What is a workers' comp audit? - Paper Trails

As a small business owner, navigating the complexities of employee benefits can be daunting. One of the key components you’ll encounter is workers’ comp. Understanding what it is, why audits are necessary, and how to prepare can make the process smoother and less stressful. In this article, we will explain what workers’ compensation insurance is, but we will really focus on the question, “What is a workers’ comp audit?”.

As a trusted payroll partner, it is our responsibility to ensure that small business owners and HR managers alike, are prepared to navigate the complexities of workers’ comp.  By the time you finish reading, you should feel well versed in workers’ comp and be ready for an audit when that time arrives.

Let’s dive in.

What is Workers’ Comp?

Workers compensation, often referred to as “workers comp”, is a form of insurance that provides wage replacement and medical benefits to employees injured in the course of employment. In exchange for these benefits, the employee gives up the right to sue their employer for negligence. Essentially, it’s a compromise between employers and employees: workers get the support they need after an injury, and employers get a layer of protection against lawsuits.

What can Workers’ Comp Insurance be Used for?

Workers’ compensation insurance is designed to cover injuries or illnesses that occur as a result of duties performed on the job or while at work.  The insurance is used to cover things like:

• Lost wages
• Medical bills
• Rehabilitation
• Job retraining
• Disability benefits
• Funeral services

Here is a scenario where workers’ comp insurance can be utilized: Maria, an office administrator, slips on a wet floor in the office kitchen and fractures her wrist. The medical bills for the fracture and the physiotherapy required afterwards, as well as any lost wages during her recovery period, are covered by workers’ comp.

How are Insurance Premiums Calculated?

Workers’ comp premiums are calculated based on a combination of factors. Primarily, they are determined by the classification of the work being performed, the company’s total payroll, and the company’s claims history. The more risky the job classification, the higher the rate. Additionally, as the company’s payroll increases, so does the premium, since more employees mean a higher chance of claims.

Workers’ compensation insurance is 100% paid by the employer. A business pays premiums to an insurance company in one of two ways:

1. Traditional workers’ comp: Traditional workers’ compensation insurance is paid in lump sum payments at the beginning of the year based on your estimated payroll.
2. Workers’ comp pay-as-you-go: Pay-as-you-go insurance is paid out in each payroll cycle based on the actual payroll amount.

What is a Workers’ Comp Audit?

A workers’ comp audit is an examination of a business’s financial records and operations to ensure that the reported payroll and job classifications are accurate. This audit helps ensure that you’re paying the correct amount for your insurance coverage. It’s conducted by your insurance company and can be performed annually or at other intervals.

Why is an Audit Necessary?

Workers’ comp audits are crucial for a few reasons:

• Accuracy: It ensures you’re paying the appropriate amount. If you overestimated payroll, you could receive a refund. Underestimating could mean you owe additional premium.
• Fairness: It ensures all businesses pay their fair share based on risk and actual payroll.
• Verification: Insurance companies need to ensure that the categories of workers you employ align with the premium you’re charged.

When Should I Expect an Audit?

Most often, businesses can expect a workers’ comp audit annually, usually at the end of your policy term. However, the frequency can depend on your policy details and the insurance provider. It’s always a good idea to review your policy or discuss with your agent so there aren’t any surprises.

How Do I Comply with a Workers’ Comp Audit?

Compliance mainly involves providing accurate records. Here’s what you might need:

• Payroll records: including payroll tax reports, overtime, and payments.
• Employee records: job descriptions, hours worked, and more.
• Certificates of insurance for any subcontractors used during the term.

Best Practices During a Workers’ Comp Audit

Navigating an audit doesn’t have to be stressful. Here are some best practices to keep in mind:

• Stay Organized: Keep your financial and employee records organized throughout the year. Digital tools or accounting software can be invaluable.
• Ask Questions: If you’re unsure about any part of the process, ask your insurance provider or agent. They’re there to help.
• Honesty is the Best Policy: Always provide accurate information. Errors or discrepancies can lead to higher premiums or potential penalties.
• Be Proactive: Don’t wait for the audit to start preparing. Periodic self-audits can help keep you on track.
• Seek Expertise: If you’re uncertain, consider hiring a professional or consultant familiar with workers’ comp audits to guide you.

Conclusion

Workers’ comp and its’ associated audit process can seem overwhelming, especially when you’re focused on growing your business. However, with a clear understanding and preparation, you can navigate this terrain with confidence. Remember, the ultimate goal is to ensure a safe workplace and fair compensation for all. With these insights, you’re well on your way to mastering the workers’ comp landscape.  Contact our team if you are looking for additional help with your workers’ compensation!