How to Survive a Workers' Compensation Audit for Contractors

The majority of business owners in the construction field have a workers' compensation policy in place. Eventually, depending on your size and complexity of operations, you will have a physical audit with the carrier’s designated audit person. A workers’ compensation policy is an auditable policy.

The premium reflected on your policy is based on estimated payroll amounts. Since it is difficult to guess how much payroll a business will have in twelve months, the payroll given is usually an estimated amount. The carrier will audit this policy at the end of the policy term to document payroll. It is imperative that you provide the following information to the auditor for a prompt and correct audit to be performed:

1. Make sure you can provide the following information to the auditor.

• Federal 941 and UCT-6 quarterly reports for the policy period
• Gross monthly payroll figures by month from the inception date of your policy to the expiration date of the policy
• Complete employee listing showing job duties and gross payroll during the policy period
• Payments to all sub-contractors listed by name and copies of current workers' compensation certificates or exemptions (with notarized declaration that he is an independent contractor)
• Federal Identification Number
• Listing of corporate officers

2. Become familiar with the classifications that workers' compensation uses for your type of work. Here are a few classifications that a residential general contractor might be classified under:

• Class Code 5606 – Project Manager, Construction Executive, Construction Manager or Construction Superintendent*
• Class Code 5645 – Carpentry, Carpentry – Detached one or two-family dwellings**
• Class 8810 – Clerical
• Class 8742 – Sales
• Class 5437 – Interior Carpentry

*Class Code 5606 Contractor – Project Manager, Construction Executive, Construction Manager or Construction Superintendent

Note that this classification is available only to project managers, construction executives, construction managers or construction superintendents having administrative or managerial responsibilities for construction or erection projects. These positions are defined as those persons exercising operation control indirectly through full-time job supervisors or foremen of the employer. When determining eligibility, it is the job duties, not the job title, that are considered.

When exercising control through a subcontractor, each subcontractor must have a job supervisor or foreman at the specific job site to permit the assignment of this classification. If any of the subcontractors do not have a foreman at any job site visited by the construction executive, all the payroll of the construction executive for that policy year is assigned to the highest rated construction class code applicable. As sole proprietor or owner/operator with no employees, working as a subcontractor for the insured would prevent the assignment of this classification to a construction executive because the subcontractor does not have the required job supervisor or foreman.

**Class Code 5645 Carpentry – When all of the carpentry work in connection with the construction of a private residence is performed by employees of the same contractor, the work is assigned to Code 5645.

This includes the construction and erection of the sill, rough framework, rough flood, studs, joists, rafters, roof deck, all types of roofing materials, sidewall sheathing, siding, doors, wallboard installation, lathing, windows, stairs, finished flooring, cabinet installation, fencing, decking and all interior wood trim. Carpentry repair or remodeling of private residences is also assigned to code 5645. To qualify for Code 5645, carpentry repair or remodeling operations of an interior or exterior nature must take place along with some framing or structural carpentry renovation of the premises that would ordinarily be assigned to Code 5645. Merely performing singular operations such as repairing or replacing cabinets or installing wallboard does not constitute work to be classified to Code 5645. These singular repair operations are assigned to the appropriate classifications representing their specific trades.

We've been helping contractors learn how to properly audit for over 20 years. Feel free to contact us today to learn more about the workers' compensation auditing process.