Workers Comp Audits: How Class Codes Back-Bill You

The audit letter shows up after the policy year ends. You feel like you already paid for the year, so the extra bill lands like a penalty.

It is not a penalty. It is a reconciliation. Workers comp is priced on estimated payroll and class codes. The audit compares estimate to reality.

If you want the compact version, start with Class Codes and Audits: The Back Premium Trap. This post gives the longer context and the why.

What’s really going on

Class codes are a pricing language. They group work by risk. A carpenter, a roofer, and a project manager do not get the same rate. If your payroll was booked under the wrong code, the premium was wrong too.

Each code has a base rate per $100 of payroll. The audit is the carrier checking whether the payroll and the code matched the work that actually happened. If the code was too low or the payroll was too low, the premium gets corrected.

The audit fixes that. It is not fun, but it is how the system stays balanced. If it did not happen, companies who underreported would subsidize everyone else.

Audits also catch payroll drift. Many businesses add overtime, seasonal labor, or new job duties during the year. The estimate made in March is rarely perfect by January.

That is why audits feel like surprises. They are not a surprise to the system. They are the system doing exactly what it was built to do.

Most audits are routine. You hand over payroll records, class code descriptions, and subcontractor certificates. The auditor maps the work to the code. If the mapping changes, the premium changes.

Many audits are now done remotely. That makes the paper trail even more important because the auditor does not walk your site. If the documents are vague, the classification drifts upward.

A simple prep step helps: pick one person to own the audit and gather the records early. Audits go smoother when there is one clear voice and a clean file set.

Tradeoffs and gotchas

The first gotcha is mixing duties. If a foreman spends half the time on the roof and half in the trailer, that split matters. If it is not documented, the auditor can default to the higher risk code.

Another gotcha is assuming clerical or supervisory exceptions apply automatically. They usually require clean, consistent documentation. If the time records are fuzzy, the exception often disappears.

The second gotcha is subcontractor paperwork. If subs do not have proper certificates, their payroll can roll into yours. That is a fast way to turn a small job into a big audit adjustment.

The third gotcha is tip and service staff in restaurants. Payroll can be recorded one way internally and read another way by the carrier. If you operate in food service, Class Codes and Tip Wages: The Audit Surprise is required reading.

One common audit story is the “helper” who does whatever needs doing. If that person spends real time on the roof or in the field, the audit will treat their payroll as field payroll. It does not matter that they also run errands or clean the shop. The highest-risk portion often wins unless you can prove a split.

A second common story is the estimator who sometimes runs a job. If the payroll is booked as office only, the audit may move it to a higher code. The split is allowed, but only with real time records.

Finally, audits get messy when you change payroll systems or switch carriers midstream. If you do that, keep your classifications and job descriptions tidy before you switch.

If you want to see how payroll volatility feeds that mess, the related post on payroll volatility and workers comp pricing is a useful companion.

Price levers or decision factors

These are the levers that keep the audit from turning into a back-bill:

• Accurate class code assignments. Get the code right at the start and update when duties change.
• Clean payroll splits. If a worker does two kinds of work, track the hours or the higher code wins.
• Subcontractor compliance. Missing certificates turn into added premium.
• Documentation. Job descriptions and time records matter more than most people think.
• Payroll volatility. If payroll jumps late in the year, expect the audit to follow.
• Owner and officer treatment. Elections and exclusions can change the audited payroll base.

If you keep a simple audit binder (payroll summaries, class code notes, and certificates), the audit goes faster and the classification is less likely to drift.

A mid-year self-audit can catch errors before they become a bill.

If you want the pricing side of that, Payroll and Class Codes: The Base Rate Drivers lays out the mechanics.

Simple decision rule

If you cannot defend the class code with real time records, assume the auditor will pick the higher code. The only way around that is documentation.

Next step

Before the audit, pull one month of payroll and match each role to the class code. If anything feels fuzzy, fix it now. The audit does not reward late clarity.

Early review keeps the audit calm and short.

Minnesota note: claim patterns and contractor timelines vary by county, so Twin Cities experience isn’t always a perfect proxy for outstate Minnesota.