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14 Work Comp Audit Questions, Answered! | Part 2

A work comp audit is the examination of a policyholder financial and payroll records after the expiration of a policy. This process is done to determine the accuracy of the estimated premium when the policy was started. The number one way to fly through an audit is to be prepared!

You should always connect with your independent insurance agent to discuss all questions you have before the audit is conducted.

Here are the next 7 of the most common workers comp audit questions, answered!


Q8: Are sub-contractors subject to workers comp premium?

A: True independent contractors normally are not subject to a premium charge. Independent contractor status is determined on a case-by-case basis.

If you use contractors, you will be asked to supply some or all the following: business name, business license, copy of contract, Certificate of Workers’ Compensation Insurance, and contractor’s license number. If a construction contractor has a valid contractors’ license, a valid Certificate of Workers’ Compensation Insurance (if the contractor has employees), or an exemption from workers’ compensation issued by the Contractor’s State License Board, he/she may be considered independent.

You MUST Keep license information and Certificates of Insurance on file, or you will pay additional premium charges.


Q9: Why are there two or more classifications for some construction classifications?

Some construction classifications are dual wage classifications. The employee’s base hourly wage rate determines which class code applies. These wage rates are subject to verification at the time of the audit through a valid source, such as timecards, personnel records, and employee earning records. Keeping records that clearly show hours, job duties, and wage rates will allow you to take advantage of the lower-rated dual class.

If you are paying your employees by piecework, you must keep a record of the number of hours worked for each employee to qualify for the lower-rated dual class. If you do not keep a time log of the hours worked, the auditor will divide the total payroll by 40 hours per week to determine an hourly wage rate.


Q10: If my employees divide their time between different job assignments, can I divide their payroll between different classifications?

It depends on the classifications. It is important to note that in the case of clerical and outside sales employees, there is no payroll division allowed. There are other class codes that prohibit payroll division as well. If your employee divides time between two or more class codes that allow for payroll division, then you can divide their payroll provided the proper records are kept. This may include timecards or an employee log that keeps track of the hours worked by each employee for each job duty.

Payroll may not be divided by means of percentages, averages, estimates, or any basis other than specific time records.


Q11: What is overtime excess and how do I report it?

A: That portion of an employee’s overtime wage, which is over and above, the regular rate of pay is called overtime excess. This includes increased pay for time worked on holidays, Saturdays or Sundays, or the number of hours worked in any week or day beyond the standard for the industry. Overtime excess does not include extra pay for swing or graveyard shifts, for working certain hours on the clock, or incentive or bonus pay figured on volume without regard to hours worked.

Example: If your employee’s hour wage is $10 and the overtime rate of pay is $15 (at time-and-a-half), the overtime excess would be $5. In this example, you pay premium on the $10. An easy way to calculate the overtime excess for the time-and-a-half is to divide the gross overtime by 3 ($15 Divided by 3 =$5)


Q12: What is a waiver of subrogation and how do I report it?

A: If you contract with a company that requires you to provide a waiver of subrogation on your workers’ compensation policy, you waive any right to a third-party settlement for injuries to your employees that occur on that company’s job site.

When you have a waiver of subrogation for one or more companies endorsed to your policy, you need to keep track of employee payroll incurred while on the job site of those companies.

You can report your waiver payroll in two ways. First, when completing payroll reports (if applicable), you may use the blank lines below the class codes and list the waiver by class codes. For each class code that has waiver payroll, you would multiply the total waiver payroll by your billing rate and the waiver percentage. This amount is the additional premium you must pay. The second way is to keep the records as noted and wait for the audit.

Example: Your premium for $10,000 at an interim billing rate of $5 per $100 payroll is $500. Multiply the premium of $500 by the waiver rate of 3%. The additional premium charge to cover the waiver of subrogation charge is $15. Your total premium charge including the waiver is $515.


Q13: Are payments made to family members subject to premium?

A: Yes, as employees they are entitled to workers’ compensation benefits. 

Special rules apply to family members living in the main household while working on a family-owned farm.


Q14: What happens after the audit is completed?

A: You may ask for a full copy of the audit upon completion. Once complete, the audit is reviewed. The results of the audit will be sent to you in the form of a final statement.

What happens if I disagree with the results of the audit?

You should immediately contest the audit in writing with the insurance company. Identify the areas of the disagreement and discuss them with your independent insurance agent or the auditor. You may be asked to supply additional documentation to verify the discrepancy. Please call our agency and the audit supervisor if the matter remains unsolved.

Keeping complete and accurate payroll records is very important and may save premium dollars.


If you would like to discuss any aspect that affects your Workers Comp coverage and premium, here are 4 easy ways to reach us:
Phone: 877-994-6787
Text: 951-482-8144
Email: [email protected]

Here are some kind words from a business that trusts Stromsoe Insurance Agency:
“I’ve been with Stromsoe Insurance For over 15 Years. Their Murrieta Office was actually my first Project after I got my license. I refuse to go anywhere else! They shop all my policies to save me money and i can talk to everyone with one phone call! I recently Moved to Arizona, and Started a new Company. Stromsoe was able to get me going and again has all my policies! Thx Guys!”
Mike Hughes – Semper Fi Plumbing, Inc. – Surprise, AZ – Client Since 2007

The CorrectComp system is a division of Stromsoe Insurance Agency

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