Introduction
A workers’ compensation audit is a routine insurance review conducted by your workers’ compensation insurer at the end of a policy period. This audit ensures that the premium you paid was based on accurate payroll data and employee classifications. By comparing projected figures with actual payroll, insurers verify that businesses are neither underpaying nor overpaying for coverage.
What Is the Purpose of a Workers’ Comp Audit?
Workers’ comp audits serve several key functions:
- Ensure the correct premium is paid based on actual business operations. Employers estimate payroll and classifications at the beginning of a policy period, but these figures may change. The audit ensures the final premium reflects actual exposure and risk.
- Recalculate premiums using:
- Actual payroll figures – Payroll fluctuations impact premium costs, and audits adjust for any increases or decreases.
- Employee job classifications – Different job roles have varying risk levels, and misclassification can lead to incorrect premiums.
- Independent contractor status – If independent contractors lack valid workers’ comp coverage, they may be counted as employees, affecting premiums.
- Prevent under- or overpayment of insurance premiums throughout the policy period. If an employer underpays, they may owe additional premiums, while overpayments may result in refunds or credits.
What Triggers a Workers’ Comp Audit?
Workers’ comp audits are typically standard and occur annually. However, they may also be triggered by:
- The end of a policy period or early termination. Insurers review the policyholder’s actual payroll and job classifications before finalizing premium costs.
- Significant payroll fluctuations. If payroll changes substantially during the year, the insurer may audit to verify whether an adjustment is needed.
- Suspicious claims activity. A higher-than-expected number of workers’ compensation claims may prompt an audit to assess potential misclassification or fraud.
- Changes in the number or type of employees. Hiring new employees, layoffs, or shifting job roles can impact classification and premium calculations.
What Happens During an Insurance Company Audit?
During the audit, an insurance auditor—either in-person or virtual—will request and review:
- Payroll records – These include year-end payroll summaries, payroll journals, and employee earnings reports.
- Tax documents (941s, 940s, W-2s, 1099s) – These confirm reported payroll and verify independent contractor status.
- Certificates of insurance for subcontractors – If subcontractors do not carry their own workers’ compensation insurance, they may be considered employees for audit purposes.
- Job descriptions and employee roles – Ensuring accurate classification prevents miscalculations in premium costs.
The auditor ensures that employees are correctly classified and insured. Once complete, you will receive an audit report summarizing findings and any necessary adjustments to your premium. If discrepancies are found, the employer may need to pay additional premiums or, in some cases, receive a refund for overpaid amounts.
What Is a Compensation Audit?
A compensation audit typically reviews employee wages and salary structures for equity and compliance. It helps businesses ensure fair pay practices, avoid wage disputes, and maintain legal compliance with labor laws. A compensation audit can identify wage disparities, improper pay scales, and potential discrimination in compensation structures.
In the context of workers’ compensation, the term may also refer to an evaluation of payroll compensation to ensure employees are correctly classified for premium calculation. This prevents misclassification that could lead to inaccurate insurance costs and ensures compliance with workers’ comp regulations.
What Happens If You Don’t Do an Insurance Audit?
Failing to comply with a workers’ comp audit can result in:
- Higher estimated premiums charged by the insurer, which may not accurately reflect actual payroll data.
- Policy cancellation or non-renewal, making it difficult to maintain business operations legally.
- Being flagged as high-risk, which can limit future insurance options and increase costs.
- Possible legal consequences or fines depending on state laws, especially if failure to complete an audit results in underpaid premiums.
What Happens If You Ignore a Workers’ Comp Audit?
Ignoring or refusing an audit can lead to severe consequences, including:
- Non-compliance notices from the insurer, requiring immediate action.
- Significant penalties and surcharges due to unverified payroll and employee classifications.
- Loss of insurance coverage, which could leave your business exposed to liability in case of workplace injuries.
- Difficulty obtaining affordable workers' comp insurance in the future, as insurers may view your business as non-compliant and high-risk.
- Challenges bidding on contracts or operating legally, particularly in industries with strict regulatory requirements for workers’ compensation coverage.
Why Would a Company Audit an Employee?
Companies may conduct internal audits of employees to:
- Verify compliance with job duties and classifications. Ensuring employees are performing the roles they are classified under helps avoid misclassification issues.
- Investigate potential misuse of time or benefits. An audit may uncover issues such as excessive overtime, unauthorized absences, or fraudulent timekeeping.
- Ensure compensation aligns with the role and market standards. Companies use compensation audits to maintain competitive pay structures and prevent wage disparities that could lead to legal action.
While these audits differ from workers’ comp audits, they can provide useful insights for insurance classification and overall business operations.
How to Prepare for a Workers’ Comp Audit
To ensure a smooth audit process:
- Maintain accurate payroll records year-round. Ensure all employee earnings, wages, and benefits are well-documented and easily accessible.
- Properly classify employees based on job duties. Misclassifications can lead to premium adjustments and possible penalties.
- Keep up-to-date subcontractor agreements and insurance certificates. If subcontractors lack valid workers’ comp coverage, they may be counted as employees.
- Respond promptly to audit requests and collaborate with your CPA or insurance broker to provide all required documentation.
Conclusion
A workers’ comp audit is a standard process that ensures fair and accurate premium billing. Proper preparation, accurate employee classification, and organized records can help business owners navigate the audit efficiently and avoid penalties.
Download our free audit preparation checklist or consult with your insurance provider or CPA to ensure compliance.
FAQs
It ensures businesses pay the correct insurance premium based on actual payroll and job classifications.
The insurer may estimate a higher premium, cancel your policy, or flag you as a high-risk client.
It means they are reviewing your payroll records to confirm you paid the correct workers’ comp premium.
A compensation audit reviews employee wages and classifications for equity, compliance, and proper insurance premium calculations.
Ignoring an audit can lead to penalties, policy cancellation, and difficulty securing future insurance.
To verify job classification, investigate misuse of time/benefits, or ensure compensation aligns with job responsibilities.
