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New York Workers Compensation Audits

New York Workers Compensation Audits

Understanding Workers’ Compensation Insurance

 

Audit

Every carrier has the right to audit a policy at least every three years; some policies are audited several times a year. During an audit, the employer must provide copies of canceled checks, payroll, general ledgers and other financial information. Employers may be penalized by the New York State Workers’ Compensation Board for not maintaining accurate and adequate records at a rate of $1,000 for each ten days that such records are deficient/nonexistent.

Because employers can only estimate the amount of payroll they may have during the forthcoming year, premiums are based upon estimated payrolls. The estimated payroll can often be either much higher or lower than the actual payroll. This results in either a higher or lower premium at the beginning of the policy period. The premium is corrected when a payroll audit is conducted. Upon completion of the payroll audit, the actual payroll figures will be used to determine actual premium and the employer will either get a refund or surcharge. Therefore, it is in the employers’ best interest to attempt to correctly forecast the amount of the payroll. Pease note that if an employer intentionally initially understates payroll, it could be classified as fraud, a class E felony.

Auditing of Payroll – Independent Contractors

The New York State Workers’ Compensation Law does not require sole proprietors, partners or officers of one or two-person corporations to provide coverage for themselves. The situation is more complex when a business that is exempt from coverage requirements either engages subcontractors or is a subcontractor that is engaged by a general contractor. In many instances, under Section 2 and 3 of the WCL, a Judge finds a subcontractor to be the direct employee of the general contractor. In addition, WCL Section 56 provides that a general contractor or its insurance carrier is liable for payments of compensation to an injured employee of an uninsured subcontractor.

Insurance carriers protect themselves against such claims by charging an additional premium for any policyholder that uses independent contractors.

In addition, insurance carriers often assess general contractors premiums for coverage of all “subcontractors” on the job site, unless the subcontractors furnish proof that they have their own workers’ compensation insurance policy. Accordingly, general contractors routinely require that subcontractors provide proof of their own workers’ compensation coverage in order to co-work on the job. This results in many sole proprietors, partnerships, and one or two person owned corporations with no employees who are not otherwise legally required to acquire a workers’ compensation policy, being required to purchase a policy (and include themselves in that policy) in order to work for a particular general contractor.

Classifying Independent Contractors and Employees

A business cannot require employees working for that business to obtain their own workers’ compensation insurance policy or contribute towards a workers’ compensation insurance policy. (Employees)

However, a business may require an independent business that has its own employees or an independent business acting as a sole proprietorship, partnership or one or two person owned corporation with no employees to obtain a workers’ compensation insurance policy if the independent business is working as a subcontractor. (An independent business usually has characteristics such as media advertising, commercial telephone listing, business cards, business stationary or forms, its own Federal Employer Identification Number (FEIN), working under its own permits or operating authority, business insurance (liability & WC), and/or maintaining a separate establishment. The independent business has a significant investment in facilities and means of performing work.)

For example, if Business “A” contracts with Business “B” to perform services and Business “B” is an independent business with or without its own employees, Business “A” can require Business “B” to have its own workers’ compensation insurance policy and obtain a certificate of insurance for this policy. This will help ensure that Business “A’s” workers’ compensation premiums are as low as possible.

The New York State Workers’ Compensation Board can not make advance determinations regarding independent contractor status, and only makes such decisions on an individual basis in the event a claim is filed.

Auditing of Payroll – Remuneration

Please refer to the Compensation Insurance Rating Board Manual at www.nycirb.org/2007/manuals/pdf/4comp.pdf  for the specific rules regarding Remuneration.

Remuneration means money or substitutes for money. Remuneration is an essential part of determining the amount of premium an employer should pay.

Premium is computed on the basis of the total remuneration paid by the insured for services of employees covered by the policy.

Exceptions

Some classifications have a different premium basis other than total remuneration. For example, premium for domestic worker classifications is computed on a per capita (number of employees) basis. Refer to Rule XIV in the CIRB Manual.

Certain construction classifications have premiums computed on the basis of limited remuneration. Refer to Rule V.G. XIV in the CIRB Manual.

