What is Workers’ Compensation?
Workers’ comp is a form of insurance that provides for the payment of medical care and/or to provide cash benefits to the injured employees because of work-related injuries or illnesses. The cost of the insurance is borne solely by the employers and most states require this form of compulsory coverage for organizations with employees. The tradeoff for providing this benefit to the workers is that the worker forfeits their right to claim against the employer–at least in theory.
Workers’ Compensation provides two parts; Part A provides the benefits to pay for the lost time and medical expenses related to the worker’s injuries or illnesses, and Part B which provides Employers Liability protecting the employer from third party claims due to their negligence and the breach of their duty to provide a safe working environment to the injured worker or the family members.
To enforce, govern, and regulate workers’ compensation, agencies are generally set up in each state, known as Workers’ Compensation Boards. These state entities can also be responsible for overseeing and ensuring the payment of claims to injured employees and sometimes to their family members that become ill from communicable diseases. Examples of the latter were spotlighted by the ongoing asbestos claims in the 1970’s.
The payment of benefits from workers’ compensation are no-fault and are generally not subject to other judicial or punitive awards that are common with civil and criminal cases. Benefits can be paid once it is assumed the injury or illness was work related. This usually follows a process of filing a claim form by the employer.
If the employer disputes the nature of the claim or if it was work related, a hearing may be requested to allow a worker’s compensation law judge to make the determination. During this process, the judge may review the documents and reports from the employer, testimonies from employees and others, evaluate evidence, and/or examine medical documents to determine the cause of injury. The injured worker can lose their rights for benefits if the injury is determined to be unrelated to work, or due to intoxication, acting in an illegal manner, or caused by their own intent.
Compensation benefits amounts or remuneration vary by state, but usually never exceed two thirds of the earned income lost because of the injury. In addition to capping the remuneration, most states limit the length of time compensation payments are made. Settlement amounts can be offered to quantify the loss, limit the exposure, and expedite the closure of the claim.
What Information is Needed for a Workers’ Compensation Audit
by William F Schaake, CIC, CRM, CLCS
Insurance carriers generally audit workers’ comp policies at the end of a policy term but reserve the right to audit at least every three years. Sometimes policies are audited many times per year. The employer may be required to provide payroll records, general ledgers, journals, canceled checks, and other financial information. In New York State, the penalty for not maintaining accurate and adequate records can be as high as $ 1,000 for every ten days of non-compliance.
Prior to the policy term, the employer will estimate the payroll for the upcoming year and a provisional premium is determined. The estimated payrolls are broken down by the classification of the employees’ duties and the rates are determined by multiplying the rate for the class code by the estimated payroll for that class. This number is aggregated for all the employees in that class and then added to all the other amounts for each class code to determine the estimated annual premium. The final number is then multiplied by a experience modification or merit factor which can either increase or decrease the adjusted premium. Discounts or assessments may then be applied as would any state or federal taxes and fees.
When the audit has been completed, the adjustments to the payroll figures can either increase or decrease based on the actual payroll. These changes can be subject to the economy, regulatory issues, the industry, but most likely the market changes affecting the organization such as greater or less than demand for its goods or services directly impacting its payroll. It is recommended that projections of payrolls prior to commencement of the policy year to be as accurate as possible to avoid large fluctuations in payroll and premium computations resulting in either audit premiums due or refunds for overpayments. In fact, if an employer intentionally understates payroll, it can be deemed as fraud subject to a class E felony, so it is in best interest that the payroll be estimated as close as possible.
Most states do not make any advance determinations regarding the status of an independent contractor until either an audit dispute or if a claim is filed.
Determining the Remunerations for Premium Computations:
Once the total payrolls are calculated and the subcontractor costs are identified, the premiums are determined by including the following remunerations which are either in the form of money or any substitutions for payment:
Remuneration for determining premiums includes for New York (Source: NYS Workers’ Comp Board**):
- 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.
- Payment for piecework, profit sharing or incentive plans.
- 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;
- Payment or allowance for hand tools or power tools used by hand provided by employees.
- The rental value of lodging, an apartment or a house provided for an employee based on comparable accommodations.
- 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.
- 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.
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:
- An automobile;
- An airplane flight;
- An incentive vacation (e.g., contest winner);
- A discount on property or services;
- Club memberships;
- 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.
*PRESENT LAW AND BACKGROUND RELATING TO WORKER CLASSIFICATION FOR FEDERAL TAX PURPOSES
Auditing of Payroll – Independent Contractors
(Source: NY Workers’ Compensation Board)
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.
Upon Audit, most insurance carriers will assess the exposures of the “subcontractors” on the job site for general contractors. Proof of insurance is usually requested showing coverage for the subcontractors and their employees on a certificate of insurance. This is generally used to offset the remuneration* of the subcontractors cost in the determination of the general contractors workers compensation premium calculations. Since the sole proprietors, partnerships, and many one or two person corporation can have the owners or officers excluded from coverage, it is recommended that the inclusion or exclusion of the executive officers be listed on the certificate of insurance. Many newer certificate forms show this as a Yes or No box.
