Interesting the way auditors are denoted as painful, bad, and contentious at the end of this article, making us look like the source of the customer service problem. The facts are that auditors are the guardians of the system that apply the rules, codes, and classifications for each state to get the right premium on each expired policy.
Now for a bit of reality that seems to be missing. It’s easy to speak in large numbers and percentages, but I much prefer specific examples to make a point. Everyone in the process from the agent, underwriter, loss control, etc, etc that sells this policy prior to binding are not babes in the woods who have no idea what they are doing.
If you have a construction company with a large clerical payroll and minimal construction payroll, questions should be asked (clerical analysis) to determine if the estimates are correct (paper contractor) or if there is an issue form the start (uninsured subcontractors), and adjust the payroll estimates accordingly before binding.
There are actually two different types of misclassifications that are used interchangeably that affect the final premium, but are completely different. The first as noted in the article are employees listed as clerical for example, but actually have duties as a laborer or shop supervisor (governing code). Again a clerical analysis prior to binding if the estimates look odd would stop a sizable percentage of this type.
The second is independent contractors (let put aside the employee / independent contractor question, and the whole payroll taxes / 1099 issue) that are added to chargeable payroll at audit because they either filed a claim or had no proof of w/c coverage during the period they worked for the insured. Again this common scenario should be discussed in detail prior to binding to prevent surprises at audit.
Now to the babes in the woods issue. I reviewed a hotel operation (a well established business with no changes in operations or how employee payroll is assigned) that are generally assigned to three distinct class codes (hotel employees, restaurant employees, and clerical staff) on a national basis. Where do you think front desk employees were assigned on this policy?
Yes, they were assigned to the clerical code. Needless to say, they were exposed to the hazards of the hotel and were reassigned to the hotel code. The agent immediately asked if this was something new in the rules or codes, as it increased premiums significantly on the policy. If you consider that front desk employees have always been included in the hotel code dating back well into the prior century nationally, then no it is not a new development.
Hence, my babe in the woods description. This is something that should have been noted and addressed prior to binding the policy as a preemptive measure. Lets take this example a bit further, when reviewing payroll (to exclude tips nationally, but not in all states), there was a significant amount of clerical employees that received and reported tips. Now if you received a cash tip from a hotel guest, can you say exposed to hazards of the hotel. They were all reassigned to the hotel code from clerical.
I’m not saying that all of the audit issues that are described as painful, bad, and contentious would disappear if a more proactive approach was implemented prior to binding a policy, but it surely would reduce the amount of misclassifications from the start. Nobody likes surprises, not the insured, not the carrier, and definitely not the auditors who have to clarify the issues and premium with the final audit.
CA is responsible for one-third of this mess due, in large part, to inadequate legislative solutions. Instead of allowing CA State Senator Calderon to enrich Dr. Drobot and his quack back surgery clinics, how about some real leadership in Legislation on a statewide level, bringing everyone (insurers, labor, medical, attorneys, and the Dept of Industrial Relations & Dept of Insurance) to hammer out a deal? This has never before been done in the history of CA Workers’ Compensation – having all of the aforementioned parties at the table at the same time. Inclusiveness. What a concept! Along with transparency and allowing the public to see and thus know how the legislation is crafted, as well as how it will impact them. As a 31 year agent and broker in CA, I’ve never seen so much shit fly in this state, shit that wouldn’t fly in most others.
So the risk is miss classified in a lower rate (as usual) and a big additional Premium occurs on the final audit. I guess the author did not know that most states have regulations prohibiting this situation.
IE Section 11753.2 of the California Insurance Code.
But what about the effect on the Underwriting aspect? So the Underwriter does not renew the risk as the loss ratio is unacceptable. But the final audit finds more premium that, if known, Would have resulted in a desirable risk? Of course,A policy renewal was not made. Naturally, a return premium may may make a good risk a lousy risk.
An Auditor is a messenger similar to a newspaper reporter. It’s up to the Editor if a story is printed. KILL THE MESSENGER!!
