A physical worker's comp audit, also known as a field audit, takes place at your business and is usually conducted within 60 days of the expiration date on your insurance policy. The auditor will usually have 30 days to complete the audit, and the results will determine your premium costs for the next billing period.

Because initial worker's compensation policies are based on your business classification and estimated number and type of employees it is vital that you prepare in advance for your business physical audit.

Many new businesses focus on accident and loss prevention as a means of lowering their worker's comp costs and neglect their records. A physical audit will focus mainly on your payroll records, so you should have your payroll expert or other knowledgeable person on hand when the auditor is scheduled to arrive.

A physical audit is usually performed at the place of business but may take place at another location such as an accountant's office. If you have any general questions you should contact your insurance carrier before the audit appointment.

Records to Prepare

It is vital that you or your representative gather all pertinent records in advance and have them in an easily managed order. Records should be clear and concise and a database that can sort various categories and line items is ideal. While your insurance company will give you a list of required documents when they notify you of the physical audit; if not ask for a summary well in advance of the audit date. Here are the typical records the auditor will need to see:

  • Description of your business operations
  • Your experience rating worksheet
  • Tax forms, particularly Employers Federal Tax Return (quarterly and annual)
  • W-2 and 1099 forms
  • Job description for each worker with an accurate description of job duties
  • Accounting ledger
  • Payroll records for the term of the policy
  • Verification of all sources of pay provided to each worker, such as salary and bonuses
  • Payroll limitations applicable to partners, sole proprietors, and executive officers that are covered under the policy
  • Records of cash disbursements
  • Payments for services provided by independent contractors and verification that they are not employees
  • Payments for all services provided by subcontractors
  • Certificate of insurance for each subcontractor you hired

Sort the above data into organized folders so that all employee W-2 forms, overtime, and pay stubs are together and subcontractor information such as payments and insurance certificates is in a separate place. Your organization will make the audit run smoothly and lessen the chance of errors.

Payroll Inclusions

Ideally your payroll database will sort the required categories. Payroll is called remuneration in reference to audits because that's what they base your premium on. The specific categories may vary in your state but in general the auditor will need access to:

  • Gross wages and salaries, including retroactive wages and salaries
  • Commissions, including total commissions received as well as any draws against commissions
  • Bonuses, including and stock bonus plans
  • Sick pay, vacation, and holiday pay
  • Overtime pay. In most states, remuneration includes overtime calculated at the straight time rate.
  • Payments made by the company that would otherwise have been withheld from employees' pay as required by law for Medicare, Social Security, or a pension plan
  • Payment to workers on a basis other than time worked, such as piecework, incentive plans, or profit sharing
  • Payment or allowances for hand tools or power tools that workers use to on their jobs
  • Rental value of a house or apartment provided to an employee
  • The value of other lodging and meals received by a worker as part of his or her pay
  • Payments deducted from workers' gross pay for savings plans, cafeteria, or retirement
  • Payroll for employees of uninsured subcontractors

Payroll Exclusions

Certain payroll costs won't be included in the audit. Again, these may vary by state but the standard items of exclusion are:

  • Reimbursed business expenses
  • Uniform allowances
  • Discounts on goods purchased from the business
  • Tips and similar gratuities received by employees
  • Pay for active military duty
  • Severance pay

What to Expect During the Audit

You or your representative should be available to the auditor throughout the audit. Only give the auditor material as they request it, and don't volunteer information unless asked specific questions. It is vital that all information is accurate, as giving a worker's compensation auditor false information can lead to fraud charges. Here are some typical types of fraud auditor often encounter:

  • Providing false job descriptions
  • Providing phony tax returns or other
  • Providing phony financial reports
  • Underreporting payroll
  • Providing falsified certificates of insurance for subcontractors
  • Concealing the fact that the business has hired subcontractors

Auditor Errors to Watch for

To err is human, and it's not inconceivable that your auditor may make one or more mistakes on your physical audit. You will be given the opportunity to review the auditor's work before they leave your business and you should do so carefully. Never sign off on an incomplete worksheet, and ask for a copy of their worksheets before they leave. Here are some common audit errors to look for:

  • Wrong class codes for one or more employees
  • Wrong experience mod used when calculating your audit premium
  • Workers comp credits that were given by the carrier at the beginning of the policy are not showing up on the audit
  • Original manual rates quoted to you are not the same as the rates shown on the audit
  • Owners and officer were excluded on the policy but were not excluded from the audit
  • Incorrect payroll figures were used on when calculating the audit
  • Employee was in multiple workers compensation class codes but the corresponding payroll was not separated on the audit
  • Charged for sub-contractor payments even though you have a valid sub-contractor certificate