Every year, thousands of Michigan business owners receive a notice that it’s time for their workers’ compensation insurance audit. For many, that letter creates immediate stress. Questions like “Did we do everything correctly?” or “Are we going to owe more money?” are common.
In fact audit complaints are one of the most common reasons that are mentioned when businesses reach out to us to help them with their insurance. Not understanding audits and how they work and managing them can be aggrivating and costly.
The good news is that a workers’ compensation audit doesn’t have to be intimidating. With good recordkeeping and the right guidance, most audits can be completed smoothly and accurately.
Whether you own a construction company in Traverse City, a restaurant in Frankfort, a retail store in Suttons Bay, or a manufacturing business serving Northern Michigan, understanding how workers’ compensation audits work can help you avoid unnecessary surprises.
Why Do Workers’ Compensation Audits Happen?
Workers’ compensation premiums are based on estimated payroll at the beginning of your policy period. At the end of the policy term, your insurance carrier performs an audit to compare those estimates with your actual payroll and business operations.
If your payroll was higher than estimated or your business exposures changed, you may owe additional premium. If your payroll was lower than expected, you could receive a premium credit or refund.
The purpose isn’t to penalize businesses—it’s to ensure your premium accurately reflects the risk your business presented during the policy period.
1. Estimating Payroll Too Low
One of the most common audit issues is underestimating payroll at policy renewal.
Many businesses experience growth throughout the year by:
- Hiring additional employees
- Paying overtime
- Offering bonuses
- Expanding into new services
If these payroll changes aren’t discussed with your insurance advisor during the policy period, they may result in a larger audit bill than expected.
Keeping your insurance agency informed as soon as possible when your business experiences a substantial increases in payroll can help minimize surprises.
2. Misclassifying Employees
Workers’ compensation uses classification codes based on the work employees actually perform. The code coorelates with the injury or sickness exposure and severity that history shows for that particular class of work.
For example, an office administrator generally has a different classification than:
- Carpenter
- Roofer
- Electrician
- Landscaper
- Heavy equipment operator
If employees perform multiple duties, maintaining accurate payroll records by job classification becomes even more important.
Improper classifications are one of the most common reasons businesses pay more than they expected or were told when the policy was written or renewed.
3. Failing to Keep Accurate Payroll Records
Good documentation makes audits much easier.
Your auditor may request records such as:
- Payroll reports
- Quarterly payroll tax filings
- Federal tax forms
- Employee job descriptions
- Certificates of insurance for subcontractors
Having organized records allows the audit to move more efficiently while reducing the likelihood of disputes.
4. Forgetting About Subcontractors
This is especially important for contractors, remodelers, landscapers, painters, and other skilled trades throughout Northern Michigan.
If you hire subcontractors, the insurance company will request proof that they carried their own workers’ compensation coverage during the policy period.
Without proper documentation, their payroll may be included in your audit calculation, potentially increasing your premium.
Why would you be charged for them?
When an injury occurs during the performance of a job and you are the contractor responsible for that project, all uninsured claims will most likely end up hitting your coverage. The State of Michigan has legal requirements for protecting workers, and if one of them is injured on your site and they did not have their own work comp policy, they could be deemed an ’employee’ under the definition of Contractor vs Employee. (21 Rules for that)
Maintaining current certificates of insurance for every subcontractor is one of the simplest ways to avoid unexpected audit costs.
5. Waiting Until the Audit Notice Arrives
Many business owners don’t begin preparing until they receive the audit appointment.
Unfortunately, that often means scrambling to locate payroll records, tax documents, and insurance certificates.
Instead, create a habit of organizing documentation throughout the year. Setting aside a few minutes each month can save hours when audit season arrives.
6. Not Reviewing Your Business Operations
Businesses evolve.
Perhaps your company added new services, purchased additional equipment, opened another location, or hired employees with different responsibilities.
These operational changes may affect your workers’ compensation classifications and premium calculations.
An annual insurance review gives your advisor the opportunity to make adjustments before they become audit issues.
7. Trying to Handle Everything Alone
Workers’ compensation rules can be complex, especially for businesses with seasonal employees, multiple job classifications, or subcontractors.
Rather than waiting until an audit reveals a problem, many business owners benefit from reviewing their policy before renewal.
An experienced insurance advisor can help identify potential issues, explain classification codes, and answer questions before they become costly surprises.
A Little Preparation Goes a Long Way
Most workers’ compensation audits are routine. Businesses that maintain accurate payroll records, document subcontractor coverage, and communicate operational changes throughout the year often experience a much smoother process.
For growing businesses across Traverse City, Elk Rapids, Kingsley, Suttons Bay and throughout Grand Traverse, Leelanau, Benzie, and Antrim Counties, proactive planning can help reduce unexpected costs while ensuring your coverage accurately reflects your operations.
Let Cardinal Insurance Group Help
If your business has received a workers’ compensation audit notice, or if you’d like to review your current workers’ compensation program before your next renewal, Cardinal Insurance Group is here to help.
Our experienced team works with Michigan businesses across a wide range of industries to review classifications, explain audit requirements, and help business owners better understand their workers’ compensation coverage.
Contact Cardinal Insurance Group today to schedule a workers’ compensation insurance review and gain confidence before your next audit.
Linda M. Fisher, AAI, CIC, CPRIA, CPRM, LIC, LUTCF, TQA
Trusted Guidance. Personalized Service.