How to Audit Workers' Compensation for Accuracy

Workers' compensation is critical to protecting employees and managing workplace safety. But as vital as it is, workers' compensation classification and reporting errors can lead to costly penalties, audits, or financial strain for businesses. HR professionals and small business owners must conduct precise and frequent workers' compensation audits to guarantee compliance and avoid unnecessary costs.

This guide is here to equip you with the knowledge and actionable steps needed to audit workers' compensation for accuracy. From understanding the basics to identifying common errors and conducting a thorough review, you'll walk away with a clear roadmap to safeguard your business.

What is Workers' Compensation?

Before we get into the nitty-gritty of audits, let's cover the basics of workers' compensation. Audit workers' compensation provides financial support or medical care to employees who experience workplace injuries or illnesses. It is typically mandated by law and funded by employers through insurance premiums.

An employer's premiums are calculated based on various factors, including employee classification codes, payroll amounts, and past claims history. An error in these areas can lead to inflated premiums or compliance issues, making audits critical for businesses.

Common Errors in Workers' Compensation

Errors often creep into workers' compensation records, sometimes accidentally and sometimes due to outdated classifications or processes. Below are the most common mistakes that audits can uncover:

1. Misclassification of Employees

• Employees are often misclassified into incorrect jobs, leading to inaccurate premium rates. For example, a clerical employee might be mistakenly classified as a field worker, resulting in significantly higher costs.

2. Incorrect Payroll Reporting

• Overestimating or underestimating payroll figures can distort premium calculations. Failure to account for overtime, exclusions, or bonuses can create discrepancies.

3. Failure to Update Job Roles

• Job roles evolve, and outdated classifications may no longer reflect an employee's tasks and associated risk levels. Regularly updating classifications minimizes inaccuracies.

4. Overlooking Subcontractor Coverage

• Including uninsured subcontractors in the payroll can unfairly inflate workers' comp insurance costs. Ensure proper documentation of independent contractor status.

5. Unverified Claims

• Not auditing past workers' comp claims could result in paying for fraudulent or improperly filed claims. Regular reviews help ensure claims align with coverage policies.

These errors might seem small but can add up to substantial overpayments or business liabilities.

Step-by-Step Guide to Auditing Workers' Compensation

A thorough workers' compensation audit can save your business money and reduce risks. Here's a step-by-step guide to help you get started:

Step 1: Gather Essential Records

Before beginning the audit, ensure you have all the critical documents:

• Employee payroll records

• Job classifications and descriptions

• List of subcontractors and associated certificates of insurance

• Records of overtime, bonuses, and other pay anomalies

• Previous workers' compensation claims

Having these records organized and readily available simplifies the process and avoids delays.

Step 2: Verify Worker Classifications

Review employee classifications meticulously. Confirm they align with their actual job duties and industry standards. If discrepancies exist, adjust them accordingly to reflect actual risk levels.

Pro Tip: To maintain accuracy, use standardized codes provided by organizations like the National Council on Compensation Insurance (NCCI).

Step 3: Reconcile Payroll Records

Cross-check payroll figures reported to your workers' compensation insurer with actual payroll reports. Ensure overtime, holiday pay, and bonuses are calculated correctly and aligned with your classification codes.

Step 4: Review Subcontractor Coverage

Audit your list of subcontractors and ensure any uninsured workers are accurately reported. Correctly categorizing insured subcontractors is critical to avoid excessive premiums.

Pro Tip: Always request certificates of insurance to validate coverage for subcontractors.

Step 5: Analyze Claims History

Examine past workers' compensation claims to confirm their validity. Check whether each claim was resolved within the legal parameters of your coverage and ensure closed claims don't remain active in the record.

Step 6: Regularly Update and Monitor

Schedule periodic audits to capture changes in job roles, workforce size, or payroll fluctuations. A system to update information continuously avoids last-minute stress during scheduled audits from insurers.

By adhering to this process, you can rest assured that your workers' compensation data will remain accurate and compliant.

Best Practices for Audit Accuracy

To take your auditing process to the next level, here are some best practices to keep in mind:

1. Invest in Technology

• Consider using payroll software or a workers' compensation management tool. These tools can help you easily track classifications, payroll, and claims.

2. Stay Current with Regulations

• Researched state-specific workers' compensation laws and any updates to coding systems. Compliance is key to avoiding penalties.

3. Train Your Team

• Educate HR and payroll teams on correct reporting procedures. Knowledgeable staff significantly reduces the chances of data entry errors.

4. Hire a Professional

• If you're unsure about auditing, consider hiring a workers' compensation specialist or third-party auditor to guide the process.

5. Communicate with Insurers

• Establish open communication with your workers' compensation insurance provider. They can clarify policies or guide industry codes.

By following these best practices, you'll reduce errors while improving transparency and efficiency for your business.

Why Regular Workers' Compensation Audits Matter

Frequent and accurate audits are more than just administrative check-ins; they are invaluable to the success of your business. Here's why they matter:

• Cost Savings: Eliminate errors that lead to overpaying on premiums.

• Compliance: Avoid penalties that result from non-compliance with workers' compensation laws.

• Improved Accuracy: Gain confidence knowing your records reflect the actual state of your workforce.

• Risk Reduction: A well-audited system enhances transparency, making fraudulent claims or misreporting less likely to slip through.

By conducting audits regularly, businesses can focus on their goals without the distraction of preventable financial or legal hiccups.