Workers’ compensation premiums, or the amount the employer pays to insurance companies to protect the employer as well as the employee in the event of a workplace accident, can be challenging to calculate. A premium is based in part on the dollars in payroll the company pays as well as the employer’s industry. Underreporting of payroll is considered insurance fraud.
Workers compensation insurers in California may charge any premium that does not tend to “impair or threaten their solvency or tend to create a monopoly,” according to one court decision.
Workers Comp Premiums – An Estimate
Workers’ comp is collected as an estimate and then checked through an audit once the insurance policy term has ended. The audit reveals any real-time changes, such as departing workers who would reduce a company’s payroll, during the insurance policy term. A workers’ compensation insurance provider can audit payroll records at any time. Employers should keep accurate payroll records to ensure the audit goes smoothly.
Payroll includes certain costs for employees, such as salaries, and not others, such as meals and lodging or stock options. Independent contractors are not covered by workers’ compensation, and employers often dispute the status of certain workers. Consulting with a lawyer to discuss the specific employees’ work, and whether the employees are truly independent contractors, is vital to reducing the risk of potential legal action. The premium audit must be done once the policy term is over, to verify the amount of payroll. The final workers’ compensation insurance premium is based on the entire amount of payroll paid to employees.
After the audit, if the payroll has increased from the estimate, the employer must pay additional premium to the insurer. If the payroll has decreased, the insurance company may owe the employer a “return premium.” The audit is important for businesses because it can reduce the possibility of a large premium or audit bill, or a large return premium, which would reduce the amount of cash coming in or going out of the business.
A state agency may also audit an employer’s payroll records. The Workers’ Compensation Insurance Rating Bureau (“WCIRB”) serves as the state’s Insurance Commissioner’s statistical ratemaking agency. It combines and analyzes all of the data received from insurers and uses that data to set certain parts of insurance premium calculations. The WCIRB has the right to conduct an audit of payroll records as well.