Sorry to be a preacher but Lets look at the resources that a California Underwriter has to insure correct classifications.
1.Experience Rating Form (if any)
2.WCIRB Inspection report (95% of rated risks have been inspected.)
3.Claims abstracts form prior Agent describing how injury occurred.
4.Reports from Safety and Health who, in some cases, are required to service the Insured. Claims abstract produced DURING coverage describing the Injury.
5. Insured’s website
6.Copies of prior audits supplied by the Agent.
7. Various reports supplied by a subscription service such as A.M. Best.
Problem is finding an Underwriter who knows the significance of what is being read.
While I do run across misclassified business operations and employees assigned to a Standard Exceptions class for which they are not eligible, the far greater problem is the use of IC’s, casual labor, unlicensed labor – or the misclassification of individuals as Non-Employees or ‘Independent Contractors’, rather than as Employees.
My analysis last year, on work performed by myself and my staff, found a 28% increase in exposures from the inclusion of these misclassified individuals (and pay types which are subject to premium). [Close to the 1/3 cited in the referenced article.]
Auditors MUST be trained and required to review General Ledgers, Disbursements, 1099s and to evaluate the use of outside labor. Is the work consistent, on-going, an integral part of the business, performed on the premises…??? Or, are we looking at individuals that are truly in separate established businesses, holding themselves out to work for others…?
Some of the more interesting ‘Independent Contractors’ that have been included at audit included:
• A butcher working in the store’s meat dept (on the premises, butchering for the store’s customers AND supervising other ‘payrolled’ employees.
• A floor covering store performing rehab of foreclosed homes for client banks – using unlicensed labor – to a tune of over $600K!
• A Restaurant Manager working 40-50 hrs. weekly, directing and supervising staff, but paid as an ‘Independent Contractor’.
• AND probably the most often seen scenario – commissioned Sales Representatives! (Only selling and soliciting products manufactured by the policyholder and often reimbursed for mileage. Sometimes, their commission is reduced by an amount to pay for health insurance.)
My point – it is out there in abundance! Most auditors receive training in reading payroll journals, registers and summaries and in reconciling these to various reports filed with tax authorities. Too few understand, and consistently review, other sources for outside labor.
First,
The Carrier big-wigs tacitly discourage the inclusion of contract labor. Their agents scream their heads off alleging that no other carrier picks them up and their continued relationship is pending on the outcome. “Darn Auditor causing trouble.”
Second,
Who are they going to get to teach the Auditors to get some sand and look for this exposure? The Auditors can’t adequately explain the nuances of contract labor and do not want to get into an explosive situation with an Insured. If this happens to them once.Never again.
So do we think that carrier Senior management is going to hire someone to teach the complexities of Employer/Employee relationships? Most Lawyers and Judgesknow NOTHING about it.
Due to the ramifications, it would be tantamount to career suicide for Senior Management. The determination of employee status if not only complicated but difficult with recalcitrant Insureds. The only thing BLACK and White is if they do that work requires a Contractor’s license and the worker is without same, (as defined by the B&P code) he is an EMPLOYEE of the person who engaged him. No other questions are necessary except how to classify him. Fee and company Auditors who preserver and include this type of payroll, might be surprised at how many times it is not billed. So if an Auditor is uneducated in this matter, not backed by his Bosses for causing trouble, you can see why it is overlooked. Right?
I know a carrier that billed over on milli0n dollars in this area.
PS if included, be prepared for your Collection Manager to get upset as mos Insured won’t pay it until a court tells them to. Hopefully you can d
While I do run across misclassified business operations and employees assigned to a Standard Exceptions class for which they are not eligible, the far greater problem is the use of IC’s, casual labor, unlicensed labor – or the misclassification of individuals as Non-Employees or ‘Independent Contractors’, rather than as Employees.
My analysis last year, on work performed by myself and my staff, found a 28% increase in exposures from the inclusion of these misclassified individuals (and pay types which are subject to premium).
