When and How Audits Occur

The audit may be performed with a CPA or at a CPA’s office. You (the insured) should be aware of the time and date of the audit so you can be available to the CPA if the auditor has questions that the CPA cannot answer or if the auditor needs documents the CPA does not keep at their site.

Payroll or remuneration is usually given in the form of a check but may be paid in cash. LWCC does not encourage the use of cash for payroll or remuneration purposes. If you (the insured) pay your workers in cash, strict record-keeping requirements must be met.

The National Council on Compensation Insurance defines payroll as money or substitutes for money. Payroll may sometimes be referred to as “remuneration.”

To dispute an audit, you should submit an audit dispute form through your agent to the LWCC Audit Department via e-mail to audits@lwcc.com or via fax to 225-231-6542. In the form, you should include the exact reason for the dispute including codes, payrolls or individual workers whose code or payroll with which you do not agree. Attached to the form should be copies of payroll journals, invoices, etc. that support the position taken.

If records are not available at the time of the audit, the auditor will request that you provide the necessary records in a reasonable period of time. If those records are not provided, and depending upon the relative importance of the records, the auditor may return the audit marked as unproductive, or the premium audit reviewer or underwriter at LWCC may decide to classify the audit as unproductive after review. The information concerning the audit’s unproductive status will be communicated to you by the auditor. If you do not provide the information after being informed that the audit was unproductive, a notice of cancellation may be sent. The types of missing information that could cause an audit to be unproductive include, but are not limited to, the following:

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• Missing verification documents. For example, 941 Federal Quarterly Reports; 1096/1099 forms for contract or subcontract labor; tax returns
• Missing information about entities, officers, locations, or operations
• Missing payroll or wage source information
• Missing information for cash labor

Yes, overtime is included in the gross payroll calculation at audit. A credit of the “premium portion” of the overtime is made by the auditor if you have maintained records in a manner that allows the auditor to easily identify overtime and make the proper deduction.

The premium portion of overtime is the amount of overtime paid that is in excess of the worker’s hourly rate of pay. The premium portion of overtime is broken out as a percentage of the amount paid for overtime depending on whether or not the overtime is paid at a rate of time-and-a-half per hour or double-time per hour.

For example: Joe is paid $10 per hour for a 40-hour week. This week Joe works 42 hours. Joe is paid overtime at time-and-a-half for the two additional hours. To determine how much of Joe’s payroll this week is included as gross payroll, multiply $10 by 40 hours to equal $400. Half of Joe's hourly pay rate is $5. For the two additional hours Joe worked, he would be paid two hours times $15 plus $400 to equal $430. At audit, the auditor will determine Joe’s gross pay for the week to be $430. However, the auditor will calculate Joe’s auditable payroll to be $420. The $30 overtime pay is divided by 3 to determine the premium portion of the overtime, and a deduction is made in the audit for $10.

The audit is based on gross payroll. Gross payroll is the entire payroll of the worker before taxes or other deductions are made. Net payroll is the amount of payroll that remains after taxes and deductions such as medical insurance, life insurance, any Cafeteria 125 plan deductions, and 401K or qualified retirement plan deductions.

The documents needed for an audit can be verified when you (the insured) or the auditor call to confirm the audit appointment. You should ask specifically what documents are needed and discuss which documents you will have available at the appointment with the auditor. The records required for the audit will depend on the type of business being audited. 

For example: The documents needed to audit a doctor’s office that utilizes only W-2 payroll will be different from the documents needed to audit a construction general contractor who utilizes W-2 employees, contract labor, and subcontractor labor.

For the doctor’s office, the documents required at a minimum are: a payroll journal, Federal Quarterly Reports (941s), State Unemployment Reports (SUTAs), a general ledger or bank statements and cancelled checks, and the most recent tax return filed for the business.

For the construction contractor, the documents required at a minimum are: a payroll journal, Federal Quarterly Reports, SUTAs, a general ledger or bank statements and cancelled checks, cash disbursements journal, Form 1096 with 1099s, certificates of workers’ compensation insurance for the subcontractors, and the most recent tax return filed for the business.

A certificate of insurance (COI) is a document that shows that a business has workers’ compensation coverage. The COI will show the name of the business, the coverage dates, the policy number, the carrier providing workers’ compensation coverage, the insurance agent for the business, and the name of the business receiving the certificate. COIs are commonly used for businesses that are subcontracting their services to another business.

For more information on certificates of insurance, please click here.

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An executive supervisor is a supervisory person in the construction industry. The class code 5606 is used to classify project managers, construction managers, or construction superintendents on construction sites. There are specific requirements that must be met to use this code:

• Used for construction or erection risks only
• The executive supervisor must exercise control through superintendents or foremen of the employer and cannot have direct control over the workers at the construction or erection site

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Tips or gratuities, severance pay, payments for active military duty, work uniform allowances, employer contributions to retirement plans, or Cafeteria 125 plans are not included in gross payroll.

Payroll includes bonuses, holiday, vacation and sick pay, meals and lodging if those items are provided to the worker as part of his or her wages.

The insured should receive a letter or phone call from the auditor assigned to perform the audit. The letter will include a list of documents needed for the audit. If the auditor makes contact by phone, the auditor should inform the insured of the documents needed and answer any questions the insured may have about the upcoming audit.

LWCC prefers that the audit be performed with an owner or officer of the company. If an owner/officer is not available, then the audit should be conducted with an individual who is knowledgeable about the company’s operations, the employees and their job duties, whether the insured uses contract or subcontract labor, and the accounting system that is used to record payroll or non-employee exposure.

The person to contact is the agent who wrote the policy. The agent will know whom to contact at LWCC for the answers to your questions.

The general rule is payroll cannot be split. The exception is if you have workers who have an interchange of labor during a workday or work week, the payroll may be split between different codes, especially if you are a construction contractor. In order for the split to be given at audit, you must keep separate records of the activities of the workers. The separation of payroll should show the date, the hours worked in that activity, and the amount paid to the worker for the different types of work performed.

Caution: Payroll cannot be split if one of the codes for work done is a standard exception code. Standard exception codes include Clerical Work (8810); Sales (8742); Clerical Telecommuting (8871); Automobile Sales (8748); and Drivers, Chauffeurs & Helpers (7380). In some situations, Drivers (7380) can be split with another code if proper records are kept.