Remuneration for determining premiums includes

1. Wages or salaries including retroactive wages or salaries, commissions and draws against commissions, bonuses including stock bonus plans, annuity plans, most extra pay for overtime, paid holidays, vacations and sick days. Payments for salary reduction, employee savings plans, retirement or cafeteria plans (Internal Revenue Code §125) which are made through employee authorized salary deductions from the employee’s gross pay are also included.

2. Payment for piecework, profit sharing or incentive plans.

3. Payment by an employer of amounts otherwise required by law to be paid by employees to statutory insurance or pension plans, such as the Federal Social Security Act;

4. Payment or allowance for hand tools or power tools used by hand provided by employees.

5. The rental value of lodging, an apartment or a house provided for an employee based on comparable accommodations.

6. The value of meal, store certificates, merchandise, credits or any other substitute for money received by employees as part of their pay. Refer to Exclusions below for certain fringe benefit exclusions.

7. Expense reimbursements to employees to the extent that an employer’s records do not substantiate that the expense was incurred as a valid business expense;

Note: When it can be verified that the employee was away from home on the business of the employer, but the employer did not maintain verifiable receipts for incurred expenses, a reasonable expense allowance within prescribed limits will be permitted.

8. Payment for filming of commercials excluding subsequent residuals which are earned by the commercial’s participant(s) each time the commercial appears in print or is broadcast.

Remuneration for determining premiums excludes:

  • Tips and other gratuities received by employees;
  • Certain payments by an employer to group insurance or group pension plans for employees
  • The value of special rewards for individual invention or discovery.
  • Dismissal or severance payments except for time worked or accrued vacation;
  • Certain reimbursed expenses and allowances
  • Payments for active military duty;
  • Employee discounts on goods purchased from the employee’s employer;

◦                      Supper money for late work;

◦                      Work uniform allowances;

◦                      Sick pay paid to an employee by a third party such as an insured’s group insurance carrier which is paying disability income benefits to a disabled employee.

◦                     Employer provided perquisites (“perks”) such as:

  1. An automobile;
  2. An airplane flight;
  3. An incentive vacation (e.g., contest winner);
  4. A discount on property or services;
  5. Club memberships;
  6. Tickets to entertainment events

◦                      Employer contributions to salary reduction, employee savings plans, retirement, or cafeteria plans ((Internal Revenue Code §125)–Contributions made by the employer, at the employer’s expense, which are determined by the amount contributed by the employee.

Wages Paid for Time Not Worked

Some employers pay employees for time not worked. The entire amount of wages paid for idle time is to be included as payroll.

 

http://www.wcb.ny.gov/content/main/Employers/audit.jsp

 

 

Workers Comp Audits

It’s important to be organized and up to date when you are audited for Worker’s Compensation year end audits.  If your paper work is not in order you could face penalties and other problems.  You also might be overpaying if you are filing the wrong classification code or in the wrong category.

In most cases, Workers Comp policies are based on an estimated payroll amount which is adjusted at the end of the official policy period.  This adjustment is called an Audit. The actual premium is determined after the policy year end by completing an audit.

Your Worker’s Compensation Premiums are determined by your Gross Payroll (remuneration) and Classification codes.

9. Gross Payroll is defined as salaries, bonuses, commissions. It also includes all vacation, holiday, and sick pay.

  1. Classification Codes are the categories created by New York Compensation Insurance Rating Board (NYCIRB). Each code describes specific work groups which you must assign to each employee.  There are 35 pages of codes which cover contractors, truckers, retailers, wholesalers and manufacturers.

Organization is the key to a favorable worker’s compensation audit.

Take the time to classify all of your employees before the audit appointment.  If you rely on the auditor setting classification codes, you may end up paying higher premiums.  Let’s say a small portion of an employee’s activity falls under a higher classification code, the auditor could place the employees entire payroll under the higher code.

You will need the following documentation for your workman’s comp audit.

  • 941, NYS45 and Business Tax Returns, 1099’s
  • Payroll Book
  • Sales Records
  • Cash Disbursements Book
  • General Ledger
  • Checkbook

Remember, an organized and prepared approach to your Worker’s Compensation Audit can save you time and trouble.  The classification codes can be overwhelming, but applying the correct codes to all of your employees can make a big difference to your bottom line.

