As year-end approaches, many businesses turn their attention to tax planning with the goal of minimizing federal and state taxes. Few invest a similar amount of time in reviewing their Workers’ Compensation, even though significant dollars are at risk. When a Workers’ Compensation policy is set up, premiums are based on an estimated risk. After the expiration of the policy period, a premium audit determines the actual exposure and premiums are adjusted accordingly.
While preparing for a premium audit and conducting a premium review always has value for employers, it takes on increased importance this year, as many employers have witnessed changes in job responsibilities and payrolls. Furthermore, many employers will be getting money back this year and may be complacent about Workers’ Compensation, leaving costly overcharges undetected.
Here are seven ways to plot year-end savings in Workers’ Comp:
1. Strengthen payroll records with job titles
Job classifications are a central factor in Workers’ Comp premiums. With the exception of construction and agriculture, the overall business operation, not individual duties, is assigned a governing classification that best identifies the type of work being performed. In most cases, this is the classification that contains the most payroll and the first critical step is to be sure that it’s accurate. Since some workplace functions are common to all businesses, there are standard exclusions for clerical, sales and driver classifications. Commonly, errors are found in the clerical classification 8810 Administrative/Clerical, often the largest classification outside of the governing class.
Employers that take the time to place classifications into the payroll records provide helpful information for the auditor; however, many auditors will probe a clerical classification because it is usually the least expensive, reflecting minimal risk. “What do they do? Where do they do it? Do they do it full-time?” are common questions. Key determinants of a clerical classification are physical separation from the plant and exclusive performance of office work.
While a company representative familiar with the financial records and the operations of the company should be present at every audit, it’s not unusual for the person to be unfamiliar with an employee’s specific duties and as a result clerical employees may be erroneously assigned to the governing classification.
A simple solution that reduces the possibility of error is to add job titles for each employee that provide a common sense description of what people do, such as payroll clerk, data entry clerk, receptionist.
2. Separate severance pay
While payroll is often referred to as the basis for premium, in most states it is actually remuneration and there are a number of exclusions from what is counted as remuneration. During a year fraught with downsizing and layoffs, a particularly important one to recognize is severance pay. Dismissal or severance pay, except for time worked or accrued vacation, is excluded from remuneration. Employers need to show the auditor exactly what was paid in severance pay.
3. Document overtime
In most states, overtime pay can be reduced to straight time when determining the Workers’ Comp premium. Records should document how much pay was overtime for the year. If the rate of overtime varies, for example, time-and-a-half and double time, be sure the records are distinct, as the adjustment will differ. This information should be in a form that is easily determined by the auditor, summarized by classification on an annual basis.
4. Understand how employer perks are treated
Year-end often means bonuses or gifts to employees. Cash or cash equivalents, such as gift cards are included in remuneration, but employer-provided tickets to entertainment events, an airline flight, employer-provided automobiles, and club memberships are excluded.
5. Special consideration for contractors