In This Issue:
- Understanding Your Audit: Why It’s Important, How It Helps
- How to Prepare for an Audit
- Your Audit in Four Easy Steps
- The Final Product: Your Audit’s Contents
- Tips for Avoiding Large Discrepancies in Your Final Statement
- Attention, Construction Employers: Keep Rigorous Records
- Wondering What to Classify as Payroll? Look Here
- 4x4: Four Things to Know About Four Common Topics
- Why Preventing Premium Fraud Matters for You
- State Fund’s Auditors Earn High Acclaim
- Free Help for Policyholders

Understanding Your Audit: Why It’s Important, How It Helps

A payroll audit is a routine, yet essential event in the life of your workers’ compensation insurance policy. All insurers are required to audit their policyholders. Some policies are audited every year, while smaller employers may be audited at less frequent intervals. To understand what an audit is all about, let’s take a look at the considerations that determine the premium you pay. California’s workers’ compensation system categorizes employees into more than 500 job-specific classifications. State Fund assigns each classification a rate reflecting the risk for that type of work. Your premium—the price of your policy—depends on three main factors:

• Your employees’ job classifications and the rates State Fund charges for them.
• Your employees’ earnings.
• Any premium modifications for which you qualify.

We rely on a year-end audit to verify exact payroll and classification information for all employees. With this important audit information, State Fund then:

• Ensures that our policyholders are charged the correct premium for their policy term. When all policyholders pay the premium amount that accurately reflects their payroll and risk, it effectively levels the playing field for you and other businesses in your industry.
• Updates any details that may affect a policyholder’s coverage and rates. When you first obtained your State Fund policy, we reviewed your operations and assigned certain job classifications. Your auditor will verify this information and make note of any changes to your operations, locations, ownership, or employees’ job duties. You may request a copy of the audit.
• Complies with important regulatory requirements of the WCIRB. The Workers’ Compensation Insurance Rating Bureau (WCIRB) collects insurer data on premiums and claims and uses this information for two purposes: (1) creating advisory rates, and (2) calculating your experience modification (if applicable), which is a premium-adjustment factor that statistically reflects your comparative safety record.

This issue of COMPonents offers guidelines on how you can simplify and streamline the audit experience for your business. Whether or not you will face an audit in the next year, this newsletter will also help you understand some essentials of your workers’ compensation policy, including payroll reporting, job classifications, and record keeping.

[Top]

How to Prepare for an Audit

Keep Good Records, and Keep in Touch

You can help reduce the amount of time and material required during an audit by implementing a few basic organizational and communication practices.

• Submit accurate payroll reports throughout the policy year, using correct figures and classifications.
• Inform us during the policy year if your operations change or if you hire new employees who perform different tasks.
• Keep clear, accessible records, especially for payroll earned in dual-wage construction classifications and third-party projects involving a waiver of subrogation or Owner Controlled Insurance Policy (OCIP).

Get Your Ducks (and Docs) in a Row

We typically request certain records during an audit, including:

• Names and job titles of employees.
• State Quarterly Wage and Withholding Reports (DE 6 forms).
• Payroll journals.
• State Fund payroll reports for the coverage period being audited.
• 1099s issued.
• Certificates of insurance for independent contractors.

Because the information needed for each audit can vary, your auditor may ask you to make other records available. These may include check registers, cash disbursement journals, bonus and commission ledgers, time cards, job cost records, profit-sharing reports, prevailing-wage determination sheets, and federal and state tax forms.

[Top]

Your Audit in Four Easy Steps

1. Save the date. State Fund audits policies according to the guidelines of the Workers’ Compensation Insurance Rating Bureau (WCIRB). If your policy requires an audit, a State Fund auditor will contact you in writing to schedule an appointment at your location. Remember that an audit is routine and presents an opportunity to discuss any questions or concerns you have about workers’ compensation or your policy. After you set up an appointment, you should prepare your payroll records for the completed policy year.
2. Face to face. At the time of your audit appointment, the auditor will review your payroll records, your employees’ job duties, and your business operations and ownership. It is important that the owner of your business or a person with detailed knowledge of your operations is available to answer questions about the relevant details of your business.
3. That’s a wrap. After your audit is finalized, State Fund generates a final premium statement on the basis of audited payroll, classification(s), rate(s), and any applicable premium modifications. This statement shows a summary of the audited payroll, your final calculated premium, and the premium you paid during the policy year. State Fund mails your final statement to you, with a bill for premium due, or with a refund if you paid excess premium during the year.
4. We hear you. If you have any questions about the audit results, you may contact your auditor and request a copy of the audit. You will be given every opportunity to document any areas of disagreement and to request a revision.

[Top]

The Final Product: Your Audit’s Contents

Your State Fund auditor prepares a report documenting your operations and your payroll for the policy term. You may request a copy of the completed audit or, if you have access to State Fund Online, view an electronic copy. In your audit, you may see the following pages:

1. A summary showing your payroll for each classification, coverage periods, and total payroll.
2. A detailed breakdown of your employees’ payroll by classifications and periods.
3. Officer names, titles, coverage status, and payroll (if applicable).
4. A comparison of your audited payroll and the amounts you reported during the term.
5. A description of your operations and your employees’ job duties.
6. The auditor’s notes and checklists.
7. Any changes that will modify your policy record (names, locations, classifications, etc.).

