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Workers’ Compensation Laws Require Employers to Provide Insurance

The National Council on Compensation Insurance, known as NCCI, developed the Employers’ Liability Insurance Policy and The Workers’ Compensation Policy. These two programs cover the statutory liability required of employers on behalf of their employees, under the different state laws governing compensation, required to be paid to employees harmed on the job.

All states have laws requiring an employer to pay for injuries sustained on the job. This is provided by insurance purchased for their workers to compensate for any injury sustained on the job, pursuant to their actual employment. Premiums must be paid for by the employer, not the employee. Companies’ premium rates are determined by the use each employer makes of the policy they have in force. Rates are company specific, not just calculated by the industry involved. Companies find this use can be influenced through proper prevention and training for employees on the part of employers.

The shortened name for this statutory insurance coverage is Workman’s Comp, or Workers’ Compensation. Workers’ Compensation can be paid out to the employee or the employee’s family. It can be for an injury (major or minor), an occupational disease or even for death on the job. Workers’ Comp is a benefit ALL employers are required to provide. It is a no-fault policy, which means the person applying to receive benefits does not have to prove the employer at fault.

Maintaining workman’s compensation as required by law provides a great side benefit to the employer, too. In addition to covering employees in the event of any job-related injuries or health problem, workman’s comp coverage makes it against the law for an employee to sue their employer when a policy is in force at the time of the loss or injury. When an employer has the required policy in force, they can have peace of mind as they are protected, by statute, from frivolous lawsuits resulting from disgruntled or injured employees.

Plans vary from state-to-state, but most plans cover the following:

  • Medical treatment for the injured employee
  • Payment for temporary disability (usually 2/3 of the average weekly wage or salary)
  • Payment for permanent disability (loss of a limb, eyesight, etc.)
  • Total disability (generally paid as a lump sum)
  • Occupational hazards (such as a disease from exposure to chemicals)
  • Employer’s liability* (payment to a third party where an employer is liable as a result of an injury)
  • Death benefits to survivor’s dependents (to replace income, etc.)

Employer’s Liability Insurance

Employer’s Liability insurance is in addition to Workman’s Comp. It further protects an employer by shielding employers from lawsuits resulting from negligence. Although workman’s compensation pays the employee (on behalf of the employer) all monies legally obligated to be paid (as a result of bodily harm by accident, or disease, sustained during and in the course of employment), there are times that an employer might be liable as a result of negligence. Employer’s Liability covers employers against paying out for financial claims due to negligence, when found legally liable in a court of law.

The protection provided against frivolous or anger-inspired lawsuits from employees can help protect a company’s assets. This coverage is part of a well-planned-out basic workers’ compensation package. CA-WorkersCompensation can help you determine the amount of coverage desirable for your business. Protect your assets. Be sure and call for a no-obligation quote. We will help you compare policies and their benefits.

Workers’ Compensation Insurance Laws and Guidelines

Workers’ compensation laws were enacted to limit the need for employees to sue their employers for health care or loss of income when an injury was sustained on the job. It is not necessary for an employee to prove their employer was at fault to garner benefits from this insurance. Workers’ Comp is designed to make it easier for an employee to get medical or financial help when they have been injured either on the job or as a result of job conditions, including such categories as occupational disease.

Because this insurance is so critical to protect employees, the government has set out specific requirements and monitors this unique form of insurance very closely. All 50 states, the District of Columbia, and U.S. territories, have passed laws requiring employers to obtain this insurance on behalf of their employees. In addition to state statutes, there are federal laws for specific types of employment categories as well.

U. S. law gives employees a right to have medical care for any injury (large or small) sustained on the job. These can be injuries that result in temporary or permanent disability, or even death. An employee does not need to have or participate in a health-care type of insurance plan to be covered by Workman’s Comp. Individuals are covered because they are an employee, through the employer’s policy. All employees are covered, regardless of their salary or position.

For employees facing excessive risk due to the nature of the business where they are employed (if a regular insurance company is not willing to cover their employer’s workman’s comp needs with a policy), a state-regulated fund can be purchased. This policy is called the State Compensation Insurance Fund. All states have one. Statutory regulations accept no excuse to omit this insurance. It can’t be stressed enough: All employees are must be covered.

When employers do not comply, they face severe financial penalties to encourage the employer to provide the mandated insurance in the future. Funds to protect workers are generated in other ways, such as in the form of monetary penalties, if employers do not maintain a policy for workman’s comp for their employees. The legislature has said all employees working for companies without the proper insurance in force must still be insured, so the states have gotten involved, requiring there be a general fund to pay benefits. Even companies with minimal risk pay into the state worker’s compensation funds to protect their employees with this valuable insurance, unless they meet their obligation by purchasing their own policy elsewhere.