Since an organization provides the benefit of workers’ compensation to its employees it may also require that its subcontractors do the same including covering its owners and/or executive officers. It is normally accepted that an independent contractor is a entity working on behalf of another that generally maintains its own identity, may provide insurance and benefits for it owners and employees, keeps separate books and records from the general contractor, and it deemed to be a separate establishment. The litmus test often used by most states for the purpose of workers’ comp audits and payroll determinations is the IRS 20 factor test.
Workers Compensation and Statutory Disability
Each state has its own requirements for workers’ compensation insurance and employer’s liability if employees are hired and under the control and direction of the landlord. This rule may even apply to independent contractors hired by the management of the building if it is determined there is vicarious liability due to the nature of worker delegated and/or performed by the contractors. It is important to check with the department of labor in the various states as well as the Office of Consumer Affairs in the local community to check if independent contractors are required to carry their own coverage and to what extent. If so, it may be important to list the landlord or building owner as an additional insured with respect to any liability claims. Contracts between the parties protecting the rights of each can also prevent confusion in the event of a claim. Language that addresses rights of subrogation, disclaimers of liabilities, hold harmless clauses, etc. often make up the language that can clearly identify which insurance responds in the event of a claim and how the process of a claim should take place. Hence, it is highly recommended that a competent attorney review and/or draft these contracts before executive by the parties.
Statutory Disability Insurance is only mandated in a handful of states. Often called DBL policies, coverage is afforded to those employees injured by sickness or illness that is not employment related. The remuneration is determined by the level of pay if the employee was actively at work. The duration of payment generally lasts no longer than six months and often has a deductible of one week for hospitalizations. Please check the policy for the terms and conditions and whether your state requires workers’ compensation and/or statutory liability. Read More>>
* The above article is intended as a tool to assist in the evaluation of coverage and offer a method to determine if certain exposures may have been overlooked and should be filled. If is not intended to offer advise which coverage to offer or suggest any levels of coverage. Please read the terms and conditions as well as the exclusions and the coverage forms before making you own determinations. It is recommended that an independent appraiser be hired to assess the value of the property, qualified legal council hired to review the contracts, work orders, and lease agreements, and that a competent agent or broker be used to sought our carriers that can package the necessary coverage at affordable prices while maintaining their financial stability.
By William F. Schaake, CIC, CRM © 2011-2012 All rights reserved
What is Workers’ Compensation?
Workers’ comp is a form of insurance that provides for the payment of medical care and/or to provide cash benefits to the injured employees because of work-related injuries or illnesses. The cost of the insurance is borne solely by the employers and most states require this form of compulsory coverage for organizations with employees. The tradeoff for providing this benefit to the workers is that the worker forfeits their right to claim against the employer–at least in theory.
Workers’ Compensation provides two parts; Part A provides the benefits to pay for the lost time and medical expenses related to the worker’s injuries or illnesses, and Part B which provides Employers Liability protecting the employer from third party claims due to their negligence and the breach of their duty to provide a safe working environment to the injured worker or the family members.
To enforce, govern, and regulate workers’ compensation, agencies are generally set up in each state, known as Workers’ Compensation Boards. These state entities can also be responsible for overseeing and ensuring the payment of claims to injured employees and sometimes to their family members that become ill from communicable diseases. Examples of the latter were spotlighted by the ongoing asbestos claims in the 1970’s.
The payment of benefits from workers’ compensation are no-fault and are generally not subject to other judicial or punitive awards that are common with civil and criminal cases. Benefits can be paid once it is assumed the injury or illness was work related. This usually follows a process of filing a claim form by the employer.
If the employer disputes the nature of the claim or if it was work related, a hearing may be requested to allow a worker’s compensation law judge to make the determination. During this process, the judge may review the documents and reports from the employer, testimonies from employees and others, evaluate evidence, and/or examine medical documents to determine the cause of injury. The injured worker can lose their rights for benefits if the injury is determined to be unrelated to work, or due to intoxication, acting in an illegal manner, or caused by their own intent.
Compensation benefits amounts or remuneration vary by state, but usually never exceed two thirds of the earned income lost because of the injury. In addition to capping the remuneration, most states limit the length of time compensation payments are made. Settlement amounts can be offered to quantify the loss, limit the exposure, and expedite the closure of the claim.
What Information is Needed for a Workers’ Compensation Audit
by William F Schaake, CIC, CRM, CLCS
Insurance carriers generally audit workers’ comp policies at the end of a policy term but reserve the right to audit at least every three years. Sometimes policies are audited many times per year. The employer may be required to provide payroll records, general ledgers, journals, canceled checks, and other financial information. In New York State, the penalty for not maintaining accurate and adequate records can be as high as $ 1,000 for every ten days of non-compliance.
