COVID’S EFFECT ON COMP
Agents and brokers must diligently watch how the pandemic affects client audits
By Kevin Ring
You could be in the insurance business 25, 30, even 40 years, and you would never have seen this coming. The 2020 pandemic created a viral train wreck that either disrupted businesses or caused them to fail altogether. At the same time, even in the midst of a crisis, some businesses managed to bloom and grow substantially. Still, almost no business has been unaffected.
When it comes to workers compensation—and specifically the premium audit—there are some issues or new wrinkles that will make audits in 2021 more complicated and much more likely to be incorrect than they have been in the past. This is a frightening realization when you consider that before the pandemic swept the nation, 75% or more of premium audits were incorrect.
The vast majority of these errors are the result of employers not having all of the records required for the auditor to complete the audit correctly. As the pandemic continues to swirl around us, it’s even more important that employers understand the rules and keep appropriate records, because there are going to be very few premium audits that happen face to face, which throws yet another wrinkle into an already complex situation.
Getting the job done remotely
Historically, businesses that pay more than $100,000 for workers compensation were almost always audited in-person. Sure, a lot of audits were done electronically pre-pandemic, but that was mostly for smaller, less complex businesses. But now, because of the pandemic, large complex businesses are going to have their premium audits done electronically, over the phone, using Zoom, through the mail, or something similar.
[U]nless you were selling insurance during the I9I8 Spanish Flu, we are in virgin territory, and your clients are looking to you to make sure a bad situation doesn’t get worse.
Unlike in previous years, there will not be a person sitting across the desk from your client—a person they were planning to spend a substantial chunk of their day with. Your employer client is going to get on a Zoom call and be asked to submit documents by email, snail mail or FedEx. My sense is that not addressing questions in person might make the chance for mistakes greater. Add to that new rules created to deal with COVID, and the opportunities for businesses to be overcharged are tremendous.
Your clients need to be made aware that, in every state, there are rules that change how a payroll is dealt with for individuals who have been furloughed from their job but have continued to be paid. In almost all states, premium is not charged on paid-furlough payroll. A few states charge the same rate as clerical employees.
If a restaurant owner says to his staff, “We can’t be open, but I’m going to continue to pay you for as long as I can,” and that payroll is a half million dollars over two months, the rules say that the restaurant owner doesn’t have to pay workers compensation on that money. But in order to take advantage of that rule, you have to show the auditor that the money was paid for people to not work.
Understanding the Payroll Protection Plan
It is also important to understand that using Payroll Protection Plan (PPP) loans to fund one’s operation does not mean that payroll is excluded. If an employer is paying employees to work, the source of the money used to fund their payroll obligations does not matter. Payroll can be excluded only if the pay was given to employees who were furloughed (not working).
Let’s circle back to the statement that more than 75% of audits are incorrect. When we say 75% are incorrect, that doesn’t mean 75% of people are paying double what they should be. Some of these mistakes actually benefit the insured. But because of the way the rules are built, more often than not, if a mistake is made, the insurance company usually collects more money than they should. That’s not the insurance company’s fault and it’s not the auditor’s fault. When it comes to the premium audit, a lot has to do with the things your clients pay their employees but don’t pay workers comp premium on.
As an agent, it all begins with working with your client to make sure that they have their records all together before the premium auditor arrives. This means gathering their payroll records and breaking out any excluded items.
To add to the confusion, you may have a reclassification of employees that are now working from home. Here’s an example: In a pre-pandemic world, Tom’s job was programming computer-controlled manufacturing equipment. His office was right off the shop floor. This worked out great because when Tom would write a new program, he would go out on the floor and inspect the work that’s been done to make sure that his program worked the way he expected.
Now, because of the pandemic, Tom’s employer has decided that he can do his work from home. The employer has implemented more distancing protocols and Tom has to perform inspections remotely. Well, before the pandemic, Tom would have been assigned to the appropriate manufacturing code for whatever widgets the company was making. Now that he is working from home he can be classified as a clerical telecommuter.
If Tom’s employer doesn’t alert the auditor that his job changed during the policy period, they can’t change the code on the audit. Oh, and in most states, there’s a different classification for clerical telecommuters versus in-office clerical jobs.
Where are client employees working?
Another factor throwing a monkey wrench into your client’s premium audit is that employees working from home may be in a different state than where the brick-and-mortar operation is based. If a business is located in Charlotte, North Carolina, and all the employees used to come to the office every day, North Carolina was likely the only state listed on the workers comp policy. Now, most of the employees are working from home. Because Charlotte is right near the state line, many employees live in South Carolina.
Employees living and working in South Carolina create a South Carolina primary state exposure for the employer’s workers compensation. The insurance company needs to be notified about the new primary state exposure and the payroll for those employees working from home should be allocated to the appropriate state. This is not only an audit issue but may also be a coverage issue.
If anything positive has come from 2020, it’s that agents are more essential than ever in managing their clients’ workers compensation programs. What was once a sturdy playing field is now continually shifting beneath your clients’ feet. Remember, there is no precedent for what is happening. There’s no agent walking around saying, “Why, I remember the 1996 pandemic … .”
So, unless you were selling insurance during the 1918 Spanish Flu, we are in virgin territory, and your clients are looking to you to make sure a bad situation doesn’t get worse.
The premium audit is the most frequently mismanaged element of the workers compensation process. The pandemic has only increased the complexity of the task, for employers and insurance companies. Agents who are prepared to assist their clients and prospective clients will stand out from those who haven’t invested the energy to stay on top of things. 2020 was hard enough for many businesses without having to pay workers compensation premium they don’t rightly owe.
Kevin Ring is the lead workers compensation analyst for the Institute of WorkComp Professionals, which trains insurance agents to help employers reduce workers compensation expenses. A licensed property and casualty insurance agent, he is the co-developer of a new workers comp software suite that will help insurance professionals in working with employers. Contact him at (828) 274-0959 or Kevin@workcompprofessionals.com.