It is illegal in most states for an employer to discriminate against an employee who has used workers’ compensation insurance. To prevent this type of discrimination, an addition fund has been created. This fund will reimburse insurers for benefits paid to workers as the result of repeat injuries.

There are many states working to make the inclusion of any workers’ compensation claims in their databases anonymous. A worker cannot be singled out because they have filed a workman’s comp claim.

Workers’ compensation policies also protect the employers. Employees may not claim benefits to which they are not entitled. Private investigators have documented employees who claimed benefits as they participate in activities inconsistent with their claimed disability. Although this evidence is not always allowed in court, an employer has a legitimate right to question, or contest, any case or claim filed against their insurance policy.

Lawyers should be consulted in contested cases. In fact, any case involving serious injury or disability should be reviewed by a lawyer. Specific experience in the precise area of law is advisable. Many states limit the claimant’s legal expenses to a percentage, or fraction, of the amount awarded. In some states this is as high as 40 percent but in others it is as low as 11 percent. Again, it is advisable to contact legal counsel to determine what can be done to help both parties. Because laws vary from state to state, it is important to have up-to-date information from a professional in the field.

Mandatory Auditing of Your Workers’ Compensation Policy

Policy premiums are based on projected payroll, combined with the type of business (class code) and the number of claims against the employer in the previous three years. These factors make it critical to use accurate figures in determining the premium amount. All policies are audited.

These audits are conducted at the end of the policy period. During the audit, records are examined to determine if the estimate used to determine the original premiums was accurate. The final audit determines whether the premium was charged accurately, since the original quote was based on the projected payroll, not on what was actually paid out to employees.

These audits adjust the premium up or down, based upon the amount verified to have been paid out in payroll. The final premium is the amount the policy will actually have cost to provide the level of coverage required, and must be paid. Because the premium must be adjusted in retrospect to be accurate, companies should expect the premium to fluctuate. It can go up or down, or even remain the same. If it goes up as a result of higher payroll expenses, the policy is adjusted and the employer will need to pay the additional premium now due. If it has gone down, the policy will be adjusted, and the company will be entitled to a refund.

The information provided to the insurance company during the audit will change the outcome of your audit. Record keeping is vital. Because your original premium was based on a projected payroll, it is rare for it to have been projected exactly right. Expect your premium to be adjusted for accuracy. In spite of knowing the projections will probably be off, using the best projected figures available will help you avoid large over or under-payments.

Conducting an Audit for Workman’s Comp

There are two basic types of audits used in Workers’ Compensation policies. They are the Physical Workers’ Compensation Audit and the Voluntary Workers’ Compensation Audit. These audits, although designed to give the same basic information, vary greatly in several very specific details.

The Physical Workers’ Compensation Audit

The name of this audit refers to the presence of the auditor at your place of business. It does not refer to the business location where workers expend physical energy to get the job done, but rather the physical presence of an auditor as they conduct the audit at your place of business or in your office. Simply stated, when the auditor comes to you instead of just mailing a form for you to complete, you are undergoing a Physical Workers’ Compensation Audit.

A Physical Workers’ Compensation Audit is scheduled through the mail. You will receive information from the auditor setting an appointment for the auditor to visit your business. This audit will be performed while the auditor is at your place of business, and must be done within 60 days of the expiration date of your policy. It is important to understand this timing. If the audit is not completed in that time frame, the auditor must return it to the insurance company within 30 days.

If an audit is not completed during the specified time period, the insurance carrier may issue a larger bill. The insured must cover this bill. It is not a matter of choice. Since employers don’t want to pay more than truly required, it is important to make sure the auditor is able to perform the audit well. This will help ensure accurate figures for premiums plus adequate coverage for your type of business.

Remember, the auditor is on a time schedule and needs your help to get the job done quickly. Be helpful and be accurate. Accuracy will help your premium truly reflect the coverage needed for your business. Cooperate with the auditor sent to your business.

The Voluntary Workers’ Compensation Audit

The two types of audits are just names for two different ways to obtain the same basic information. The term “voluntary” does not mean you have a choice of whether or not to return the form. It means you “volunteer” the information necessary to fill out the form, rather than having an auditor come to your place of business to fill out the form for you. You are required to provide the information to the insurance carrier. They will tell you precisely what information they want. If you have any questions you need to ask your insurance company what is needed to make sure you fill out the forms correctly.