We will be happy to email you the NYS audit rules and procedures upon request.

 

http://www.enforcecoveragegroup.com/about-workers-compensation-insurance/workers-comp-audits/

 

 

About Auditing & Payroll Reports

The New York Compensation Insurance Rating Board requires insurance carriers to audit the payroll records of employers for the purpose of determining premiums for workers’ compensation policies. In many instances, a NYSIF auditor will examine your books and records to determine payroll. In certain cases, a policyholder may be permitted to complete an underwriting payroll report (DP517) or a premium audit payroll statement in lieu of an actual audit.

Audits are necessary to determine the total amount of payroll subject to a premium charge, to determine if the classification code applied to your premium is correct, to verify the division of payroll for each classification code, and to assist you in setting up accurate records and proper classification codes so you will pay the lowest possible premium.

 

Preparing for a Premium Audit

Policyholders receive advance notice either in writing or by telephone of a scheduled audit within two weeks of a selected audit date. Please inform us if an alternate date is preferable, and of the location and availability of records necessary for performing the audit. Someone familiar with your books and business activities should be present to work with our auditor. There are a number of record keeping tips that can help save you money.

Required Records for an Audit

The terms of your NYSIF policy allow our auditors to perform a complete examination of your records, the contents of which remain confidential with NYSIF. To facilitate the audit process, the following required records should be made available to the auditor:

  1. Payroll records (showing totals and division of payroll by type of work performed);
  2. Checkbook;
  3. Cash book (disbursements and receipts);
  4. General ledger;
  5. Contracts (construction);
  6. Tax returns including quarterly payroll taxes;
  7. Original certificates of insurance for covered subcontractors.

NYSIF prefers to conduct an audit at your place of business, rather than your accountant’s office. Please allow some time to review your audit with the auditor, discuss related issues and resolve potential differences.

 

Record Keeping Tips

Proper record keeping can help keep your workers’ compensation costs down.

Payroll Separation

If your policy has more than one classification code, payroll must be shown separately for each classification to take advantage of lower rated classifications. If not, all payroll may be assigned to the highest rated classification.

Overtime

Deduct the premium portion of overtime pay from the gross pay in calculating payroll. For example, if an employee is paid a regular rate of $10.00 per hour and receives time-and-a-half for overtime, the employee’s pay rate is $15.00 for each overtime hour. The $5.00 for each overtime hour can be deducted from your gross payroll only if it is shown separately on your records. You must show overtime separately for each classification.

Construction

Usually, a separation is allowed for an employee’s earnings if the employee works in more than one trade. Some of your employees’ payrolls can be charged at lower rates if your records show a separation for each trade on an actual time spent basis. A 1998 law allowing payroll limitation or construction puts further emphasis on the need to maintain proper payroll separations by both territory and trade. Consult your auditor for assistance.

Uninsured Subcontractors

You are responsible for injury claims brought by employees of uninsured subcontractors. NYSIF must charge premiums for this exposure. Obtaining a certificate of workers’ compensation insurance coverage from your subcontractor before work is started is the best way to avoid this cost. Have the certificate on file for review by our auditor.

Certificate Validation

A valid certificate of insurance ensures the certificate holder that the named party has insurance. Certificate validation is a valuable way to protect your business while fighting fraud and denying dishonest contractors an unfair competitive advantage. To validate any NYSIF certificate, access NYSIF eCERTS®, NYSIF’s online electronic Certificate of Insurance System.

About Owners/Executive Officers

Covered corporate officers, individual owners and partners who request coverage are classified like any other worker. If any of those persons work in an industrial plant, the plant classification will apply; if in an outside sales position the outside salesperson classification will apply, etc. Officers, when active, are subject to minimum and maximum payroll limitations. Individual owners and partners who elect to be covered are charged on the same minimum and maximum basis as corporate officers. More about Executive Officers, Owner and Partners.

 

Premium Audit Frequently Asked Questions

Why have an audit?

