All businesses in California must carry workers’ compensation insurance in the event anyone who performs work for a company is injured while working. Unlike other types of insurance, workers’ compensation policy premiums are collected as an estimate during the policy term. Once the policy term ends, an auditor checks the premium amounts by conducting an audit. The audit reveals any real-time changes, such as departing workers who would reduce a company’s payroll (and thus affect the premium amounts) during the insurance policy term.
If the audit finds the estimated premiums were too high, the insurance company issues a refund to the insured company. Similarly, if the estimated premiums were too low, the insurance company will request the insured company pay additional costs, typically known as a “premium audit bill”. There are several reasons a company may pay additional costs following an audit.
· Inaccurate payroll projections: Workers’ compensation premium is based in part on the dollars in payroll the company pays, as well as the employer’s industry. Payroll is based on who works for the company and in what jobs. The jobs are assigned a classification rate based on the employer’s industry. For example, roofers are classified with a higher classification or rating than most office workers because of the dangerous nature of roofing work (and the greater likelihood of injury). If payroll projections are incorrect, and payroll is larger than expected, a company will need to pay additional premium.
· Labor costs miscalculated: Relying on non-employees can be very costly to a company from a workers’ compensation perspective. For instance, if a company uses a subcontractor to perform work for the company, and the subcontractor does not have his own workers’ compensation insurance or a policy through his employer, the auditor will require the company cover this subcontractor’s workers’ compensation insurance. The policy premium will therefore be adjusted to reflect this additional subcontractor. Moreover, auditors do not always understand the particular job duties of certain employees and may misclassify them into a more costly classification rate.
· Failure to monitor projections during the policy term: It is unwise to wait until an audit occurs to compare the premium estimate with the actual premium costs as reflected in the audit. Quarterly reports showing payroll figures and any unexpected labor costs could help a company avoid surprises at the end of the year.
For more information on workers comp premiums, or if you have a dispute, contact attorney Drew E. Pomerance today.