Payroll Audit Defense

Understanding Workers' Comp Payroll Audits

When you purchase a workers' compensation policy, your premium is initially based on estimated payroll figures and the classification codes that apply to your employees. At the end of each policy year, your insurer conducts a payroll audit to compare your actual payroll against the estimates used to set your premium.

If your actual payroll was higher than estimated, you owe additional premium. If it was lower, you should receive a refund. The audit also verifies that employees are classified correctly — an error in classification can change your premium rate significantly.

Payroll audits seem straightforward, but in practice they are a frequent source of disputes. Audit adjustors sometimes make errors in classifying work activities, counting excluded compensation (like S-corp distributions), or determining worker status. A poorly handled audit can result in a premium bill thousands of dollars higher than warranted.

Common Audit Errors That Inflate Your Premium

• Misclassification of work activities: If employees perform multiple types of work, auditors must assign payroll to the appropriate classification code. Errors here can result in payroll being assigned to higher-rated codes than appropriate.
• Including excluded compensation: Certain types of compensation are excluded from workers' comp payroll calculations, including tips above a certain threshold, overtime premiums, employer contributions to benefits plans, and executive payroll above state caps. Audit adjustors sometimes improperly include these amounts.
• Misclassifying independent contractors as employees: When auditors cannot find certificates of insurance from subcontractors, they often simply include those subcontractors' labor costs in your payroll — even when the workers were genuine independent contractors.
• Applying wrong classification codes: The wrong NCCI code can result in a dramatically different premium rate. For example, the difference between office staff (low rate) and construction laborers (high rate) is substantial.
• Double-counting workers: Workers who appear on multiple payrolls (e.g., staffing agency workers) can sometimes be counted twice.

The WCB Connection: When Audits Lead to Penalties

What starts as a premium audit can quickly become a WCB penalty situation. If an audit reveals workers who were not covered under your policy — whether due to misclassification or payroll discrepancies — the insurer may report this to the WCB. The WCB can then assess penalties for the period those workers were allegedly uninsured.

We address both the premium dispute with your insurer and any resulting WCB penalty investigation simultaneously, ensuring a coordinated defense rather than fighting on two fronts independently. See also: Independent Contractor vs. Employee in NY.

Our Payroll Audit Defense Process

1. Audit review: We review the audit adjustor's worksheet in detail, identifying all errors, questionable classifications, and improperly included amounts.
2. Documentation compilation: We help you gather certificates of insurance from subcontractors, payroll records by job type, officer election forms, and other documents that support your position.
3. Formal dispute: We file a formal written dispute with your insurer, specifying each error and the supporting documentation.
4. Insurer-level resolution: Most disputes resolve at the insurer level. We negotiate toward the most favorable outcome.
5. Escalation if needed: If the insurer's final offer is inadequate, we can escalate to NCCI's dispute resolution process or, where applicable, the WCB's own procedures.
6. WCB penalty defense: If the audit triggers a WCB penalty inquiry, we defend that simultaneously.

Independent Contractor Certificates of Insurance

One of the most effective ways to protect against payroll audit issues is to require certificates of insurance from all subcontractors before they start work. If a subcontractor has their own workers' comp policy, their payroll cannot be included in your audit. We help businesses set up proper certificate collection procedures and can review your existing subcontractor documentation.

Frequently Asked Questions