Forms will be sent to your company for a voluntary audit. This audit must be completed more quickly than the Physical Audit. Voluntary audit forms must be completed and returned within 30 days of the end of your policy. The form can be confusing to someone unfamiliar with the audit form, but your insurance company or auditor will be happy to answer questions to help you fill out the form. The voluntary audit usually shows the classifications (class codes) and insurance rates as shown on your policy. You fill in the actual expenses your company has incurred for payroll. Be sure and ask for clarification if you have questions, because, remember, your next policy premium will be calculated based on the information you provide during this audit.

Either audit must be handled in an expeditious manner. To make it go smoothly, be sure to comply with requests from the auditor and ask questions when you are in doubt.

Preparing for your Audit

Give the auditor records as they ask for them. You are not required to open up your books to auditors without reason. They know what they need to complete the audit, and want to get in and out quickly, too. No auditor wants to wade through boxes of receipts and unorganized pay stubs. Remember, you and the auditor want a smooth audit to determine the right premium for your company. They don’t want to have to hunt for information and you don’t want them to be at your place of business asking questions or poking through your information any longer than is necessary. Make sure you are ready for the audit and it will go much more smoothly. They are only auditing information relative to workers’ compensation, not your entire company!

Here is a list of records typically asked for by auditors:

An accurate and detailed description of your business operations

Payroll Records

These records are as individual as your company. Some of the more common ways to document your payroll are:

  • Payroll journals and summaries
  • Federal tax reports (especially 941’s from the time period under audit)
  • State unemployment reports and individual earnings records
  • All overtime payments (broken out when possible)
  • Your company check book (if this is how you keep records)
Employee records

Up-to-date and complete employee records. Pertinent information to have available:

  • Time worked for the company. Hours, days and years!
  • A detailed job description for each category of employee
Cash disbursements and/or payments

Consider expenses for your business. What expenses are normal for your business other than payroll?

  • Material expenses
  • Casual labor costs
  • Payments made to subcontractors (they should have their own policies) and independent workers
Copies of Certificates of Insurance

Remember, these workers are supposed to carry their own insurance. You shouldn’t have to be paying their premiums. Document that they are insured. Make copies of their documents for your files.

  • Subcontractor policies
  • Independent worker policies
NCII Modification Worksheet

When you are being audited, this worksheet has been already sent to you. It has details about claims against your policy for the previous three years. There will be in information from this year, but the information here is used to track your use of the policy during the last three years. It shows each use individually and is used to predict how frequently your employees will use a future policy. This form can greatly impact your rates. As you carefully manage your risk, you will see lower premiums.

As you look at this Modification Sheet (commonly called a Mod Sheet), you will see each claim listed individually. The number of claims impacts your premium prediction more heavily than the severity of the claims, so you will want to make sure the information is accurate. Because the Mod Sheet covers a three-year time period, you are prevented from excessively high premiums after a single bad year.

Tips for a Smooth Audit

Make sure overtime is documented. Premiums paid on overtime pay are less than the rates on regular payroll. Separate these wages out, and have them detailed by job classification or class code for the auditor.

Update any certificates of insurance from subcontractors used during the policy period. Check the certificates to make sure the contractors had workman’s comp when you used them. If you can’t prove there was insurance, you will be required to pay for it. Make sure your records are up-to-date and accurate.

If any employee performs more than one type of duty, each of them can potentially fall under a different workers’ compensation code. You will want your records to show (in dollar amounts) the work performed in each code category. If you don’t have the records to show where payments should be allotted, you will be charged at the highest rate applicable to that employee.

Remember, your job is to make the auditor’s job easy. Be prepared with accurate records on hand for the auditor to look at. Don’t volunteer extra information. The auditor will ask for what is needed. Give clear, straight-forward answers to questions. Make sure someone who knows the answers is there for the auditor to question for any details needed. It is a good idea to have an owner or management personnel available to meet with the auditor.

Review any worksheets the auditor prepares and ask for copies. Make sure any forms you sign are complete before you sign them, and retain copies for your own records. Don’t be intimidated: Ask questions if you don’t understand something! Auditors expect questions, because they do a very specific task that few people really understand.

Because it is easy for human error to creep in, go over the forms yourself. After the auditors are gone check them again to make sure you think they are accurate. Remember, if auditors make mistakes, it is probably in favor of the insurance carrier. Keep on top of any information you need to assure your premiums are balanced with your true needs and your industry.

Remember, allowing an audit is a contractual obligation with a workers’ compensation policy. It does not mean you have problems! The audit is done to make sure the premiums paid reflect your payroll. It is a common practice to tack on 25% if a business fails to comply during the audit. Make sure you have the documentation you need to prevent this from happening to you!

