A workers’ comp audit is a tool used by insurance companies to verify that your business has paid the appropriate amount throughout the expired policy period. Knowing how to prepare and what to expect can help you ensure compliance and avoid penalties, fees, and other consequences. Join us as we cover this mandatory practice within workers’ compensation insurance.

What are workers’ comp audits?

A workers’ compensation audit is an annual review conducted by your insurance provider to reconcile the estimated numbers used to calculate your initial policy with your business’s actual payroll figures and employee job classifications.

What’s the purpose of a workers’ comp audit?

The primary goal of a workers’ comp audit is to verify that your business paid the correct insurance premium over the last year. It helps prevent fraud and miscalculation, and serves as a guideline for rates in the coming year.

Why would you need a workers’ comp audit?

Workers’ compensation audits are enforced by virtually every insurance carrier, as these companies are often required by law to perform them in order to ensure compliance.

When would you get a workers’ comp audit?

You can expect an annual workers’ comp audit at the end of each policy period, but that’s not the only time they occur. Your insurance company can demand an assessment after a contract cancellation or even mid-term if a business owner requests a premium adjustment. They may also occur after a significant change in payroll, such as hiring a number of independent contractors or subcontractors.

Get answers to common payroll and insurance questions in our FAQ

What’s the workers’ comp audit process?

Let’s take a look at the audit process so you know what to expect as your policy’s expiration date approaches.

What happens during a workers’ comp audit?

Your insurance company uses workers’ comp audits to confirm coverage rates by verifying your business operations and proper class codes, assessing employee duties, and confirming payroll is accurate. When you send the requested paperwork, they’ll compare actual payroll with original estimates, identify any discrepancies, and verify that all contractors are insured.

They’ll also ensure that all employees are correctly classified according to their job duties. Once they have completed the audit, you will receive a final audit report that shows if you had more or less payroll than on your policy, resulting in an audit bill or refund.

It will also show if any of your contractors were uninsured, which can make you responsible for paying your set percentage on them.

How to prepare for a workers’ comp audit

Maintaining detailed, accurate records is the first step to navigating your annual workers’ comp audit. The awesome part about Clearpalm is that if we administrate your payroll and insurance, we do the audit for you! Here are some of the documents you may need to provide:

Payroll records, including summary reports and unemployment returns
W2 and 1099 forms
Certificate of insurance for each subcontractor
Detailed job descriptions for each employee
Tax return records
General ledger or profit and loss statement

Be sure to review all information to ensure accuracy before sending this documentation to your carrier. While your casualty rate doesn’t directly impact your premium, frequent injuries could trigger an Experience Modification Rate, increasing future costs.

Keep in mind that time tracking for overtime does figure into your gross payroll, but you should be able to submit only the straight-time rate rather than the premium portion. Your provider can clarify their requirements to take the guesswork out of your submission.

What happens if you don’t do a workers’ comp audit?

Failing to comply with a workers’ comp audit can have serious consequences. Your provider may charge a large estimated premium based on the highest risk class codes and maximum payroll estimates, cancel your policy, or take legal action against your business. They can even report the issue to state authorities. In other words, you’re lucky if you only need to pay a small penalty fee.

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What happens after a workers’ comp audit?

Upon receiving your final audit report, it’s important to respond accordingly. Here’s what to expect after your workers’ comp audit:

Addressing audit results

Depending on the results of your audit, you may need to take action to maintain compliance. Here’s how to address workers’ comp audit results:

If your initial premium was too low: Your carrier will send an invoice that’s usually due within 30 days. You may be able to set up a payment plan.
If your initial premium was too high: Your provider may apply your refund to your next policy or issue a check for the balance.
If your initial premium was correct: No action needed. Results will remain on file to inform future premiums.

Making adjustments

A workers’ compensation audit can help you identify areas of improvement for the coming year. For example, it might be necessary to update employee classifications, upgrade your payroll software, or establish a better system for record keeping. Consult with your payroll company and insurance broker, as they may advise small changes that can make a big difference.

Disputing audit outcomes

If you have reason to believe your final report is incorrect, start by reviewing the response line by line to identify any discrepancies. Contact your insurance provider right away and ask for a copy of the auditor’s notes. Most carriers allow disputes within 30 to 60 days of the final report, so act quickly.

Document any inaccuracies, then file a formal dispute in writing. Include supporting documents like pay records, job descriptions, and tax forms that can bolster your argument. Your broker may advocate for you and help you present your case for the best possible outcome.

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At Clearpalm, we aim to help employers master daily operations, maintain comprehensive records, and navigate occasional requirements like workers’ comp audits using the best business solutions on the market. Contact us today to learn more!

What Is a Workers’ Comp Audit?