Let’s dispense with the niceties and all attempts to eloquently ease into a discussion of the troubles surrounding workers’ compensation audits and let us rather jump right into the problem – assignment of “employee” status to non-employees. This is not the only problem, but this is where additional premium headaches seem to originate.
Statutes in most jurisdictions are rather clear regarding who is and is not an employee, but auditors in my state and I’m sure in others have taken it upon themselves, on many occasions, to assign an individual “employee” status in direct contradiction to statutory language; particularly in regards to sole proprietors, partners, corporate officers, properly insured subcontractors and true independent contractors. Worse yet, different carrier’s audit departments treat the same exposure in different ways – leaving agents to guess on the outcome. Guessing usually ends with the client being stuck with an additional premium bill.
I am aware of one agent who was sued by his insured to recover the amount of the additional premium audit (in the neighborhood of $75,000 to $80,000) resulting from workers being assigned “employee” status. The insured claimed the agent never advised him which workers might and might not be considered an employee and thus the agent erred in his professional responsibility and duty to the insured. Could this happen to you if an audit results in a huge additional premium? It could, but even if no lawsuit results, the client will likely move his coverage, even if the audit is right.
Challenging an auditors ruling seems to be a no-win proposition akin to tilting at windmills. Some underwriters have related that they cannot overrule the auditor; and even the state seems to be or chooses to be impotent in a classification dispute. What has your experience been with contested audits? Be as specific as possible (protect the innocent and even the guilty, though). If you won, how; if you lost, why. The agent community needs to be able to do what is best for our clients; shared experience and the power of your voice is required to reiterate that agents and auditors are, or at least should be, on the same team.
Before completely ripping auditors apart, good ones can be a valuable resource when working on a difficult account. Some company auditors will even take the time to help you classify the account (which could possibly help win an account). I have had occasion to establish an up-front agreement with the auditor regarding a particular insured’s classification at audit. Auditors that go above and beyond need to be recognized to their managers and the manager’s manager. Bosses generally hear nothing at all or bad stuff, a good report will stand out in their mind and the auditor will be an ally later.
To be fair, the auditor’s job is not always easy. Judging who is and is not an employee is not always clear. Several articles in this series have tried to offer guidance*, but even with this and other material, there are still gray areas. When there is a gray area, the auditor will go with the conservative approach and assign “employee” status. The bad part is the agent doesn’t generally find out until the angry call from the insured holding the audit bill in his hand. How the auditor is approached once the audit is contested will hopefully go a long way towards amiably rectifying any problems.
(*”Workers’ Compensation – Who Is An Employee”,” Workers’ Compensation – The General Contractor’s Responsibility” and both “Exempt Employee” articles)
Regardless, the agent needs to protect himself or herself from the whims of the auditor or the sufficiency of gray area that may lead to an additional premium audit. Employee status in workers’ compensation is a function of law, not a function of the policy, and since agents are not generally lawyers, the best they can do is make an educated interpretation – but even that might be wrong.
Stuart Powell, CPCU, CIC, CLU, ARM, ChFC, AMIM, AAI, ARe, Vice President of Insurance Operations for the Independent Insurance Agents of North Carolina, crafted a letter for agents to send to their clients upon purchase or renewal of a work comp policy. The letter does a good job explaining to the client what workers’ compensation is, how it is priced, how employee status is determined and what will happen at audit. The letter follows.
City, State Zip
Re: Workers’ Compensation Policy
You recently purchased (renewed) a Workers’ Compensation and Employers’ Liability Insurance Policy. This policy is designed to support and comply with (this state’s )Workers’ Compensation Laws and to provide benefits to any injured employee as prescribed by statute whose injury or disease “arises out of and in the course of” their employment.
Payroll generally determines the ultimate cost of your coverage. Estimated payroll supplied by you determines the deposit premium due at the start of the policy year. An audit done by the carrier at the close of the policy period determines the final premium based on actual payroll. If actual payroll is less than your estimate, the prior year’s premium may be reduced. Likewise, actual payroll higher than your estimate results in a bill for additional premium.
Who qualifies as an “employee” is difficult to determine in today’s business climate with the use of leased employees, subcontractors and independent contractors. Employment contracts, statute or common law usually establish employment (and employee) status. “Employees” are usually defined by way of statute or common law in the absence of contract. Calling a worker by a name other than employee, such as “subcontractor” or “independent contractor,” does not itself overcome either. Additionally, how compensation is reported to the IRS, such as by use of a 1099 Form, is not sufficient to establish that the individual is not, in fact, an employee.
Workers’ compensation insurance must pay benefits to injured “employees,” any individual determined by statute or by the court to be your employee is entitled to benefits. Because benefit payments are the responsibility of the insurance carrier, they are becoming very aggressive in making sure you pay the proper premium for the benefits they must provide an injured employee. Insurance company auditors traditionally allowed the use certificates of insurance to establish exemption from “employee” status. Recently, though, auditors have begun to disregard these certificates particularly in cases of workers’ compensation “ghost” policies. A “ghost” policy is a workers’ compensation policy written for an unincorporated business with no employees and which does not extend coverage to the business’ owner(s).
Additionally, workers that perform the same tasks that employees perform or would perform may lead the auditor to define such individuals as employees, charging you an additional premium based on the individual’s compensation. These are workers you might label as “independent contractors” or “subcontractors.” Depending on the number of workers in question, the premium adjustment could be substantial.
A legal opinion from an attorney trained in employment law is required to answer any questions about the status of a particular worker or group of workers. We as your agent appreciate the opportunity to assist you in your workers’ compensation insurance program; however, we are not attorneys and are unable to assist you in providing a legal opinion as to whether a particular worker is or is not a statutory or common law employee.
Your Independent Agent
Keeping other agents and our clients informed will allow a better system to be built. Communicating with clients up front will also avoid some heart burn in the end.
Employers’ liability coverage will be the focus of the next few articles. Employers’ liability is a very valuable coverage that often gets overlooked by many agents as a throwaway coverage. The need and importance of this coverage will be detailed in depth. Its importance cannot be overlooked.