How to Handle a Workers’ Compensation Audit: A Guide for California Employers and Employees

Workers compensation injury

Workers’ compensation insurance is a critical component of workplace safety and employee protection in California. Employers are required to carry workers’ compensation insurance to cover workplace injuries and illnesses. To ensure accuracy in premium calculations and compliance with state laws, insurance companies conduct periodic workers’ compensation audits.

Both employers and employees may find the audit process intimidating, but understanding what to expect and how to prepare can alleviate stress and ensure a smooth experience. This guide provides practical tips for employers and employees navigating a workers’ compensation audit in California.


What Is a Workers’ Compensation Audit?

A workers’ compensation audit is a review conducted by an insurance company to verify that the premiums charged for a policy accurately reflect the employer’s payroll and workplace risk. These audits typically occur at the end of a policy period and ensure that:

  • Payroll records align with the estimated figures provided when the policy was issued.
  • The correct job classifications were used to calculate premiums.
  • Any changes in business operations or workforce size are accounted for.

For employers, the audit may result in additional charges if payroll exceeded estimates or in a refund if estimates were too high. For employees, the audit ensures accurate classification and protection under the policy.


Why Are Workers’ Compensation Audits Important?

Workers’ compensation audits serve several critical purposes:

  1. Ensuring Fair Premiums: Audits verify that employers are paying a fair premium based on their actual payroll and risk exposure.
  2. Identifying Compliance Issues: Audits ensure that employers comply with state regulations and accurately report employee classifications.
  3. Protecting Employees: By verifying payroll and classification data, audits ensure that all eligible employees are covered in the event of a workplace injury.
  4. Preventing Fraud: Audits discourage underreporting or misclassification of employees, which could otherwise lead to fraudulent premium reductions.

Steps Employers Can Take to Prepare for a Workers’ Compensation Audit

Preparation is key to ensuring a smooth and successful workers’ compensation audit. Here’s how employers in California can get ready:

1. Gather Accurate Payroll Records

Payroll records are the foundation of the audit process. Employers should prepare detailed records, including:

  • Total wages paid to employees.
  • Overtime wages.
  • Bonuses, commissions, and other forms of compensation.
  • Hours worked by each employee.

Ensure that all records are accurate and up-to-date to avoid discrepancies during the audit.

2. Review Employee Classifications

Insurance premiums are based on job classifications that reflect the level of risk associated with each role. For example, an office administrator is classified differently from a construction worker. Employers should:

  • Verify that each employee is assigned the correct classification code.
  • Reclassify employees whose roles have changed since the policy was issued.

Misclassifications can result in higher premiums or compliance issues, so it’s important to address these before the audit.

3. Organize Certificates of Insurance for Subcontractors

If the business used subcontractors, ensure that all subcontractors provided certificates of insurance showing their own workers’ compensation coverage. If a subcontractor doesn’t have coverage, their payroll may be added to the employer’s during the audit.

4. Track Changes in Workforce or Operations

If the business underwent changes during the policy period, such as hiring more employees or expanding services, document these changes. Auditors need this information to assess whether adjustments to the policy are necessary.

5. Review Policy Documents

Familiarize yourself with the details of your workers’ compensation policy, including the estimated payroll and classifications used to calculate premiums. Understanding your policy will help you identify potential discrepancies during the audit.


What Happens During a Workers’ Compensation Audit?

The audit process typically involves the following steps:

  1. Notification: The insurance company notifies the employer of the upcoming audit, specifying the required documents and information.
  2. Document Submission: Employers provide payroll records, employee classifications, and other requested materials. This can be done in person, online, or via mail, depending on the insurer’s preferences.
  3. Review and Analysis: The auditor reviews the submitted information to verify payroll figures, classifications, and any changes in business operations.
  4. Audit Results: The insurance company provides the audit findings, which may include adjustments to the premium based on actual payroll and risk exposure. Employers may owe additional premiums or receive a refund.

Tips for Employees During a Workers’ Compensation Audit

While the audit primarily involves employers, employees may play a role in ensuring accuracy. Here are some tips for employees:

  1. Ensure Proper Classification: Confirm that your job duties are accurately reflected in your classification. Misclassifications could result in reduced coverage or incorrect benefits in the event of an injury.
  2. Provide Accurate Time Records: If requested, submit accurate time records to verify hours worked.
  3. Report Changes in Duties: Inform your employer of any significant changes in your job responsibilities to ensure proper classification during the audit.

Common Mistakes to Avoid During a Workers’ Compensation Audit

Both employers and employees should avoid these common pitfalls:

  • Inaccurate Payroll Reporting: Misreporting payroll, whether intentionally or accidentally, can result in penalties and higher premiums.
  • Misclassifying Employees: Assigning incorrect classification codes to employees can lead to significant financial adjustments.
  • Failing to Track Subcontractor Insurance: Employers must document subcontractors’ workers’ compensation coverage to avoid being held responsible for their payroll.
  • Ignoring Auditor Requests: Delays in providing requested information can prolong the audit and increase scrutiny.

What Happens After the Audit?

Once the audit is complete, the insurance company provides a summary of the findings, including any adjustments to the premium. Employers should review the audit results carefully and address any discrepancies by:

  • Requesting Clarification: If something appears incorrect, request an explanation from the auditor or insurance company.
  • Filing an Appeal: If you disagree with the audit results, most insurance companies offer an appeals process to resolve disputes.
  • Updating Records: Use the audit as an opportunity to improve payroll and classification tracking for future policy periods.

How a Workers’ Compensation Attorney Can Help

Navigating a workers’ compensation audit can be challenging, particularly if discrepancies arise. A workers’ compensation attorney can assist by:

  • Reviewing audit findings and identifying errors.
  • Advising on employee classification and payroll reporting requirements.
  • Representing employers in appeals or disputes with the insurance company.
  • Ensuring compliance with California workers’ compensation laws to avoid penalties.

For employees, an attorney can review classifications and coverage to ensure that rights are protected in the event of an injury.


Conclusion

Workers’ compensation audits are a standard part of maintaining accurate insurance coverage in California. While they can be intimidating, proper preparation and understanding of the process can help employers and employees navigate them successfully. By gathering accurate records, reviewing classifications, and addressing discrepancies proactively, employers can ensure compliance and avoid costly adjustments.

If you’re facing a workers’ compensation audit or need help understanding your rights and responsibilities, consulting a knowledgeable attorney can provide clarity and support. Whether you’re an employer or an employee, having expert guidance ensures that the audit process is fair and transparent.

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