  1. To determine the total amount of payroll subject to premium charge;
  2. To determine the nature of your business and ensure your employees are classified correctly;
  3. To verify the division of payroll for each employee’s job classification;
  4. To assist you in setting up accurate records so that you will pay the lowest possible premium.

How does NYSIF determine classification?

NYSIF determines classification via the underwriting process and verification by the premium audit function in line with New York Compensation Insurance Rating Board direction. The object of the classification procedure is to assign one basic classification that best describes the business of the employer within the state. Subject to certain exceptions, each classification includes all the various types of labor found in a business. It is the business which is classified, not the individual employments, occupations or operations within a business.

How does NYSIF determine premium for uninsured subcontractors and out of state employees?

NYSIF follows guidelines as set in the New York Compensation Insurance Rating Board Manual for subcontractor charges: The contractor shall provide a complete payroll record of the employees of each uninsured subcontractor for purposes of establishing the appropriate premium. If the contractor does not supply the payroll records of its subcontractor, premium is determined as follows:

  • 33.3% of the subcontract price shall be considered payroll if the subcontract is for mobile equipment with operators (such as, but not limited to, earth movers, graders, bulldozers or log skidders).
  • 50% of the subcontract price shall be considered payroll if the subcontract is for labor and material.
  • 90% of the subcontract price shall be considered payroll if the subcontract is for labor only.

When subs are charged, why does NYSIF include subs that could be independent contractors?

With the passage of the NYS Fair Play Act, NYSIF charges for all independent contractors working for a GC, unless they provide proof of workers’ compensation coverage. Even then, our underwriters have the authority to include charges if it can be reasonably expected that we would be held liable for any claims by an individual subcontractor. The fact that they are “independent” has no bearing on how they are treated by NYSIF.

Why does NYSIF add payroll for uninsured subcontractors, casual labor, site inspection, day laborers, unpaid relatives and payments made on my 1099?

If a policyholder hires or utilizes individuals who have been deemed as compensable “employees” by a Workers’ Compensation Board (WCB) judge in the past, we are obligated to include them to cover their exposure to NYSIF and the assured.

Why does NYSIF require actual audits, while other carriers accept reports?

NYSIF has a fiduciary responsibility to collect the proper premium to cover the costs of administering the Fund and for paying the workers’ compensation claims of our policyholders. Our experience indicates that the best way to accomplish this is via actual audits for the majority of our policyholders. In addition, the New York Compensation Insurance Rating Board requires an annual audit of any policyholder producing an annual premium of $5,000 or more.

Why does NYSIF need tax returns and contracts when conducting a payroll audit?

The auditor needs to view and account for the entire operation. Our auditors are conducting premium audits, and payroll is but one area of interest. The tax return sheds light on the size of the operation, corporate ownership, outside labor, etc. Contracts provide insight in to the correct classifications that should be utilized.

Why did I receive an estimated audit?

Our auditors are directed to make two attempts to conduct a premium audit (one attempt on a cancelled policy). If they are unsuccessful in securing an appointment or viewing a full set of records after two attempts, NYSIF estimates the payroll.

How is estimated premium calculated?

NYSIF auditors follow standard guidelines when estimating payrolls. The rates and percentages vary depending on the premium size, longevity of the policyholder and specific facts related to the risk. The goal of the estimate is two-fold; first, to generate enough premium to cover the potential exposure to the Fund and, secondly, to provide the impetus for the policyholder to provide a full set of records to our auditors.

Why did NYSIF add payroll to an audit, particularly for relatives, earning subpar wages?

In many industries (restaurants, dry cleaning, etc.), it is common for relatives to assist in the operation. Many times they are not paid or are underpaid compared to a non-relative doing the same work. However, if they get injured the WCB judge would set their wage replacement benefits based on that of a comparable worker.

What are the minimum/maximum payrolls for executive officers? How are they determined?

The current minimum and maximum payrolls for active executive officers is $29,900 and $91,000 per year, respectively. That equates to $575 and $1,750 weekly, respectively. The minimum and maximum levels are set by the New York Compensation Insurance Rating Board.

