Author, Rory Anderson, Account Executive, Tree Care Group, Rancho Mesa Insurance Services, Inc.
The premium for your workers’ compensation policy is based on the type of work you do, and the amount of payroll incurred. By maintaining proper payroll records, segregating the wages earned by your employees, you may reduce the cost of your workers’ compensation insurance. The final audit is the process that calculates the last premium due. It compares the estimated payrolls to actual wages paid during the policy year. The audit may result in a refund or additional premium due. Workers’ compensation audits also determine if the classification codes quoted at inception accurately reflect the scope of work performed during the policy period. Insurance carriers charge more premium for higher risk operations, like tree trimming.
In my last article, we looked at how it may be possible for a tree care company to use the 0042 landscape classification code at specific times, if they are trimming hedges or trees from the ground. We noted, however, that when any of the tree care company’s operations are off the ground, at any elevation, that payroll would be classified in 0106 tree trimming. Also, any type of work that is associated with the tree trimming (e.g., clean-up, chipping, stump grinding, etc.) would also be included as 0106.
The basis of premium is the payroll earned during the policy period. Payroll includes regular wages, salaries, overtime, bonuses, vacation pay, sick pay, commissions, cash payments, and other substitutes for money. Summarizing and segregating wages allows for the possible reduction of exposures and lower premium charges. Consider the following for potential adjustments at final audit:
If employees are engaged in both landscape construction/maintenance work, and tree trimming, you can segregate wages between operations and utilize both classifications. Earnings can be split by classification if time cards are maintained showing hours worked by activity, and payroll reports summarize hours and wages earned for each class. Segregation is based on records of actual hours worked; you cannot split earnings by percentages or projected bid calculations.
The wages for miscellaneous employees can be split by class if timecards segregate earnings by type of work performed. If no segregation is maintained, payroll will be assigned to the highest rated class.
Premium overtime is excludable if records document the hours and remuneration earned for regular hours and overtime hours. This includes earnings paid over and above the straight time earnings. If overtime is paid at one and one-half times the regular rate of pay, 1/3 of the total overtime pay can be excluded. If double time is paid, ½ of the overtime pay is excludable.
California allows the exclusion of deductions which are part of a Section 125 Cafeteria Plan. This might include medical, dental, and vision premiums. If these deductions are summarized by employee and by classification, they can be excluded from the workers comp wages.
Severance pay and tips are excludable. Maintain severance agreement letters documenting final payment agreements.
Depending on the type of entity insured, the earnings of sole proprietors, partners, and corporate officers may be excludable. Talk with your agent regarding qualifications and endorsements which can be issued as adjustments to your policy.
Workers’ compensation exposures may include costs for additional earnings paid outside of payroll. This could include bonuses, flat auto allowances, cash payments, casual labor, and subcontractors who could be considered employees. If subcontractors are hired, be sure to use licensed contractors who operate their own business. Always obtain and keep copies of the certificates of insurance from subcontractors to confirm independent coverage.
To prepare for final audit, maintain proper payroll records segregating and summarizing wages earned by your employees. The Auditor will:
Advise you on which reports to prepare for final audit. This typically includes payroll records and summaries, quarterly payroll tax reports, general ledger, cash disbursements, and/or 1099 reports.
Assist you in identifying cost saving measures. They will help to recognize and explain how to take advantage of all potential credits, such as premium overtime, severance, Cafeteria 125 plan deductions, etc.
Ask for a description of the business, and the job duties of employees to verify classification assignments.
Review all findings and suggestions, and address any additional questions you may have.
For questions about your annual audit, contact me at (619) 486-6437 or randerson@ranchomesa.com