The premium for Workers’ Compensation insurance is initially priced on an estimated basis. This includes an employer’s estimated payrolls (as well as class codes) at the beginning of the policy period for the upcoming year on which the insurance carrier charges a premium using prescribed rates. After the close of the policy year, the insurance carrier looks to firm up the numbers to confirm collection of the actual premium earned for the actual exposure insured, a process that involves a premium audit. Unfortunately, some employers are surprised to find out what’s actually included in payroll remuneration (all of the various items that are considered part of an employee’s payroll) – such as income or benefits that go beyond just an employee’s salary.
Precision Manufacturing Insurance Services (PMIS) is committed to assisting manufacturing clients in understanding what drives their California Workers’ Compensation premium in addition to helping them avert any unexpected surprises during a comp audit. Following is a list of what is and isn’t included in payroll remuneration when determining your manufacturing Workers’ Compensation insurance coverage:
Included in Payroll Remuneration
- Gross Wages
- All Bonuses
- Most Profit Sharing
- Vacation, Holiday and Sick Pay
- Overtime (“straight time” portion only)
- Market Value of Gifts
- Automobile Allowances (less reimbursement for documented expenses)
Excluded from Payroll Remuneration
- Meals or Lodging
- Severance Pay (except for accrued vacation, sick pay, commissions, and bonuses)
- Employer Contributions to Qualified Insurance, Stock, or Retirement Plans
- Stock Options
- Value of an Automobile Furnished to an Employee
- Employee Discounts for Merchandise
- Meals Provided at No Charge at the Work Location
- Residual Payments for Commercials
- Uniform Allowance
Insurance carriers have the right to audit a policy at least every three years; some policies are audited several times a year. During an audit, you must provide copies of canceled checks, payroll data, general ledgers and other financial information. The California State Workers’ Compensation Board, known as the WCIRB, can penalize an employer for not maintaining accurate and adequate records. Moreover, upon completion of the payroll audit, the actual payroll figures will be used to determine actual premium and the employer will either receive a refund or a surcharge. Therefore, it is in your best interest to attempt to correctly forecast the amount of the payroll. Please note, employers who intentionally initially understate payroll could be found guilty of committing fraud. Intentionally misclassifying employees is also a crime. For example, employers cannot classify a machine operator as an employee who works behind a desk.
Of course, failing to secure Workers’ Compensation coverage is a criminal offense. Section 3700.5 of the California Labor Code makes it a misdemeanor punishable by either a fine of not less than $10,000 or imprisonment in county jail for up to one year or both. Additionally, the state issues penalties of up to $100,000 against illegally uninsured employers. If an employee gets hurt or sick because of work and there is no Comp coverage, the employer is responsible for paying all bills related to the injury or illness.
Preparing for an Audit
To prepare for a Workers’ Compensation premium audit, we recommend taking the following steps:
- Prior to the premium auditor arriving, decide who at the shop will be the primary contact person for the auditor. This contact person should be someone who is very familiar with the work done by all departments and all employees, as well as someone familiar with the payroll records the auditor will be reviewing.
- Review the original policy to see how the initial estimated premium was calculated. Look at the classification codes, rates, and payrolls used to compute your initial premiums – the auditor will be starting from this as well, but will not necessarily be limited to using only the classifications listed on the policy.
- Take a look at the information about your manufacturing firm that is readily available to the auditor, such as your company website and other online information. Remember, it is likely the auditor will be looking at this information in advance of his or her visit to your office. If there is any information there that could be misleading or is out of date regarding your operations or the nature of your work, not only should you correct it, you should also be prepared to clarify the changes with the auditor.
- A premium auditor may also ask for information about the specific job duties performed by a certain department or by individual employees. Typically it’s to an employer’s advantage to provide accurate and detailed information to the auditor, because if the auditor has to make assumptions about the exposures he or she may well make worst-case assumptions that unnecessarily increase your premium.
- Have your designated contact person review prior years’ audit billing statements and prior auditor’s work papers (if your company has requested these in the past.) This will help your contact person understand the important issues that will likely be queried during the upcoming audit.
- Review your payroll documents to make sure that the records will allow the auditor to readily break out overtime pay and discount it back to straight time, as is allowed in the California Workers’ Compensation rules (see above list).
PMIS can provide you with competitive Workers’ Compensation insurance and can help you by reviewing your current insurance policies, your experience modification worksheet, payroll audits, and loss-sensitive rating adjustments, to see where we can make improvements and where there have been undiagnosed problems or miscalculations. Just give our manufacturing insurance specialists a call at 855.910.5788.