, and How to Avoid Unexpected Additional Premiums
What is Workers’ Compensation?
Workers’ Compensation is designed to respond to injuries and illnesses that employees experience while performing their usual job duties. The coverage is twofold: coverage for medical bills associated with the injury/illness, and wage indemnification when an employee misses an extended period of work due to the injury/illness. Depending on the state that your injured or ill employee claims benefits in, there are different waiting periods – or days of consecutive work they miss – before they can claim the wage indemnification benefit.
How is Workers’ Compensation premium calculated?
Since the purpose of this article is to focus on the impact of Workers’ Compensation audits, first we need to define how Workers’ Compensation premiums are calculated. Workers’ Compensation is broadly based off your total payroll, and the duties of your employees. The insurance industry uses class codes to group segments of similar employees and price their Workers’ Compensation per the risk associated with their job. In the delivery space, the most common class codes are 7231 (Last Mile Delivery – all employees), 7219 (Trucking – all employees – NOC), 8810 (Clerical – NOC), and 8742 (Outside salespersons). Each of these class codes is assigned a base rate from which different insurance companies can deviate away depending on their individual appetite for the specific class of business. The basic formula for calculating Workers’ Compensation premium is:
Payroll x Net Rate / 100 = Premium
What is a Workers’ Compensation Audit?
In most states, Workers’ Compensation is mandated by statutory law. Resultingly, insurance carriers are only meant to charge you premium based on your exact payroll during the policy period, to the dollar. To ensure that their calculations are correct, within 60 days after your Workers’ Compensation policy expires, your insurance carrier from the previous term will reach out to collect data points. These pieces of data may include:
- Your payroll reports for the days during the policy period
- Your quarterly tax forms
- A P&L statement for the most recent fiscal year
How do I avoid a large additional premium consequence at my audit?
The best carriers for the delivery space offer pay-as-you-go billing. When run properly, these billing systems interact directly with your payroll software so that your real-time payroll is communicated to the insurance company. This process mitigates the chance for deviation between your actual payroll vs. what the insurance company estimated your payroll would be at the beginning of the policy term. If you are not set up with a pay-as-you-go billing carrier, it’s best to keep a monthly, or quarterly, record of your actual payroll vs. your originally estimated payroll. Most carriers will allow you to endorse your policy midterm to reflect any major deltas in actual payroll as compared to the original expected amount.
What other factors can lead to unexpected increases in Workers’ Compensation premiums?
Classification of employees is crucial. Insurance carriers generally push employees into their class of highest risk. As an example, if you have an employee that does clerical work 50% of the time, but also delivers on route 50% of the time, the insurance carrier will look to calculate 100% of that employee’s wages in the driving class code. If employees aren’t classified correctly throughout the policy period, this will be picked up at audit, and you will owe the premium that should have been paid during the policy period. Inversely, if an employee was reported under a higher-risk class code than the job they performed, the insurance company may owe you money back after the audit is completed.
In the delivery industry with its peak seasons and dead times, it’s important to have an advisor that understands how to properly implement a Workers’ Compensation program that fits your unique needs.