Prior to the policy term, the employer will estimate the payroll for the upcoming year and a provisional premium is determined. The estimated payrolls are broken down by the classification of the employees’ duties and the rates are determined by multiplying the rate for the class code by the estimated payroll for that class. This number is aggregated for all the employees in that class and then added to all the other amounts for each class code to determine the estimated annual premium. The final number is then multiplied by a experience modification or merit factor which can either increase or decrease the adjusted premium. Discounts or assessments may then be applied as would any state or federal taxes and fees.
When the audit has been completed, the adjustments to the payroll figures can either increase or decrease based on the actual payroll. These changes can be subject to the economy, regulatory issues, the industry, but most likely the market changes affecting the organization such as greater or less than demand for its goods or services directly impacting its payroll. It is recommended that projections of payrolls prior to commencement of the policy year to be as accurate as possible to avoid large fluctuations in payroll and premium computations resulting in either audit premiums due or refunds for overpayments. In fact, if an employer intentionally understates payroll, it can be deemed as fraud subject to a class E felony, so it is in best interest that the payroll be estimated as close as possible.
Most states do not make any advance determinations regarding the status of an independent contractor until either an audit dispute or if a claim is filed.
Determining the Remunerations for Premium Computations:
Once the total payrolls are calculated and the subcontractor costs are identified, the premiums are determined by including the following remunerations which are either in the form of money or any substitutions for payment:
Remuneration for determining premiums includes for New York (Source: NYS Workers’ Comp Board**):
- 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.
- Payment for piecework, profit sharing or incentive plans.
- 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;
- Payment or allowance for hand tools or power tools used by hand provided by employees.
- The rental value of lodging, an apartment or a house provided for an employee based on comparable accommodations.
- 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.
- 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.
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:
- An automobile;
- An airplane flight;
- An incentive vacation (e.g., contest winner);
- A discount on property or services;
- Club memberships;
- 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.
*PRESENT LAW AND BACKGROUND RELATING TO WORKER CLASSIFICATION FOR FEDERAL TAX PURPOSES
Auditing of Payroll – Independent Contractors
(Source: NY Workers’ Compensation Board)
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.
Upon Audit, most insurance carriers will assess the exposures of the “subcontractors” on the job site for general contractors. Proof of insurance is usually requested showing coverage for the subcontractors and their employees on a certificate of insurance. This is generally used to offset the remuneration* of the subcontractors cost in the determination of the general contractors workers compensation premium calculations. Since the sole proprietors, partnerships, and many one or two person corporation can have the owners or officers excluded from coverage, it is recommended that the inclusion or exclusion of the executive officers be listed on the certificate of insurance. Many newer certificate forms show this as a Yes or No box.
Since an organization provides the benefit of workers’ compensation to its employees it may also require that its subcontractors do the same including covering its owners and/or executive officers. It is normally accepted that an independent contractor is a entity working on behalf of another that generally maintains its own identity, may provide insurance and benefits for it owners and employees, keeps separate books and records from the general contractor, and it deemed to be a separate establishment. The litmus test often used by most states for the purpose of workers’ comp audits and payroll determinations is the IRS 20 factor test.
Workers Compensation and Statutory Disability
Each state has its own requirements for workers’ compensation insurance and employer’s liability if employees are hired and under the control and direction of the landlord. This rule may even apply to independent contractors hired by the management of the building if it is determined there is vicarious liability due to the nature of worker delegated and/or performed by the contractors. It is important to check with the department of labor in the various states as well as the Office of Consumer Affairs in the local community to check if independent contractors are required to carry their own coverage and to what extent. If so, it may be important to list the landlord or building owner as an additional insured with respect to any liability claims. Contracts between the parties protecting the rights of each can also prevent confusion in the event of a claim. Language that addresses rights of subrogation, disclaimers of liabilities, hold harmless clauses, etc. often make up the language that can clearly identify which insurance responds in the event of a claim and how the process of a claim should take place. Hence, it is highly recommended that a competent attorney review and/or draft these contracts before executive by the parties.
Statutory Disability Insurance is only mandated in a handful of states. Often called DBL policies, coverage is afforded to those employees injured by sickness or illness that is not employment related. The remuneration is determined by the level of pay if the employee was actively at work. The duration of payment generally lasts no longer than six months and often has a deductible of one week for hospitalizations. Please check the policy for the terms and conditions and whether your state requires workers’ compensation and/or statutory liability. Read More>>
* The above article is intended as a tool to assist in the evaluation of coverage and offer a method to determine if certain exposures may have been overlooked and should be filled. If is not intended to offer advise which coverage to offer or suggest any levels of coverage. Please read the terms and conditions as well as the exclusions and the coverage forms before making you own determinations. It is recommended that an independent appraiser be hired to assess the value of the property, qualified legal council hired to review the contracts, work orders, and lease agreements, and that a competent agent or broker be used to sought our carriers that can package the necessary coverage at affordable prices while maintaining their financial stability.
By William F. Schaake, CIC, CRM © 2011-2012 All rights reserved