A client recently remarked to me about how much the annual Workers’ Comp audit request sounds like an IRS demand…
- Please have payroll registers for the audit period available
- Also, I will need quarterly 941s and quarterly CA DE3s for 2012
- Please prepare a list of those employees engaged in clerical and outside sales duties
- Please have the 1099s for 2012 available
Why do they need payroll registers for the audit period?
The purpose of the audit is to match the actual payroll per classification with the estimates for the policy period. The reuslts will generate either a return premium if the estimates were too high, or an additional premium if the estimates were too low.
The audit also makes sure that any overtime pay is removed from the calculation, a process which inures to the benefit of the policyholder. Additionally, officers of the company have an annual cap on the amount of their payroll used for premium computation, which is also adjusted at audit.
Why do they need both Fed 941s, and State DE3s?
In past years, a quarterly California payroll report was all that was needed for the final audit. The reason both reports are requested now is because of the different treatment between Fed and State, regarding HSAs and stock options, among other things. For example, HSA money to the employees is not counted in California for WC premium calculation.
Why the “list” of employees classified as clerical and outside sales?
These two classifications have low rates as compared to the primary classification of the business. The rate for a manufacturing classification is typically 5 to 10 times higher than the clerical or outside sales classification. It is the job of the auditor to make sure that those classified as clerical and outside sales are in fact eligible for those classes, rather than the higher rated classes.
This can create adversarial discussions between the auditor and the insured, especially given the picayune nature of some of the rules regarding eligibility for clerical and sales.
A typical example would be someone who does clerical work at a desk located in the manufacturing area. Unless the desk has some physical separation from the shop floor, that person wouldn’t be qualifed for the clerical class, increasing substantially the Workers’ Comp premium on him.
Another example might be someone who typically does white collar management work in the offices. Occasionally, he may be part of an entourage to a trade show, or a large customer. Though not an “outside salesperson” he would be classified as such, as soon as his work took him away from the premises. This is important only because the rate for outside sales is generally 30-50% higher than clerical.
Why the need for the 1099s?
This can become another contentious area of the audit, i.e., the eligibility of workers to be true subcontractors or vendors, as opposed to employees. This is the same issue you may encounter with the IRS or State, as they want to collect the appropriate payroll taxes for “employees”.
The true 1099 relationship will avoid the payroll taxes, and the workers’ comp premium calculation.
The bad news, is that the workers’ comp rules to be considered an independent contractor are even tighter than those of the IRS or State.
An example we recently encountered was that of a “former employee” who received $1,000 per month for six months after his termination date, only to be available for phone questions. Though the employment relationship had offically terminated (with paperwork to prove it) the workers’ comp carrier treated the $6,000 of additional payments made as payroll, charging workers’ comp premium at audit.
Who are these guys?
Many clients feel that the auditor is just out to get them, part of an overall corporate strategy to extract the maximum amount of Workers’ Comp premium possible.
In my 30+ years in the business I haven’t encountered a carrier that is that organized, or frankly that smart, to have an overall strategy including maximum premium capture through clever use of the audit process.
The auditors are like the guys with the big shovels, cleaning up later after the elephant parade has past. They really don’t know how good or bad the parade was, they simply have a cleanup job.
They aren’t like cops who metaphorically speaking, are on quota to write a prescribed number of speeding tickets. They are judged by how quickly and accurately they are able to complete final audits.
They typically don’t even have offices in the branches of the companies, mostly working from home. They might be seen at the occasional all-company meeting, and at the company Christmas party.
They have no idea what your rates are, or whether they went up or down this last renewal.
Best not to shoot the auditor.
Advice: Be Prepared
The old Boy Scout motto is applicable here. I recommend a discussion with your broker prior to the audit, to review the fine points of the classification system, and how it might apply to your current payroll.
Leave a Reply