Auditors MUST be trained and required to review General Ledgers, Disbursements, 1099s and to evaluate the use of outside labor. Is the work consistent, on-going, an integral part of the business, performed on the premises…??? Or, are we looking at individuals that are truly in separate established businesses, holding themselves out to work for others…?
Some of the more interesting ‘Independent Contractors’ that have been included at audit included:
• A butcher working in the store’s meat dept (on the premises, butchering for the store’s customers AND supervising other ‘payrolled’ employees.
• A floor covering store performing rehab of foreclosed homes for client banks – using unlicensed labor – to a tune of over $600K!
• A Restaurant Manager working 40-50 hrs weekly, directing and supervising staff, but paid as an ‘Independent Contractor’.
• AND probably to most often seen scenario – commissioned Sales Representatives! (Only selling and soliciting products manufactured by the policyholder and often reimbursed for mileage. Sometimes, their commission is reduced by an amount to pay for health insurance.)
My point – it is out there in abundance! Most auditors receive training in reading payroll journals, registers and summaries and in reconciling these to various reports filed with tax authorities. Too few understand, and consistently review, other sources for outside labor.
First,
the Carrier big-wigs tacitly discourage the inclusion of contract labor. Their agents scream their heads off alleging that no other carrier picks them up and their continued relationship is pending on the outcome.
Second,
Who are they going to get to teach the Auditors to get some sand and look for this exposure? The Auditors can’t adequately explain the nuances of contract labor and do not want to get into an explosive situation. If this happens to them once. Never again.
So do we think that carrier Senior Management is going to hire someone to teach the complexities of Employer/Employee relationships?
Due to the ramifications, it would be tantamount to career suicide for Senior Management. The determination of employee status if not only complicated but difficult with recalcitrant Insureds. The only thing BLACK and White is if the work requires a Contractor’s license and the worker is without same, (as defined by the B&P code) he is an EMPLOYEE of the person who engaged him. No other questions are necessary except how to classify him. Fee and company Auditors who persevere and include this type of payroll, might be surprised at how many times it is not billed. So if an Auditor is uneducated in this matter, not backed by his Bosses for causing trouble and yelled at by Insureds, for even asking about it you can see why it is overlooked. Right?
PS. the Collection Manager will be pissed as most Insureds need a Judge to tell them to pay. The Judge and your company lawyer may need some education also. Up on your Control of Details test?
I don’t see how anyone can say “The situation is worse in California, which accounts for roughly one‑third of the nationwide total of misclassified payroll.”
You could get this number from the California state Test Audit results and many other states have NO Test Audit or Inspection program. This number is not credible anyway due to the relatively low count of Test Audits conducted.
If you can’t even get this number, how can you attribute any result to construction risks (which is probably correct.)?
So how can anyone determine what is the Nationwide total”
The total would have to be an estimate.
Someone said this is a good article. So was the infamous article by
Clifford Irving.
Interesting the way auditors are denoted as painful, bad, and contentious at the end of this article, making us look like the source of the customer service problem. The facts are that auditors are the guardians of the system that apply the rules, codes, and classifications for each state to get the right premium on each expired policy.
Now for a bit of reality that seems to be missing. It’s easy to speak in large numbers and percentages, but I much prefer specific examples to make a point. Everyone in the process from the agent, underwriter, loss control, etc, etc that sells this policy prior to binding are not babes in the woods who have no idea what they are doing.
If you have a construction company with a large clerical payroll and minimal construction payroll, questions should be asked (clerical analysis) to determine if the estimates are correct (paper contractor) or if there is an issue form the start (uninsured subcontractors), and adjust the payroll estimates accordingly before binding.
There are actually two different types of misclassifications that are used interchangeably that affect the final premium, but are completely different. The first as noted in the article are employees listed as clerical for example, but actually have duties as a laborer or shop supervisor (governing code). Again a clerical analysis prior to binding if the estimates look odd would stop a sizable percentage of this type.
