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Audits are routinely conducted to verify an employer’s business and to update policy information such as changes in operations, locations, and ownership. We audit to confirm information used for calculating experience modification and classification rates, and to determine correct premium.
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You need to contact your auditor. When the audit was first scheduled, your auditor sent a letter advising you of the date and time. The auditor’s contact information should be at the bottom of that letter, or you can contact your regional office.
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It is important to keep detailed payroll records. It is even more significant if you wish to divide your wages between classification codes. This is often referred to as “payroll segregation”. If you have an employee who does more than one type of work during the day, you must detail that information.
In general, if your employee divides time between two or more activities that are separately classified, you can divide the employee’s wages if you maintain detailed payroll records documenting the number of hours the employee spends in each separately-classified activity. These records may include time cards or a daily log that tracks employee hours by activity or classification code. If you do not maintain detailed time records, then you must assign the employee’s entire gross earnings to the highest-rated classification to which she or he is exposed. Please note that for some industries and classifications, including Clerical Office (8810) and Outside Sales (8742), payroll segregation is not allowed.
If you wish State Fund to endorse a new classification onto your policy, you must first complete an employee job description before we add the classification to the policy. We will review the job description and possibly complete an on-site inspection before making a determination if a new classification should be endorsed, and what that classification should be. Please do not report payroll in the new classification until it has been reviewed and endorsed onto your policy.
Special rules for payroll segregation and record keeping apply to the Construction and Agriculture industries.
In Construction, each trade is separately classified and rated, and each construction employee’s wages can be segregated between the classification codes that apply to each trade in which he or she works, as long as the employer maintains time records like those described above.
The Workers’ Compensation Insurance Rating Bureau (WCIRB) also allows construction industry employers with wages paid above specified dollar amounts to take advantage of lower cost classifications that are established based upon an employee’s hourly wage. The WCIRB provides two tiers of rates in construction classifications for 14 different trades. The lower-rated (less expensive) tier applies to employees who earn at or above a specified hourly wage threshold. To take advantage of the lower-rated, high-wage classifications, the employer must keep employee records that show daily start and stop times, hours worked, job duties, and wage rates. This applies to employees who are paid by the hour, the piece, or the job. As with record keeping requirements for payroll segregation by type of work, if the employer does not keep detailed, clear, and verifiable time records, then wages shall be assigned to the corresponding low-wage, higher-rated classification. By following the guidelines for documentation, you can save premium dollars and streamline the audit process.
In Agriculture, payroll is classified according to the crops produced instead of the different kinds of work or jobs being done. If a farm produces different crops that are separately classified, the employer must keep payroll records segregated according to the crops. When employees earn wages that are not connected to any particular crop (for example: miscellaneous chores, repairing fences, maintaining buildings), those wages can be allocated among crop-production classifications in the same proportions as direct crop- production payroll. Without properly segregated records, all payrolls must be assigned to the highest-rated crop produced.
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After your audit is finalized, State Fund generates a final premium statement based on audited payroll, classification(s), rate(s), and any applicable premium modifications. This statement shows a summary of the audited payroll, your final calculated premium, the premium you paid during the policy year, and your premium due (or refund amount if you paid excess premium).
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During your audit, the auditor will review your payroll records, employees’ job duties, and business operations and ownership. That information is recorded and forwarded for verification. Audits are required to go through a secondary billing justification before the statement is released. Until that time, your auditor will not be able to tell you whether or not you will have an amount due. They may be able to tell you if information is missing or that they have all the required documentation, but the auditor cannot provide billing information until the billing justification is completed.
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There could be a few reasons why you received a bill despite no employees:
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The indicators for your bill (or refund) appear on the audit and the audit justification form, available to all brokers and policyholders through “Document Search” on State Fund Online. You may view an electronic copy on State Fund Online, or request a copy. The following pages may appear in your audit:
This documentation helps determine your audit bill. If you have further questions regarding your audit, you can contact your auditor.
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http://www.statefundca.com/CustomerSupport/Billing.asp#ReadBill
The payroll figures on the audit bill could differ for several reasons:
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One reason for reclassification could be that the duties the employees were performing were not clearly defined within the scope of the classification or time records did not support assigning the payroll to the classification you used. Another reason could be that time records did not support the higher-wage, lower-rate class code. If you have employees whose wages qualify for a lower-cost classification, be sure you keep records of daily start and stop times, along with hours worked by classification and total wages paid.