 

Payroll Reports & Statements

In the interest of efficiency and convenience and in lieu of an actual audit of your books, NYSIF allows some policyholders to complete a payroll report or statement. NYSIF asks policyholders who receive a payroll report or statement to complete and return it to NYSIF within 30 days. All information submitted on a payroll report or statement is subject to verification, and NYSIF reserves the right to perform an actual audit.

 

Construction Employment Payroll Limitation Program

The New York State Legislature enacted the Construction Employment Payroll Limitation Law to provide a more equitable distribution of workers’ compensation premium between high-wage paying and low-wage paying employers in the construction industry. The Construction Employment Payroll Limitation Program applies a maximum payroll limitation for employees in eligible construction classification codes for the purposes of determining workers’ compensation insurance premiums.

Construction Employment Payroll Limitation Program Overview

Eligible Classifications

Record Keeping Requirements

Territories & Differentials/Surcharges

NYSIF’s Guide to the Construction Employment Payroll Limitation Program

Construction Employment Payroll Limitation Program Overview

The Payroll Limitation Program affects any policyholder endorsed with construction classification codes, except for work involving one- or two-family houses. The program affects premium in two ways:

  1. A payroll cap is applied to actual weekly payroll, per employee, in each of the eligible construction classification codes;
  2. The program creates three geographic rating territories used in calculating premiums and surcharges.

Actual payroll, and not the limited payroll, is used for employments engaged in the construction of one- or two-family housing (residential work). Premiums for these operations are determined based on traditional methods (total payroll, without territorial surcharges). Documentation must be provided (contracts, invoices, etc.) verifying the type of work performed.

Companies involved in both residential and commercial work are subject to the law for their commercial operations. Only construction work on one- or two-family detached or semi-detached (no more than two attached units) houses is exempt. Any construction work on apartment houses, co-operatives, three-family-or-more residences, mixed-use one- and two-family dwellings, farms and attached (three or more units in a group of connected houses) townhouses or brownstones is subject to the payroll limitation law, regardless of whether the work is done for an individual owner, a renter, the building owner, or the building manager.

Territorial differentials apply to casual labor and uninsured sub-contractors performing commercial work.

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Construction Employment Payroll Limitation Law – Eligible Classification Codes

0042 5069 5223 5479 5610 6216 6319 9534
3365 5102 5348 5480 5648 6217 6325 9539
3724 5160 5402 5491 5651 6229 6400 9545
3726 5183 5403 5506 5703 6233 6701 9549
3737 5184 5428 5507 5709 6235 7536 9553
5000 5188 5429 5508 6003 6251 7538
5022 5190 5443 5536 6005 6252 7601
5037 5193 5445 5538 6017 6254 7855
5040 5213 5462 5545 6018 6259 8227
5057 5221 5473 5547 6045 6260 9526
5059 5222 5474 5606 6204 6306 9527

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Maximum chargeable payrolls

 

Weekly payroll cap amounts and effective dates are as follows:

Effective date Weekly Payroll Cap
10/1/2000 $900 per week per employee
10/1/2001 $800 per week per employee
10/1/2002 $750 per week per employee
7/1/2008 $825 per week per employee
7/1/2009 $900 per week per employee
7/1/2010 $1,109.75 per week per employee
7/1/2011 $1,159.44 per week per employee
7/1/2012 $1,188.10 per week per employee
Thereafter New York State average weekly wage

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Construction Employment Payroll Limitation Law Record Keeping Requirements

Detailed bookkeeping is important under the Payroll Limitation Program. Weekly payroll records must be kept showing each employee’s earnings separately. Each employee’s payroll must be separated by:

  • Classification (type of work performed)
  • Hours worked
  • Regular pay
  • Overtime pay
  • Gross pay
  • Residential work pay (one- or two-family homes)
  • Commercial work pay (non-residential)
  • Geographic location (applicable territories for non-residential work)
  • Holiday, sick, vacation and bonus pay must be shown separately

Documentation such as contracts, invoices and daily work reports must serve as verification for your payroll separation.