The second is independent contractors (let put aside the employee / independent contractor question, and the whole payroll taxes / 1099 issue) that are added to chargeable payroll at audit because they either filed a claim or had no proof of w/c coverage during the period they worked for the insured. Again this common scenario should be discussed in detail prior to binding to prevent surprises at audit.
Now to the babes in the woods issue. I reviewed a hotel operation (a well established business with no changes in operations or how employee payroll is assigned) that are generally assigned to three distinct class codes (hotel employees, restaurant employees, and clerical staff) on a national basis. Where do you think front desk employees were assigned on this policy?
Yes, they were assigned to the clerical code. Needless to say, they were exposed to the hazards of the hotel and were reassigned to the hotel code. The agent immediately asked if this was something new in the rules or codes, as it increased premiums significantly on the policy. If you consider that front desk employees have always been included in the hotel code dating back well into the prior century nationally, then no it is not a new development.
Hence, my babe in the woods description. This is something that should have been noted and addressed prior to binding the policy as a preemptive measure. Lets take this example a bit further, when reviewing payroll (to exclude tips nationally, but not in all states), there was a significant amount of clerical employees that received and reported tips. Now if you received a cash tip from a hotel guest, can you say exposed to hazards of the hotel. They were all reassigned to the hotel code from clerical.
I’m not saying that all of the audit issues that are described as painful, bad, and contentious would disappear if a more proactive approach was implemented prior to binding a policy, but it surely would reduce the amount of misclassifications from the start. Nobody likes surprises, not the insured, not the carrier, and definitely not the auditors who have to clarify the issues and premium with the final audit.
Thank You, CG (well seasoned auditor)
well said. I appreciate your expertise. Thanks!
CA is responsible for one-third of this mess due, in large part, to inadequate legislative solutions. Instead of allowing CA State Senator Calderon to enrich Dr. Drobot and his quack back surgery clinics, how about some real leadership in Legislation on a statewide level, bringing everyone (insurers, labor, medical, attorneys, and the Dept of Industrial Relations & Dept of Insurance) to hammer out a deal? This has never before been done in the history of CA Workers’ Compensation – having all of the aforementioned parties at the table at the same time. Inclusiveness. What a concept! Along with transparency and allowing the public to see and thus know how the legislation is crafted, as well as how it will impact them. As a 31 year agent and broker in CA, I’ve never seen so much shit fly in this state, shit that wouldn’t fly in most others.
So the risk is miss classified in a lower rate (as usual) and a big additional Premium occurs on the final audit. I guess the author did not know that most states have regulations prohibiting this situation.
IE Section 11753.2 of the California Insurance Code.
But what about the effect on the Underwriting aspect? So the Underwriter does not renew the risk as the loss ratio is unacceptable. But the final audit finds more premium that, if known, Would have resulted in a desirable risk? Of course,A policy renewal was not made. Naturally, a return premium may may make a good risk a lousy risk.
An Auditor is a messenger similar to a newspaper reporter. It’s up to the Editor if a story is printed. KILL THE MESSENGER!!
The person from Valen Analytics does not understand the CA rules as you have pointed out very well. Almost all states have a similar rule.
Sorry to be a preacher but Lets look at the resources that a California Underwriter has to insure correct classifications.
1.Experience Rating Form (if any)
2.WCIRB Inspection report (95% of rated risks have been inspected.)
3.Claims abstracts form prior Agent describing how injury occurred.
4.Reports from Safety and Health who, in some cases, are required to service the Insured. Claims abstract produced DURING coverage describing the Injury.
5. Insured’s website
6.Copies of prior audits supplied by the Agent.
7. Various reports supplied by a subscription service such as A.M. Best.
Problem is finding an Underwriter who knows the significance of what is being read.
While I do run across misclassified business operations and employees assigned to a Standard Exceptions class for which they are not eligible, the far greater problem is the use of IC’s, casual labor, unlicensed labor – or the misclassification of individuals as Non-Employees or ‘Independent Contractors’, rather than as Employees.