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Payroll was likely added for your independent contractor because the auditor did not receive supporting documentation to substantiate the worker as an independent contractor. Without proof, as well as an analysis of the relationship, the person may actually be working as an employee, and subject to premium costs under your workers’ compensation policy.
The question of whether a worker is an independent contractor or an employee is not easily answered. Several factors determine if someone qualifies as an independent contractor. Some of the tests used include the right to direct and control, the skill required in the particular occupation, whether the person performing the service supplies their own tools or other instruments, and whether the person performing the service has the right to hire and fire others.
For someone in the construction industry, for example, important factors include having their own contractor’s license and having their own workers’ compensation certificate of insurance or proof of exemption from workers’ comp coverage from the Contractors State License Board (CSLB). You can check a contractor’s status on the CSLB web site.
For more details, read our informational document “Independent Contractor vs. Employee: What is Your Workers’ Comp Liability?” and/or use the Independent Contractor Questionnaire.
If you have documentation, which includes (but is not limited to) a copy of their contractor’s license, copy of their business license, and/or certificate of their workers’ compensation policy, you can contact your auditor and supply them with the additional documents.
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When an officer or partner obtains a policy with State Fund, he or she must complete an officer/partner exclusion letter. If we do not receive the completed exclusion letter, then they must be covered based on the officer Minimum/Maximum payroll guidelines established by the Workers’ Compensation Insurance Rating Bureau (WCIRB). For policies initiating or renewing in 2011/2012, the minimum amount an insurance carrier can charge is $37,700 and the maximum is $97,500. This means, for example, that if an officer earned $30,000 for the 2011 policy year, we must base the premium on $37,700. Likewise, if an officer earns $100,000 for the 2011 policy year, we must base the premium on $97,700 for that officer. We base premium on actual wages for earnings falling between the minimum and maximum amounts. Please note, for policies initiating or renewing in 2012, the minimum is $40,300 and the maximum is $104,000 for the policy year.
We provide the exclusion paperwork to employers at the time we write the policy, and allow 90 days to return it to the underwriter. If we do not receive the signed exclusion letter within the first 90 days of the policy term, the officer/partner will be covered, and payroll for them will be included in the final bill. State Fund does not retroactively exclude officers from coverage, so it is imperative that policyholders return the forms to State Fund within the 90-day window.
Please note, in some situations corporate officers and Limited Liability Company (LLC) members are not eligible for exclusion. For corporations, officers, or board of directors, members must own all shares in the corporation to be eligible for exclusion. Only shareholding officers and directors are eligible for exclusion. If there is any outside stock ownership, workers’ compensation coverage is required for all working employees, including officers and directors. Likewise, all working and paid officers of non-profit organizations or corporations must be covered, subject to minimum and maximum limits, because non-profits do not have shareholders. Coverage for paid non-profit directors is based on their actual wages, not the minimum/maximum amounts. For LLCs, only members who are managers are eligible for exclusion.
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A copy of the completed audit shows a detailed breakdown of employees’ payroll by classification and period, as may also include a comparison of your audited payroll and the amounts you reported. The reporting cycle of your actual payroll periods and your State Fund reporting cycle may vary, but payroll should balance by the year-end records.
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The Auditor will review your payroll records, your employees’ job duties, and your business operations. They will take that information and compare it to the WCIRB’s 500+ available classifications. It is important that the business owner, or a person with detailed operational knowledge, is available to answer questions and provide relevant business details in case there is a discrepancy.
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Contact State Fund if you wish to dispute your audit bill. You will be sent an audit dispute letter, which will explain what you need to provide and where to send the information. This letter will have a submission due date. You will receive notification regarding the status of your dispute.
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You may view an electronic copy of the completed audit and audit justification form via State Fund Online, or request a copy from State Fund. Your customer service agent, underwriter, and auditor can all assist you. You can also contact your broker.
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If you have any further audit-related questions, contact your auditor.
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Note: State Compensation Insurance Fund is not a branch of the State of California.
