Insurance & Employee Benefits
by William F Schaake, CIC, CRM, CLCS
Insurance carriers generally audit workers’ comp policies at the end of a policy term but reserve the right to audit at least every three years. Sometimes policies are audited many times per year. The employer may be required to provide payroll records, general ledgers, journals, canceled checks, and other financial information. In New York State, the penalty for not maintaining accurate and adequate records can be as high as $ 1,000 for each ten days on non-
Prior to the policy term, the employer will estimate the payroll for the upcoming year and a provisional premium is determined. The estimated payrolls are broken down by the classification of the employees’ duties and the rates are determined by multiplying the rate for the class code by the estimated payroll for that class. This number is aggregated for all the employees in that class and then added to all the other amounts for each class code to determine the estimated annual premium. The final number is then multiplied by a experience modification or merit factor which can either increase or decrease the adjusted premium. Discounts or assessments may then be applied as would any state or federal taxes and fees.
When the audit has been completed, the adjustments to the payroll figures can either increase or decrease based on the actual payrolls. These changes can be subject to the economy, regulatory issues, the industry, but most likely the market changes affecting the organization such as greater or less than demand for its goods or services directly impacting its payroll. It is recommended that projections of payrolls prior to commencement of the policy year to be as accurate as possible to avoid large fluctuations in payroll and premium computations resulting in either audit premiums due or refunds for overpayments. In fact, if an employer intentionally understates payroll, it can be deemed as fraud subject to a class E felony so it is in best interest that the payrolls be estimated as close as possible.
The New York State Workers' Compensation Law does not require sole proprietors, partners or officers of one or two-
Insurance carriers protect themselves against such claims by charging an additional premium for any policyholder that uses independent contractors.
Upon Audit, most insurance carriers will assess the exposures of the “subcontractors” on the job site for general contractors. Proof of insurance is usually requested showing coverage for the subcontractors and their employees on a certificate of insurance. This is generally used to offset the remuneration* of the subcontractors cost in the determination of the general contractors workers compensation premium calculations. Since the sole proprietors, partnerships, and many one or two person corporation can have the owners or officers excluded from coverage, it is recommended that the inclusion or exclusion of the executive officers be listed on the certificate of insurance. Many newer certificate forms show this as a Yes or No box.
Since an organization provides the benefit of workers’ compensation to its employees it may also require that its subcontractors do the same including covering its owners and/or executive officers. It is normally accepted that an independent contractor is a entity working on behalf of another that generally maintains its own identity, may provide insurance and benefits for it owners and employees, keeps separate books and records from the general contractor, and it deemed to be a separate establishment. The litmus test often used by most states for the purpose of workers’ comp audits and payroll determinations is the IRS 20 factor test.
If the person for whom the services are performed has the right to require compliance with instructions, this indicates employee status.
Worker training (e.g., by requiring attendance at training sessions) indicates that the person for whom services are performed wants the services performed in a particular manner (which indicates employee status).
Integration of the worker’s services into the business operations of the person for whom services are performed is an indication of employee status.
4. Services rendered personally:
If the services are required to be performed personally, this is an indication that the person for whom services are performed is interested in the methods used to accomplish the work (which indicates employee status).
5. Hiring, supervision, and paying assistants:
If the person for whom services are performed hires, supervises or pays assistants, this generally indicates employee status. However, if the worker hires and supervises others under a contract pursuant to which the worker agrees to provide material and labor and is only responsible for the result, this indicates independent contractor status.
6. Continuing relationship:
A continuing relationship between the worker and the person for whom the services are performed indicates employee status.
7. Set hours of work:
The establishment of set hours for the worker indicates employee status.
8. Full time required:
If the worker must devote substantially full time to the business of the person for whom services are performed, this indicates employee status. An independent contractor is free to work when and for whom he or she chooses.
9. Doing work on employer’s premises:
If the work is performed on the premises of the person for whom the services are performed, this indicates employee status, especially if the work could be done elsewhere.
10. Order or sequence test:
If a worker must perform services in the order or sequence set by the person for whom services are performed, that shows the worker is not free to follow his or her own pattern of work, and indicates employee status.
11. Oral or written reports:
A requirement that the worker submit regular reports indicates employee status.
12. Payment by the hour, week, or month:
Payment by the hour, week, or month generally points to employment status; payment by the job or a commission indicates independent contractor status.
13. Payment of business and/or traveling expenses.
If the person for whom the services are performed pays expenses, this indicates employee status. An employer, to control expenses, generally retains the right to direct the worker.
14. Furnishing tools and materials:
The provision of significant tools and materials to the worker indicates employee status.
15. Significant investment:
Investment in facilities used by the worker indicates independent contractor status.
16. Realization of profit or loss:
A worker who can realize a profit or suffer a loss as a result of the services (in addition to profit or loss ordinarily realized by employees) is generally an independent contractor.
17. Working for more than one firm at a time:
If a worker performs more than deminimis services for multiple firms at the same time, that generally indicates independent contractor status.
18. Making service available to the general public:
If a worker makes his or her services available to the public on a regular and consistent basis, that indicates independent contractor status.
19. Right to discharge:
The right to discharge a worker is a factor indicating that the worker is an employee.
20. Right to terminate:
If a worker has the right to terminate the relationship with the person for whom services are performed at any time he or she wishes without incurring liability, that indicates employee status.
Most states do not make any advance determinations regarding the status of an independent contractor until either an audit dispute or if a claim is filed.
Once the total payrolls are calculated and the subcontractor costs are identified, the premiums are determined by including the following remunerations which are either in the form of money or any substitutions for payment:
Remuneration for determining premiums includes for New York (Source: NYS Workers’ Comp Board**):
Note: When it can be verified that the employee was away from home on the business of the employer, but the employer did not maintain verifiable receipts for incurred expenses, a reasonable expense allowance within prescribed limits will be permitted.
Payment for filming of commercials excluding subsequent residuals which are earned by the commercial's participant(s) each time the commercial appears in print or is broadcast.
Remuneration for determining premiums excludes:
Wages Paid for Time Not Worked
Some employers pay employees for time not worked. The entire amount of wages paid for idle time is to be included as payroll.
*PRESENT LAW AND BACKGROUND RELATING TO WORKER CLASSIFICATION FOR FEDERAL TAX PURPOSES https://www.irs.gov/pub/irs-