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Territories & Differentials/Surcharges

The Payroll Limitation Program creates three geographic rating territories used in calculating premiums and applying differentials/surcharges, adjusted annually, to offset premiums lost to the limitation in each region. For new policyholders, NYSIF applies the differential/surcharge of your home territory unless you provide documentation of work in a different territory. There are three New York territories:

Territory 1

Bronx, Kings, New York, Queens and Richmond counties;

Territory 2

Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk and Westchester counties;

Territory 3

All other counties within the state.

why are workers’ comp payroll audits necessary?

 

It seems like just one more paperwork headache: completing your workers’ comp payroll audit. Insurance carriers, such as NYSIF, are required to audit the payroll records of employers to determine premiums for workers’ compensation policies. In reality, the payroll audit actually helps you get the lowest possible rates on workers’ comp insurance for your business. The purpose of the audit is:

  1. To determine the total amount of payroll subject to a premium charge.
  2. To determine the nature of your business and ensure your employees are classified correctly.
  3. To verify the division of payroll for each employee’s job classification.

By examining each of these areas as part of the payroll audit, you are setting up accurate records that will help you pay the lowest possible premium on this insurance.

“When employees aren’t classified correctly, it can lead to a significant increase in premiums that the employer really shouldn’t need to pay,” said Retail Council Insurance Services Manager Virginia Hitchcock. “The audit is designed to catch errors so employers aren’t paying more than they should for workers’ comp or less than they should, which will eventually lead to a sizeable back payment of premium due.”

The audit is time sensitive as the information on payroll is one component used to calculate experience modifications on applicable policies and to estimate the next renewal premium. When an audit is completed early, additional premium due can also be paid in an installment schedule.

Retail Council Safety Group participants need to remember, too, that a payroll audit(s) must be complete to be eligible to receive your part of the Safety Group’s dividend! In November 2010, more than $4.1 million was returned to qualified group members. Don’t let an incomplete payroll audit stand in the way of the hundreds, thousands, and in some cases, tens of thousands, of dollars you may be eligible to receive.

When it comes to conducting the audit, insurance carriers may want to examine your books and records to determine payroll; this is called a physical audit. In other cases, a policyholder may be permitted to complete an underwriting payroll report (DP517) or a premium audit payroll statement in lieu of a physical audit.

If NYSIF, underwriter of the Retail Council’s Safety Group 493, would like to perform a physical audit of your records you will receive advance notice either in writing or by telephone from NYSIF within two weeks of a scheduled audit date.

For tips to make a physical audit go smoothly, visit our website at www.retailcouncilnys.com.

If you have questions about your payroll audit(s) or any other aspect of your workers’ comp insurance, please call Virginia or Ken in the Retail Council’s Insurance Services Department at (800) 442-3589.
Premium Audits

If you wind up doing your audit all by yourself with no help from your current agent, that’s like allowing an IRS agent to conduct an audit without an expert at your side! Why allow an insurance company auditor to conduct an audit without an expert at your side?

A Workers’ Comp audit could actually cost you more money than an IRS audit.  A Workers’ Comp audit happens every year. You may go years without an IRS audit.

  • What happens when you are notified that the insurance company’s auditors are coming to conduct a premium audit?
  • What steps does your current agent take in preparing you for your audit?
  • Has your agent made you aware that the Premium Audit which the insurance company performs is actually designed so that almost all grey areas; and frankly a lot of mistakes, go in the insurance company’s favor causing many employers to just flat be Over Charged?

You are penalized and overpay when the audit police make a mistake. You are at a disadvantage from the start.  The auditor is not compelled by law to explain the rules, especially if applying a rule would cause you to pay a lower premium.

Premiums from audits are the easiest way for insurance companies to get more money from you.  Every dollar the auditor gets goes right to the insurance company’s bottom line and away from yours.

We review hundreds of Work Comp. Audits. The result is:

  • Misclassifications are common and the Work Comp “System” is designed for you to pay for all mistakes.
  • The audit process is prone to many other errors and omissions in addition to misclassifications.

Do you know how your audit is conducted?  We help you control the audit, not the auditor.

Isn’t it time you took back control of your Workers’ Compensation?