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.)


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.


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!


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.

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