The workers comp audit: what they ask for and how to not get surprised

The honest answer is that the workers’ comp audit isn’t a trap. It’s the bill. The premium you paid at the start of the term was a deposit on a guess about payroll, and the audit is where the carrier replaces the guess with the number from your books. Contractors who get surprised at audit almost always guessed low, paid a sub without a certificate, or kept timesheets that say “labor” for twelve months. The workers compensation page covers what the policy does. This one is about the day the auditor calls, what they’re going to ask for, and what to keep all year so the answer is a folder instead of a scramble.

Why there’s an audit at all

Workers’ comp premium is a rate, set by class code, applied to payroll. When the policy is written, nobody knows what your payroll will be, so the carrier charges a deposit premium on your estimate. When the term ends, the carrier is entitled to see what you actually paid, by employee and by kind of work, and to adjust the premium up or down to match. That’s the audit.

Most policies in our trades get audited every year, and the carrier decides how: a phone or mail audit for a small account, a field audit for a larger or messier one. Which you get depends on the carrier and the shape of your operation, which we don’t control. What we do control is whether your records make the audit short.

What they ask for

The request list looks about the same from every carrier. Here’s what an auditor for an excavation or landscape account typically wants to see, and why.

Two lines on that table do most of the damage: the subcontractor certificates and the payroll by task.

Subcontractor certificates

A subcontractor who carries their own workers’ comp is not your employee. A subcontractor who doesn’t is, for audit purposes, and the auditor will add what you paid them to your payroll in the class for the work they did. Same rule the state uses for the coverage requirement in the first place.

The proof that satisfies an auditor is usually a certificate of insurance from the sub’s carrier showing workers’ compensation in force for the dates the sub worked for you. Not a text saying they’re covered. Not a certificate from last year. If the sub’s policy expired in June and they trenched for you in August, August is on your payroll.

That’s the audit reason to collect certificates. There’s a claim reason too: an uninsured sub who gets hurt on your site can end up as your workers’ comp claim or your general liability claim, depending on the facts, and neither is a conversation you want. The additional insured article explains what the certificate does and doesn’t prove, and the short version for audit is that the certificate needs to list workers’ comp, needs dates that cover the work, and needs to be in your file before the sub unloads.

One more thing about the sub who has no employees. A true one-man sub with no workers’ comp policy (because Colorado doesn’t require one for a sole proprietor with no employees) still shows up as payroll on your audit unless the carrier accepts other proof that the person is an independent business. Some carriers do, with a signed statement and evidence the sub works for others. Some don’t. Ask before the term, not at the audit.

Payroll by task

This is the part the class code article spends the most time on, so here’s just the audit view. If an employee works in more than one classification, their payroll can be split between the codes only if your records show the actual hours or wages in each. If the records don’t, the auditor typically puts that employee’s whole payroll in the highest-rated code that applies.

For a grading and site prep outfit that also does landscape installs, which describes a lot of the excavation contractors we insure, that’s the difference between a foreman rated as an excavator operator for the hours he ran the mid-size excavator and rated that way for the whole year. For a landscaper who plows, it’s the difference between a snow code on the winter hours and a snow code on all of them.

The records that work: timesheets with a task or job code on each entry, a job-cost report that ties hours to jobs and jobs to a kind of work, or a payroll system that lets you tag hours by class. The records that don’t work: a percentage you told the agent, a memory, or a job list with no hours attached.

Owners and officers

Auditors check owners two ways. First, who’s included. Under Colorado’s rules, sole proprietors and partners are commonly excluded unless they elected in, corporate officers and LLC members are commonly included unless they elected out, and the paperwork for either election has to have been filed with the carrier during the term, not produced at the audit. In Colorado, a corporate officer or LLC member who owns at least ten percent of the corporation or company and controls, supervises, or manages its business affairs may elect to reject workers' compensation coverage by written notice on a Division-approved form sent by certified mail to the insurer (C.R.S. 8-41-202), while a working general partner or sole proprietor is not covered unless they elect to be included by endorsement as an employee of the insured (C.R.S. 8-40-302(5)(b)). (C.R.S. 8-41-202(1), (4); 8-40-302(5)(b)) The details depend on how the business is organized, so confirm your own status with us before the term starts. Second, what class each included owner belongs in. An included owner is rated at a set payroll figure under the carrier’s rules, not at their actual draw, and in the class of the work they actually do.

That last point is where the excavation owner gets caught. If you run the John Deere 772GP most days, you’re rated as a grader operator. Describing yourself as management on the application doesn’t change the seat you sit in, and the auditor will ask.

The audit worksheet

When the audit is done, the carrier produces a worksheet. It lists every employee (and every uninsured sub) by name, the class code the auditor assigned (in our trades, usually one of 0042, 9102, 6217, 0106, 9402[VERIFY] ), the payroll counted, and the resulting premium by class. Then it compares the audited premium to the deposit and bills or refunds the difference.

Ask for it. Every time. The worksheet is the only document that shows you exactly how the auditor read your records, and it’s where errors live. Things we see on worksheets:

• A sub counted as payroll because a certificate was in the job file but never sent to the auditor.
• A foreman’s whole year in the excavation code because the timesheets said “operator” with no task.
• An owner rated in a field class when the election form on file said excluded, or the reverse.
• Overtime premium counted as ratable payroll because it wasn’t broken out.
• A class code on the policy that no longer describes the operation, so payroll landed in the wrong place.

Every one of those is fixable with the record that should have gone in the first time. Send the worksheet to us with the records and we’ll go through it line by line before the bill is final. Disputes get harder after you’ve paid.

What to keep all year

Here’s what we tell every contractor who asks. Build a folder at the start of the policy term and put five things in it as they happen:

1. Payroll by person, by pay period, with overtime separate. Your payroll provider can usually do this by default.
2. Hours by task. A code on every timesheet entry: excavation, landscape, mowing, plow, shop, office. This is the record that saves the most money.
3. Owner elections. A copy of whatever inclusion or exclusion form is on file with the carrier, and a one-line description of what each owner actually does.
4. Subcontractor certificates, dated. One per sub, showing workers’ comp, with policy dates that cover the work. Ask for a new one when the sub’s policy renews.
5. A job list. Address, dates, type of work. It lets the auditor confirm the class codes still fit without walking every job.

Then do one thing mid-term: if the crew grows, shrinks, or changes what it does, tell us. Payroll estimates can be endorsed during the policy. A crew that doubled in July should not wait until the audit to find that out, because the audit bill comes all at once and the mid-term endorsement spreads it.

When the audit says you owe more than you can pay

It happens, usually to a crew that grew fast. Talk to us before the due date. Carriers will sometimes set up a payment plan on an audit balance, and the worksheet review often trims the number before you get there. What you shouldn’t do is ignore it, because an unpaid audit balance typically follows you to the next carrier and can block the renewal. The excavation insurance cost article covers how payroll and codes drive the number in the first place.

If you carry a commercial snow contract in Colorado Springs on top of a summer dirt operation, the audit will look at both seasons, and the commercial snow and ice crew’s hours need their own code on the timesheet like everyone else’s.

Where to go from here

If you’ve got an audit worksheet in hand and the number looks wrong, send it to us with your payroll records and we’ll walk it before you pay. If you’re renewing and want the next audit to be boring, a policy review starts with the classification schedule and the payroll estimate, and ends with the folder above. And if you’re new to the trade and haven’t been audited yet, the general liability page and the one-employee article are the two things to read first.

Serving businesses located in Colorado. Coverage is determined by the policy language and the carrier.