Most types of cannabis insurance can be difficult to understand and navigate. Workers' compensation insurance is no different, especially when it comes time for your audit. The workers compensation audit process can be confusing, complex and, if done incorrectly, expensive. It doesn’t help that the audit process is set up so that most errors benefit the insurance company.
The company may simply ask you to send the information needed to perform the audit, or may choose to conduct a physical audit at your place of business. It is their right to be able to reconcile your estimated annual payroll. In either case the auditor will probably want to see your State quarterly wage and withholding reports (DE-6s), payroll journals, and any previously filed payroll reports for the period being audited. Occasionally, other records that relate to your workers compensation policy may be requested as well.
Regardless of what records are requested, it is imperative that the payroll is placed in the appropriate classifications and that any rules that could work to your advantage are employed. If you operate a farm, edible company, dispensary, or any other number of cannabis related operations, your class codes are important to get right in advance to avoid an expensive reclassification at audit time. Make sure you understand the differences so you can classify your employees in the most favorable category.
Your premium is based on gross payroll, not net payroll. Gross payroll includes salaries, commissions, bonuses, vacation and holiday pay, sick pay, overtime payments (which can subsequently be deducted), the value of gifts, all substitutes for money earned or paid during the policy period, including meals and lodging in lieu of wages, automobile allowances, and any amount by which an employee’s salary is reduced to fund a pension or deferred compensation plan.
If you subcontract work, you will be asked to supply basic information about the subcontractors, and verification that they have appropriate insurance. Recognize that if they do not carry the appropriate insurance, you will be charged premium based on their exposures.
Some payroll classifications allow you to split an employee’s payroll among various class codes (recognize that many, including clerical, do not allow this). In order to take advantage of such a split, proper payroll records must be kept that specifically identify time worked in each classification.
The following are additional tips that you should be aware of during the course of the audit process:
- Executive Officers and Partners - Executive Officers and Partners are capped for payroll purposes. For 2017, the maximum amount that an executive officer or partner in California can be charged is $122,200. If you have elected to exclude executive officers or partners, make certain that they are at least 15% owners and their payroll is not included in the audit.
- Overtime - You are not required to pay workers compensation premium on the overtime portion of a wage. In other words, if somebody who normally makes $10 an hour works an hour of overtime and is paid $15, you would pay premium on the $10 but not the extra $5. It is important that your payroll records be maintained to show the regular rate of pay, the overtime earnings by employee, and a summary by type of operation performed so that the auditor can give you credit for overtime excess.
- Payments to Inactive Employees - Payments to inactive employees are not counted when calculating your workers compensation premium.
- Severance - If you have paid severance to anyone in the past year, you can deduct this from your audit. You are not required to pay workers compensation premium on severance pay.
- Third Party Sick Pay - Were there any employees hurt on the job that received disability payments (short or long term) from a disability carrier or provider? If this third party sick pay was included in the employees W-2 and/or payroll register, you can deduct it.
- Travel Expense Offset - Did any employees receive additional funds to offset travel expenses? This is not chargeable as payroll.
- Form 1099 - If anyone was paid by Form 1099 through your payroll, was this amount deducted for workers compensation purposes?
- Uniform Allowance - Was anything added to individuals payrolls to compensate for required work clothes or safety equipment? If so, this can be deducted.
- Any Other Additions or Exclusions - Other than base pay, bonuses and commissions, were there any other additions or exclusions to payroll?
- Owner-Controlled Insurance Programs (Wrap-Up Policies) - Were you involved in any owner-controlled insurance programs (wrap ups) that extended to workers compensation? If so, you can deduct this payroll from your audit.
The best advice for a workers' compensation audit is to be prepared. If you have questions about classifications, rates, audits or otherwise, consult with us. It's better to understand your policy and audit in advance rather than when you get a large audit bill.