Hearing the word ‘audit’ is enough to send chills down some people’s spines; and the “workers compensation audit” even more so, as it is a complicated process that requires a lot of preparation and paperwork. However, as long as you know what you’re up against and start early, you can turn it into a smooth procedure that won’t require much time. From deciding on the place where you’ll be hosting the workers compensation audit to gathering the documents and to crossing the finishing line, here is a short but comprehensive guide to all you need to know.
What Is Workers’ Compensation?
We couldn’t possibly begin detailing the workers compensation guide without first outlining what workers compensation in itself is.
Simply put, workers’ compensation is an insurance program mandated by the state that offers coverage to all employees that have suffered or are prone to injuries and illnesses caused by their line of work or the place in which they do it. As a general rule, the employee who has suffered such an affliction will get said compensation no matter who was at fault for the injury. Even if it was self-afflicted or if a coworker, manager, customer or third party was responsible for the accident happening. In return for this financial benefit or compensation, the employee can no longer sue his company so that he or she can obtain damages out of the trial.
One thing you need to know about workers’ compensation is that while the federal government has a compensation program for federal and some other types of employees, so does each state. The best thing to do if you want to learn about the laws in your own state would be to check them out individually, instead of relying on federal legislation. Here is a link towards the US Department of Labor’s website that will tell you all you need to know.
Why Is a Workers Compensation Audit Necessary?
As stated in the introduction, almost everyone cowers away when they hear the word ‘audit.’ Even so, this is one assessment you do not want to miss. Why? Because it will, in fact, help you get the lowest rates possible for the workers’ compensation insurance as far as your business is concerned.
The reason a workers compensation audit is necessary is that it’s an insurance program. Given its nature, the insurance companies behind it, such as the NYSIF, for example, are specifically asked to audit your payroll records for all your workers. They have to determine the premiums they can get. Circling back to the main idea, they can help you get the lowest rates in those premiums and, therefore, save you money.
How to Prepare for a Workers Compensation Audit
As with any audit, there are a few things about which you need to thinks. Our advice is you do them all, in the correct order and as early as possible.
#1. Take the audit seriously
There are many people out there who think an audit is just a ‘document check’ which will be over in a few days. It’s not. In fact, it’s a very pressing thing, which could lose you money if not done correctly, not to mention getting you in trouble legal wise.
This idea brings us to a warning we need to issue from the beginning – any information that you intentionally or unintentionally hide from the auditor will be classified as a felony. If you misclassify your workers so that you can get cheaper workers’ compensation, that too will be considered against the law.
A word of caution – if you do not prepare the audit properly and happen to provide inaccurate information, it will be viewed upon by your auditor as an attempt to break the law. Needless to say, it will be tough afterward to prove it was an ‘honest mistake.’ All this being said, take the audit seriously and start preparing for it as soon as you get your notice.
#2. Learn the insurance method
In case you don’t already know it, learn the system your insurance company uses to charge you for compensating your employees for risk. The process is called ‘remuneration’, and the National Council on Compensation Insurance governs it because they are the ones who set the rules for most of the states.
Every insurance agency uses a classification code to calculate exactly how much they need to charge you for every type of worker you have. Learn these regulations as this links back to the first tip we gave you. If you do not know the codes and mistakenly identify a worker, it will be seen as an attempt to a felony.
#3. Put together all the paperwork for the workers compensation audit
Paperwork can be a vague and misleading term. Therefore, here is a list of the documents you will need for the workers compensation audit.
- The payroll journal
- A summary of all the time your employees worked in the past year, divided by hour, week, and month.
- The federal tax records for that year
- The state unemployment records
- The individual earning records
- The entire paid overtime, which you need to breakdown for each employee
- Every single job description or duties that every employee has
- All the payments you made towards your subcontractors and other independent contractors which you used in that year
- A granulated description of your line of work and of what your business does.
#4. Prepare yourself for dealing with the auditor
Typically, a workers compensation audit takes place onsite. This means the examiner himself will come to your offices, headquarters, and he may even ask to see the actual places where the employees perform their duties. Before he or she arrives, prepare a pleasant, well-lit office, where they can conduct the assessment in good working conditions and swiftly.
Maintain a cordial, but a friendly attitude towards the auditor and make sure he or she has all they need regarding requirements.
#5. Look at all your records and information before the auditor arrives
This might seem like a redundant piece of information, but it’s not. The reason you need to check all the info related to your business before the auditor arrives and the review starts is that he will be doing the same thing before he comes.
If there so happens to be any information in your records, paperwork or even on your website that can be misleading, it’s far easier to correct it before the person arrives than after he has seen it. Be careful about the information that is out of date. Check your records and fix it. Apart from that, be ready to clarify with the auditor all these changes, so that he or she doesn’t believe you have something to hide. Remember that this is the person in charge of assessing your business, your employees and, last but not least, you. Don’t allow him to make wrong decisions that will cause your premiums to rise.
#6. Establish a place for the workers compensation audit
Most professionals in this area advise you do not ask for or permit the inspection to take place at a third party site. For some reason or another, people are tempted not to allow auditors on their premises. They want the assessment to take place at their accountant’s office or even online. That is not a smart decision on your part.
A third-party location might not hold all the records and documents you need, which will cause the audit itself to run a lot slower than it should or even stall. Apart from that, the auditor might consider you have something to hide.
#7. Delegating a person to handle the workers compensation audit
The best thing to do here is to run it yourself. That way, you can be in control of everything that happens at all times. However, that might not be entirely possible, especially if you run a big company or even an umbrella corporation, because you, as the owner, founder or CEO might not be up to speed with this part of your business, simply because it’s not your job.
If this is the case, then you need to delegate someone. However, the selection of the appropriate person is crucial. Many audits take a wrong turn somewhere along the process simply because the man who is supposed to talk to and support the auditor doesn’t have all the information he is supposed to or has a negative and unsupportive attitude.
Concerning workers’ compensation, the best person from your side to handle an assessment is your CFO or even an accountant. Nonetheless, whichever one you choose, they have to be on top of the information and have a positive attitude towards the auditor.
Becoming familiar with the way a workers compensation audit works can be a tricky thing. However, as long as you start getting prepared as early as possible and read our guide to help you through, you’re good to go!