Workers' Compensation Coverage
Understanding Workers' Compensation Insurance
Every carrier has the right to audit a policy at least every three years; some policies are audited several times a year. During an audit, the employer must provide copies of canceled checks, payroll, general ledgers and other financial information. Employers may be penalized by the New York State Workers' Compensation Board for not maintaining accurate and adequate records at a rate of $1,000 for each ten days that such records are deficient/nonexistent.
Because employers can only estimate the amount of payroll they may have during the forthcoming year, premiums are based upon estimated payrolls. The estimated payroll can often be either much higher or lower than the actual payroll. This results in either a higher or lower premium at the beginning of the policy period. The premium is corrected when a payroll audit is conducted. Upon completion of the payroll audit, the actual payroll figures will be used to determine actual premium and the employer will either get a refund or surcharge. Therefore, it is in the employers' best interest to attempt to correctly forecast the amount of the payroll. Pease note that if an employer intentionally initially understates payroll, it could be classified as fraud, a class E felony.
Auditing of Payroll – Independent Contractors
The New York State Workers' Compensation Law does not require sole proprietors, partners or officers of one or two-person corporations to provide coverage for themselves. The situation is more complex when a business that is exempt from coverage requirements either engages subcontractors or is a subcontractor that is engaged by a general contractor. In many instances, under Section 2 and 3 of the WCL, a Judge finds a subcontractor to be the direct employee of the general contractor. In addition, WCL Section 56 provides that a general contractor or its insurance carrier is liable for payments of compensation to an injured employee of an uninsured subcontractor.
Insurance carriers protect themselves against such claims by charging an additional premium for any policyholder that uses independent contractors.
In addition, insurance carriers often assess general contractors premiums for coverage of all "subcontractors" on the job site, unless the subcontractors furnish proof that they have their own workers' compensation insurance policy. Accordingly, general contractors routinely require that subcontractors provide proof of their own workers' compensation coverage in order to co-work on the job. This results in many sole proprietors, partnerships, and one or two person owned corporations with no employees who are not otherwise legally required to acquire a workers' compensation policy, being required to purchase a policy (and include themselves in that policy) in order to work for a particular general contractor.
Classifying Independent Contractors and Employees
A business cannot require employees working for that business to obtain their own workers' compensation insurance policy or contribute towards a workers' compensation insurance policy. (Employees)
However, a business may require an independent business that has its own employees or an independent business acting as a sole proprietorship, partnership or one or two person owned corporation with no employees to obtain a workers' compensation insurance policy if the independent business is working as a subcontractor. (An independent business usually has characteristics such as media advertising, commercial telephone listing, business cards, business stationary or forms, its own Federal Employer Identification Number (FEIN), working under its own permits or operating authority, business insurance (liability & WC), and/or maintaining a separate establishment. The independent business has a significant investment in facilities and means of performing work.)
For example, if Business "A" contracts with Business "B" to perform services and Business "B" is an independent business with or without its own employees, Business "A" can require Business "B" to have its own workers' compensation insurance policy and obtain a certificate of insurance for this policy. This will help ensure that Business "A's" workers' compensation premiums are as low as possible.
The New York State Workers' Compensation Board can not make advance determinations regarding independent contractor status, and only makes such decisions on an individual basis in the event a claim is filed.
Auditing of Payroll – Remuneration
Please refer to the Compensation Insurance Rating Board Manual at www.nycirb.org/2007/manuals/pdf/4comp.pdf for the specific rules regarding Remuneration.
Remuneration means money or substitutes for money. Remuneration is an essential part of determining the amount of premium an employer should pay.
Premium is computed on the basis of the total remuneration paid by the insured for services of employees covered by the policy.
Some classifications have a different premium basis other than total remuneration. For example, premium for domestic worker classifications is computed on a per capita (number of employees) basis. Refer to Rule XIV in the CIRB Manual.
Certain construction classifications have premiums computed on the basis of limited remuneration. Refer to Rule V.G. XIV in the CIRB Manual.
Remuneration for determining premiums includes
- Wages or salaries including retroactive wages or salaries, commissions and draws against commissions, bonuses including stock bonus plans, annuity plans, most extra pay for overtime, paid holidays, vacations and sick days. Payments for salary reduction, employee savings plans, retirement or cafeteria plans (Internal Revenue Code §125) which are made through employee authorized salary deductions from the employee's gross pay are also included.
- Payment for piecework, profit sharing or incentive plans.
- Payment by an employer of amounts otherwise required by law to be paid by employees to statutory insurance or pension plans, such as the Federal Social Security Act;
- Payment or allowance for hand tools or power tools used by hand provided by employees.
- The rental value of lodging, an apartment or a house provided for an employee based on comparable accommodations.
- The value of meal, store certificates, merchandise, credits or any other substitute for money received by employees as part of their pay. Refer to Exclusions below for certain fringe benefit exclusions.
- Expense reimbursements to employees to the extent that an employer's records do not substantiate that the expense was incurred as a valid business expense;
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:
- Tips and other gratuities received by employees;
- Certain payments by an employer to group insurance or group pension plans for employees
- The value of special rewards for individual invention or discovery.
- Dismissal or severance payments except for time worked or accrued vacation;
- Certain reimbursed expenses and allowances
- Payments for active military duty;
- Employee discounts on goods purchased from the employee's employer;
- Supper money for late work;
- Work uniform allowances;
- Sick pay paid to an employee by a third party such as an insured's group insurance carrier which is paying disability income benefits to a disabled employee.
- Employer provided perquisites ("perks") such as:
- An automobile;
- An airplane flight;
- An incentive vacation (e.g., contest winner);
- A discount on property or services;
- Club memberships;
- Tickets to entertainment events
- Employer contributions to salary reduction, employee savings plans, retirement, or cafeteria plans ((Internal Revenue Code §125)–Contributions made by the employer, at the employer's expense, which are determined by the amount contributed by the employee.
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.