What to Expect During a Workers’ Compensation Audit

Mike A. Dwyer | Jun 18, 2020 | minute read

Audit—the word has a unique ability to strike fear into any business owner. But if you know what type of audit will be performed, what to expect, and how to prepare, the entire process should be quick and easy. 

Your insurer performs a workers’ compensation audit to make sure that the premium you’re paying aligns with the risk exposure the insurer faces. The audit also confirms that employees are classified correctly for the work they’re performing. 

In some states, these audits are required by law once the annual premium exceeds a set amount; in California, you can expect to have an audit after every policy term, regardless of the amount of annual premium you pay. 

In this article, we’ll go over what to expect during an audit, and helpful tips to make it all go smoothly. 

How a Workers’ Compensation Audit is Scheduled

If an audit is going to be conducted, it’ll almost always be scheduled right around when your policy will renew, with the audit itself taking place 30 to 60 days after the current policy expires. Your insurance company will contact you to inform you that the audit needs to be scheduled. 

The person who conducts the audit may be employed by an insurance company or by an independent auditing firm. This will not change the process, but it doesn’t hurt to know who you’ll be working with. 

When you get this phone call or letter informing you of the upcoming audit, do not panic. You’ll be given some time before it is scheduled, and you’ll get to pick a date that is convenient for you. This appointment must be set far enough in advance that you’ll be able to gather all the records you need for the process.

Remember, there are also several ways the audit may be performed. It can be conducted over the phone, via email, or in-person during an on-site audit.

Types of Workers Comp Audits Performed

Workers’ compensation audits come in two varieties: physical audits and voluntary audits. Which type of audit a business receives will be based on what type of business you run and how large your premium is. Bigger businesses and those with large premiums tend to end up with physical audits while smaller businesses and those with low premiums often get voluntary audits. 
A physical workers’ compensation audit takes place at your business. An auditor shows up and looks over the items with you nearby in case they need to ask questions. With a voluntary audit, you complete a form and mail it with the required documents to the insurance company. Because there’s a lot of room for error with a voluntary audit, and these errors have the potential to cost you a lot of money, you should contact your insurance representative with any questions you may have.

Make certain you understand how the information you give can impact the premium you pay on new policies. With both types of audits, do everything within your power to get them completed in a timely manner. 

Failure to comply with your audit can result in unwanted consequences, including the following: 

  • If you renew coverage with the same carrier and do not complete the audit from the prior term, the carrier can cancel your current policy.

  • If not received after multiple follow-ups, the carrier can issue an "estimated audit," which generally estimates your exposure to be about 25% higher. When this happens, you can expect a bill for a 25% additional premium to be paid.

  • Not complying with your audit can also affect your experience modification. Because the WCIRB used audited payroll in their calculation of the ex-mod, you can put yourself in a position to have your experience mod issued inaccurately. Critically, there’s a rule that ex-mod cannot increase more than 25 points for only having one claim in the experience--but if you’re missing a payroll audit in the experience period, the rule doesn’t apply.

Records to Have Available During an Audit

The records your auditor requests can vary. However, there are certain documents they are likely to ask to see.

Once your audit is scheduled, gather the following documents:

  • Payroll records, including:

    • Payroll journal and summary
    • Your checkbook if it is the only way you maintain your records
    • Federal tax reports that cover the period of time being audited, particularly form 941 and 944
    • State unemployment reports
    • Individual earnings records
    • Overtime payments, listed separately for each employee
    • W-2 and 1099 forms
    • DE-9 and DE-9C forms and quarterly tax reports

  • Employee records, including:

    • Summaries of employee duties, given separately for each employee
    • The total number of employees, divided by full-time and part-time status
    • The hours, days, and weeks worked annually, given separately for each employee

  • Cash disbursement records showing:

    • All payments made to subcontractors
    • Money spent on materials
    • Payments made for casual labor

  • Certificates of Insurance for:

    • All subcontractors
    • All independent contractors

  • A summary of your business operations, providing all relevant details.

Keep these records organized as they are listed above—this will make it easier for the auditor to access the records they need and will allow the audit to finish as quickly as possible. Your auditor will let you know the exact documentation they’ll expect to see. 

Helpful Tips and Hints for Navigating an Audit

If you’re feeling overwhelmed at this point, that’s understandable. However, your audit will likely pass smoothly.

To help things go as easily as possible, keep these tips in mind:

  • When scheduling the audit, ask why the insurance company has chosen to conduct one on your business. This allows you to set your expectations and take some of the mystery out of the process, which is often a source of anxiety. 
  • Review previous audits if you have had any to help you spot any changes in advance.
  • Double-check all your documents to ensure they’re accurate.
  • Do not volunteer any information not explicitly requested by the auditor. 
  • Request the worksheet from the auditor once done and review it for accuracy. 
  • Set up your policy on a monthly reporting form or pay as you go so that you are always up to date; many carriers can integrate with payroll partners.

If your rates change as a result of the audit and you no longer find your premiums affordable, it’s possible that you can shop around for lower rates. But don’t worry too much about an audit; more often than not, these audits are merely routine. 

Leap | Carpenter | Kemps Insurance Agency Is Here for You

At Leap | Carpenter | Kemps Insurance Agency, we understand how stressful a workers’ comp audit can feel and we’re there to guide you through it. Our dedicated team even strives to be on-site for clients undergoing a physical audit to prepare and assist. If you have questions about an upcoming audit, or are unsure about your insurance policy, reach out to our knowledgeable agents today. 

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About The Author

Mike Dwyer is a Commercial Insurance & Risk Advisor, who specializes in Group Captive Insurance, and specialty insurance and risk management solutions for businesses in the construction industry.

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