KY Worker's Compensation:
How to Avoid Large Audits
Worker's Compensation insurance—a subject most contractors hate to talk about and can be a source of complete frustration. But armed with the RIGHT information, it doesn't have to be that way. If you know how it works, what is expected and how to handle it, you'll find yourself on the right track and probably save yourself a lot of headaches....as well as some money.
Workers compensation is required by law in Kentucky for any business that has at least 1 employee. It's also a financial safety net for employers when employees get hurt or sick due to the job. The problem is.... who is an employee? Who is a sub-contractor? Who is paying who? What is the job? What am I responsible for?
Since I've been in the insurance industry, the most popular question I get from prospects is "I have received a large audit on my worker's comp, and I don't know why or what I can do?"
I typically answer with, "how often do you speak with your agent that handles your worker's compensation?" More often than not, the answer is once a year, sometimes twice. Worker's compensation is rated off estimated payroll and the type of work being performed. Payroll is an ESTIMATE of what you think it will be in the coming year, that is why audits are performed—to calculate what the payroll ACTUALLY was during the term. Audits are always a "look back" to see what actually occurred in the prior year. If you are not keeping an eye on your payroll throughout the year or not getting certificates from your subs you can get sideways really fast!
"What do I do if I get a large audit?" First, check it for accuracy. Unless there is a discrepancy in payroll or you can produce certificates of insurance on sub work that is being calculated as employees, you don't have much choice but to pay it. Employer's has every right to be upset if their agent did not explain how worker's comp works before binding the insurance coverage.
Things Contractors need to know about audits and their insurance:
- Rule of Thumb: If an employee/sub doesn't have their own insurance, you will be providing it and paying for it. Anyone you pay to do a job, regardless of whether you 1099 or W-2 them, you are responsible for them while working on your jobsite. Therefore, sub-contractors need to provide their own insurance while working for you and provide a certificate of insurance proving as such. If that certificate is not presented at audit time, you will be paying for that subcontractor as an employee—at the rate of whatever the job was they performed, i.e. roofing, plumbing, etc. This applies to both general liability and workers comp.
- "Pay me now or pay me later"- your policy should be based on the most accurate payroll possible. It is an estimate so be as accurate as you can considering if you expect more or less jobs in the coming year, etc. You can amend your payroll throughout the year as fluctuations occur—usually once or twice a year is possible. But there is no getting around what you will owe for employees/subs. You either pay it as an estimate or it will be paid later thru an audit
- Employees performing multiple jobs: Do you have an employee performing multiple tasks, i.e., carpentry, drywall, site clean-up for example? Unless you are keeping separate payroll records for each job performed, they will be rated on the highest rate job they perform. Most contractors don't keep separate payroll records so be aware if you have someone doing roofing and drywall for example, you will pay for them using the roofing rate.
- If you are an S corp or C corp, and the owners want to be excluded from coverage, make sure the state Form 4 Exclusion is on file with the state to avoid being charged owner payroll. If you are an owner and your business is a corporation, and you want to be excluded from workers comp, you are required to sign and file with the state the Form 4 exclusion. Companies can charge you owner payroll if this form is not completed and filed. Owner payroll varies but it is usually a minimum of $40,000, whether you make that much or not. If you are a roofing contractor, that is going to be a large amount you'll have to pay when you didn't intend to. Companies will not let you backdate form 4's—so if you don't get it filed early in the audit term, you'll be charged and can only correct it going forward. Talk to your agent and make sure this form is filed if you intend to be excluded and own a corporation.
- Owners of sole proprietors, partnerships and LLC's are automatically excluded from work comp unless you elect to be covered. Most owners don't cover themselves for work comp because of the minimum payroll required; however, if your form of business is any of the above and you DO want to be covered, be sure your policy reflects you as "included". The time to find out you were excluded, and it wasn't your intention is not after you get hurt on the job.
- FINES ARE HUGE for not carrying workers comp when you are required to. If someone performs work on your behalf, part time or full time, that triggers the work comp requirement. If an inspector drops in on your jobsite and you don't have any insurance or your subs aren't providing it, the fines can be as much as $1500 per DAY. And they go back to when you should have had it. Keep this in mind if you let your workers comp lapse. They can go back to your lapse date and charge the fine. Fines are not fun and very expensive, just be aware.
- Enforce requirements for your subcontractors. Your subcontractors should provide you with proof of insurance before starting a job. And we recommend a simple subcontractor agreement that spells out expectations. It should include an insurance section that requires them to list your company as an additional insured and that they carry liability limits of at least $1,000,000 on general liability and $100,000/$500,000 for workers comp. This has become common practice and one that is becoming a requirement of insurance companies. Consult your attorney or we have sample agreements we'd be happy to share. As stated above, if there is no certificate of insurance, you will pay for your subs as employees.
- Keep yourself organized. From maintaining certificates for subcontractors to separate payroll records by employees and jobs being organized is important for a smooth audit process, and it can help you save money. It is your job as the owner of the policy to provide the documentation to support the numbers you present to an auditor.
When getting a quote for Worker's Compensation, it is important to make sure that you give the most accurate payroll for the jobs being done. A common mistake is contractors think once they have their policy, they don't need to talk with their agent again until renewal time. If this is the case with you currently, I strongly advise you speak with your insurance agent soon to discuss the work and payroll you are using. I would also recommend, if you can every quarter check yourself to see where you are at. If that number is going to be higher than what you said at the beginning, you can adjust it. This is the most effective way to avoid a large audit at the end of the year.
After reading, I hope I have informed you of the importance of updating this policy more times than not. You can never be too cautious when it comes to Worker's Compensation. As always, I am available to help and answer any questions you may have.
-John L. Caudill