[Top]

Tips for Avoiding Large Discrepancies in Your Final Statement

Here are some things you can do to avoid a large difference between your final audit-based premium and the amount you paid during the policy year:

• Be precise. Report your payroll accurately, and check your math calculations. If you have an experience modification (ex-mod) printed on your payroll report, always multiply the percentage shown by the subtotal of your premium. If you think you have an ex-mod, but it is not shown on your payroll report, please contact us right away.
• Fix mistakes. If you find that you have made an error on a submitted payroll report, file a revised report.
• Mind your officers. Do not report the payroll of officers, partners, or owners who are excluded from coverage. If you have officers who are covered under your policy, you should include their names on your payroll report. Be aware of the minimum and maximum payroll thresholds for officers. Once an officer’s earnings exceed the maximum threshold for a policy year, you should no longer calculate premium for that officer.
• Keep it real. If your operations or employee job duties change during the policy year, inform State Fund and adjust your payroll reporting accordingly.

[Top]

Attention, Construction Employers: Keep Rigorous Records

If you are a construction employer, you know that California’s dual-wage classification system may entitle you to lower premium rates for employees whose hourly wages are above certain thresholds. To qualify for these higher-wage, low-rate classes, you must follow a strict record-keeping standard: Keep daily time cards or time sheets and document start and stop times for all your employees.

The Workers’ Compensation Insurance Rating Bureau (WCIRB) requires construction employers with dual-wage classifications to maintain records that show daily start and stop times, hours worked, job duties and type of work performed, and wage rates or salary earned. If you lack clear verifiable records of hours, duties, and wages, your State Fund auditor will assign all construction payroll into the applicable low-wage, high-rate classifications.

By following the rules for documentation, you can save premium dollars and streamline the audit process.

[Top]

Wondering What to Classify as Payroll? Look Here

Workers’ compensation premium is assessed on gross wages and other compensation as defined by law. The table below identifies whether or not a specific form of compensation is considered as payroll for premium calculation.

*Overtime Excess (OTX): Total overtime compensation paid over and above the regular rate of pay, including increased pay for weekends, holidays, or hours worked beyond the standard number for the day or week.

[Top]

4x4: Four Things to Know About Four Common Topics

Clerical: Class 8810

• This classification is for employees whose time is spent exclusively on clerical duties.
• Clerical employees must have no exposure to nonclerical business operations (that is, no handling of products or industrial equipment).
• Their work area must be physically separate from all nonclerical workspace.
• Their payroll may not be divided between Clerical and any other classification.

Outside Sales: Class 8742

• This classification is for salespersons whose work includes activity away from a main office.
• These employees must spend their workdays in sales or collection work and/or in on-premises clerical work.
• They must be physically separated from the business operative hazard (for example, industrial or construction work).
• Their payroll may not be divided between Outside Sales and any other classification.

Corporate Officers

• Corporate officers (including partners and LLC managers and members) may choose to be covered (or not) when you obtain your policy. If they are excluded from coverage, you don’t need to report their payroll.
• The payroll of covered officers is assigned to the classification that best describes their job duties. Their payroll may be placed in the Clerical or Outside Sales classes only if their duties meet the proper qualifications.
• If officers directly supervise any employee, their payroll is assigned to the classification supervised.
• Officer payroll is subject to a maximum and minimum figure. Your audit may make adjustments if an officer’s actual payroll is above or below the thresholds. The officer maximum is $94,900 for the 2009 policy year and $97,500 for 2010; the minimum is $36,400 for the 2009 policy year and $37,700 for 2010.

Farming

• You may allocate payroll among applicable classifications according to the kinds of commercial crops grown. Keep track of payroll accrued per crop.
• You may also elect to allocate total payroll on the basis of crop acreage.
• If employees sort and pack fruits and vegetables in a building, you must use a separate classification for this work and allocate payroll accordingly.
• The fair-market value of lodging provided to employees counts as payroll.

[Top]

Why Preventing Premium Fraud Matters for You

Audits help make the workers’ compensation system fair by applying uniform standards to determine the correct policyholder premium. When employers knowingly provide false information to reduce their premium, that’s fraud. Fraud distorts the system, and it may give illegal competitive advantages to dishonest parties and leave employees unprotected.

At State Fund we work to root out fraud, including cases of misrepresented payroll or improper classifications. We do this work to ensure a level playing field for the vast majority of employers who play by the rules.

[Top]

State Fund’s Auditors Earn High Acclaim

You might be interested to know that State Fund’s audit work gets audited too. The Workers’ Compensation Insurance Rating Bureau (WCIRB) continuously audits the performance of State Fund and other insurers to make sure that employer audits are meeting its standards for accuracy and compliance. Recently, the WCIRB gave State Fund a superior grade for our audit results over the previous year and awarded us a two-year exemption from its test audit program.

This rating represents a vote of confidence in our audit staff’s professionalism. Our experienced field auditors understand businesses across many industries. They will work with you to ensure that your audit experience is as straightforward and expeditious as possible. Your audit is also reviewed by audit analysts who check for accuracy, providing an extra layer of assurance that other carriers may lack.

All this expertise adds value to your workers’ compensation policy and supports our goal to provide you with the highest level of customer service.

[Top]

Free Help for Policyholders

If you have questions about audits, payroll reporting, or anything else concerning your State Fund policy, we would like to hear from you. Please call our Customer Service Center at (877) 405-4545, and our workers’ compensation experts will be happy to help. If you are represented by a broker for your policy, you may also contact your broker for audit-related information.

[Top]