Frequently asked questions about audits

What records must I have for an audit?

Payroll and disbursement journals, ledgers, checkbooks, cash receipt journals, etc. You want to show how your workers were paid, and the amounts they received. It should be broken down into categories to obtain the lowest premium possible for your company’s policy.

What about vacations, holidays and sick days? Do I have to include wages for days when the employee did not actually work but received pay?

Yes, these wages are included in the formula to calculate your premium. You must include them in your figures.

What do I do with amounts paid as a housing allowance?

These are also included in the calculation.

Is overtime handled the same way?

Most states will allow overtime wages to be reported separately rather than at the regular wages, if they can be documented as separate expenses. Not all states allow this treatment of overtime pay. We can help you understand the laws in your state. Overtime is usually charged a lower premium rate than regular wages or salary, so you will want to separate overtime out when possible.

Some employees “wear several hats” at our company. How do we handle their wages when giving the auditors information?

Although some categories may not be split for the purpose of calculating premiums, most categories can be allocated their proper dollar-value weight for each employee. This means an employee’s pay will be recorded proportionate to where they spend their time. Classification codes are used to specify the task being performed, and when an employee works in more than one area, their classification can be listed under more than one code.

Record keeping is vital. When you have shown a payroll breakdown to reflect the various duties, and assigned pay from different departments or classification, you can split wages into multiple categories. Each class code will only show the actual wages earned performing a specific type of task.

If you have not kept records showing the department to be charged for payroll, you must assign a classification that best describes that employee’s job description. It is important to be accurate because the estimated premiums vary depending on the category each worker merits based on their job description. These figures may not be estimates! Actual figures must be used, showing how the employee was paid based on different duties. For example, an aide at a school might be paid as a playground supervisor and a classroom assistant. Because schools require detailed time sheets showing where aides are working, they would be allowed to break the payroll into various categories.

There are a few categories where you may not break the employee’s hours (and wages) down into more than one category: clerical, sales or messenger and auto sales person. These must be allocated into only one category.

Do we have to provide coverage for corporate officers?

Some states permit corporate officers to sign an exclusion form. They might not be considered an employee. To qualify for an exclusion, this form must be signed and given to the carrier before the policy goes into force. This exclusion may be available in your state. Ask the experts for the laws in your state.

Does a change in ownership or legal status matter during the policy term?

Contact your insurance agent or the insurance carrier immediately. This could change your policy, and there are legal limits to the time allowed to make changes.

Must I pay premiums for work done by independent contractors (also called subcontractors?

You will be responsible for Workers’ Compensation insurance unless you have a valid certificate showing the subcontractor or independent contractor carries workman’s comp. It is critical to ask for their certificate proving coverage prior to allowing them to begin the job. If you do not have proof, you will provide coverage through your own policy. It is a matter of statutory law, and the only way to not pay premiums for a worker is to have proof they are covered under another policy at the time they are performing a service for you.

What types of businesses or suppliers qualify as independent contractors?

Subject to precise conditions, a company or individual providing a service to multiple customers can possibly be considered an independent contractor. Some of these conditions governing the status of subcontractors or independent contractors are: Services are performed for multiple outside companies or groups, at a set rate, under the terms of the company or individual providing the service; Independent contractors are separate from your business operation; Subcontractors are not controlled by the company utilizing their services.

Keep contracts and invoices received from independent contractors, as well as certificates or business cards. These help to document the independent status of these suppliers.

What evidence is accepted to show an independent contractor has valid insurance of their own?

An independent contractor will have an insurance certificate. This certificate will list the contractor as the “insured,” and the time period for the policy will be clearly visible. It will also show your company as the Certificate Holder. Keep the certificate in your files, don’t just look at it and give it back. This certificate helps establish proof that the subcontractor is considered as a separate entity.

Definitions of commonly used terms for Workers’ Compensation:

Payroll Auditing

The insurer’s representative examines the payroll records to determine premiums, when payroll is the basis for the policy. This is typically how policies are verified and corrected to compensate for a company’s growth or decline in volume. A regular audit is a standard operating procedure.


Term used for money paid to employees in exchange for work rendered. The payroll amounts are considered the gauge to determine an employee’s exposure to hazards in many industries. Each type of worker has a specific workman’s compensation classification code. Premiums are determined based on the type of work done and the payroll generated for that specific job description.

Premium Discounts

This term refers to a discount, given in percentages and based upon the size of projected premiums. Larger premiums earn larger discounts. Discounts are designed to protect larger companies from carrying more than their fair share of the insurance burden resulting from workers’ compensation claims. Premium discounts were created to make sure all companies are paying their fair share for workers’ benefits.