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Business Protection Bulletin


By May 1, 2011No Comments

When your insurance company issued your Workers Compensation policy, you paid an estimated premium for the term of the policy. This rate was based on the nature of your business and your estimated payroll. However, once your policy expires, the insurance company conducts a premium audit to gather data about your actual costs for the applicable policy term. If there is any shortfall, you are responsible for the difference between the original estimate and actual premium.

Naturally, you want to keep the difference between the estimated and actual rate as low as possible. Consider the following list of tips:

  • Have all necessary records available for the auditor.
  • Break down your payroll by classification code so that the auditor doesn’t have to classify any unexplained payroll. Leaving the decision up to the auditor could result in having the payroll placed in the highest classification.
  • Separate overtime wages from regular wages. This allows the auditor to discount the overtime wages back to regular wages.
  • Exclude tips, severance pay, meal and travel advances and bonuses paid for inventions, because none of these are included in Workers Compensation premium calculations.
  • Divide uninsured subcontractor billings into material and labor costs since you are only required to pay premiums for labor. If you don’t have an actual split, figure on 50% for each. One important exception to this is for heavy equipment operators who are employed as subcontractors. In this case, use a third of their total billings as reportable labor costs.
  • Don’t include short- or long-term disability payments in the data given to the auditor because these are excluded from premium calculations.
  • Be sure to cap all covered officers’ payroll at the maximum for your state.
  • Exclude wages paid to employees who are on active military duty because their wages aren’t included in premium calculations.
  • Present the auditor with all Certificates of Insurance for covered subcontractors so you aren’t charged for them.
  • Classify all employees in the lower-rated payroll classifications if you aren’t sure about where they should be classified. However, you should never deliberately misclassify an employee.
  • Be sure you make the auditor aware of all employees who do only clerical work and are physically located away from the shop floor. These employees qualify to be classified in the lower rated clerical codes. If your clerical staff isn’t physically separate from the shop, you should consider changing their work location.