Work Comp can be one of the most expensive and most frustrating of insurance costs for small business owners. There are many ways to control work comp costs, and many insurers and safety experts provide safety training and resources to help reduce injuries. There is another way to control your work comp costs, though, that isn’t talked about as much. And that is to make sure that you’re not paying too much for your coverage to begin with. Besides finding the right work comp insurance company, you also need to make sure that the information you’re providing to your work comp insurer is correct, including the payroll records and employee classifications. Completing a successful premium audit is one effective way to control work comp costs.
Most insurance companies have very efficient premium audit processes. They also have many clients, and many requests for audits and coverage reviews, and don’t often have the time or resources to investigate every possible error or ambiguity in underwriting. As a result, if your information isn’t accurate, you may experience unintentional overcharges. However, if you know the rules and if you do your homework and prepare well, you can take control of the premium audit process, and ensure that you are not paying more for your work comp coverage than you need to.
Creating an Accurate Premium Audit Package
To prevent overcharges, you need to take control of the process and create an “overcharge-proof” premium audit package that will give the auditor complete and accurate information to work with.
To begin, you will need to collect the following source material:
- Payroll records (employee specific)
- Unemployment tax return
- 1040 Schedule C (if you are a sole proprietor)
- Federal and state payroll tax reports (940s and 941s)
- General ledger, subcontractor ledgers and journals (or 1099s)
- Certificates of insurance from subcontractors
- Your workers’ compensation insurance package
Properly Classify Employees
Your business should have one primary employee classification. Outside sales, clerical employees and, in some states, drivers need to be classified with a separate code. Any items the auditor cannot classify quickly with a lower-rated code remain in the governing code. This may result in charges due to the improper classification of employees who should be in standard class exemption groups (clerical, outside sales) common to all industries. This may also affect employees who could be considered for a lower industry code (manufacturing, retail and wholesale are examples of industries with multiple class codes). Auditors may also accidentally include corporate officers, who should be excluded, or may not remove excluded remunerations that should be deducted from payroll before calculating your premium liability.
If you have questions, consult the NCCI Scopes Manual; it has detailed job descriptions for most states.
Certain forms of compensation are not used to determine workers’ compensation premium. Tips are an example of this. Allowable exclusions differ from state to state, but typically fall within 18-20 categories. Once you’ve added up all the excluded remunerations (by employee code), make sure to deduct them from your reported payroll.
Many work comp experts recommend that you only use employee-insured subcontractors, requiring them to present relevant certificates of insurance before beginning work. Make sure you have copies of all subcontractors’ insurance certificates on file. Provide these certificates to the auditor in order to save on premium. If you do use uninsured subcontractors, they must be treated like employees for workers’ compensation purposes. In these cases be sure you report only their payroll to the auditor (excluding the cost of materials or other supplies that a contractor may be charging to you).
Following these audit preparation steps will not only save you and your auditor time and effort, in the long run they will also help you control work comp costs, saving you money on insurance premiums and possibly in other areas of your business.
For additional help and information on how to control work comp costs, and for a free Workers’ Compensation Audit Checklist to help you prepare for your premium audit, email Roper Insurance’s Work Comp department here or give us a call at 303-721-1145 today.