My analysis last year, on work performed by myself and my staff, found a 28% increase in exposures from the inclusion of these misclassified individuals (and pay types which are subject to premium). [Close to the 1/3 cited in the referenced article.]
Auditors MUST be trained and required to review General Ledgers, Disbursements, 1099s and to evaluate the use of outside labor. Is the work consistent, on-going, an integral part of the business, performed on the premises…??? Or, are we looking at individuals that are truly in separate established businesses, holding themselves out to work for others…?
Some of the more interesting ‘Independent Contractors’ that have been included at audit included:
• A butcher working in the store’s meat dept (on the premises, butchering for the store’s customers AND supervising other ‘payrolled’ employees.
• A floor covering store performing rehab of foreclosed homes for client banks – using unlicensed labor – to a tune of over $600K!
• A Restaurant Manager working 40-50 hrs. weekly, directing and supervising staff, but paid as an ‘Independent Contractor’.
• AND probably the most often seen scenario – commissioned Sales Representatives! (Only selling and soliciting products manufactured by the policyholder and often reimbursed for mileage. Sometimes, their commission is reduced by an amount to pay for health insurance.)
My point – it is out there in abundance! Most auditors receive training in reading payroll journals, registers and summaries and in reconciling these to various reports filed with tax authorities. Too few understand, and consistently review, other sources for outside labor.
A few more interesting articles:
States Going After Employers Who Misclassify Workers as Independent Contractors http://www.insurancejournal.com/news/national/2013/10/18/308625.htm
Labor Department’s 6-Part Test for Classifying Employees, Independent Contractors http://www.insurancejournal.com/news/national/2015/07/16/375401.htm
The problem is two-fold.
First,
The Carrier big-wigs tacitly discourage the inclusion of contract labor. Their agents scream their heads off alleging that no other carrier picks them up and their continued relationship is pending on the outcome. “Darn Auditor causing trouble.”
Second,
Who are they going to get to teach the Auditors to get some sand and look for this exposure? The Auditors can’t adequately explain the nuances of contract labor and do not want to get into an explosive situation with an Insured. If this happens to them once.Never again.
So do we think that carrier Senior management is going to hire someone to teach the complexities of Employer/Employee relationships? Most Lawyers and Judgesknow NOTHING about it.
Due to the ramifications, it would be tantamount to career suicide for Senior Management. The determination of employee status if not only complicated but difficult with recalcitrant Insureds. The only thing BLACK and White is if they do that work requires a Contractor’s license and the worker is without same, (as defined by the B&P code) he is an EMPLOYEE of the person who engaged him. No other questions are necessary except how to classify him. Fee and company Auditors who preserver and include this type of payroll, might be surprised at how many times it is not billed. So if an Auditor is uneducated in this matter, not backed by his Bosses for causing trouble, you can see why it is overlooked. Right?
I know a carrier that billed over on milli0n dollars in this area.
PS if included, be prepared for your Collection Manager to get upset as mos Insured won’t pay it until a court tells them to. Hopefully you can d
Thank you for your expertise and willingness to share. I really appreciate that. Thanks again.
While I do run across misclassified business operations and employees assigned to a Standard Exceptions class for which they are not eligible, the far greater problem is the use of IC’s, casual labor, unlicensed labor – or the misclassification of individuals as Non-Employees or ‘Independent Contractors’, rather than as Employees.
My analysis last year, on work performed by myself and my staff, found a 28% increase in exposures from the inclusion of these misclassified individuals (and pay types which are subject to premium).
Auditors MUST be trained and required to review General Ledgers, Disbursements, 1099s and to evaluate the use of outside labor. Is the work consistent, on-going, an integral part of the business, performed on the premises…??? Or, are we looking at individuals that are truly in separate established businesses, holding themselves out to work for others…?
Some of the more interesting ‘Independent Contractors’ that have been included at audit included:
• A butcher working in the store’s meat dept (on the premises, butchering for the store’s customers AND supervising other ‘payrolled’ employees.
• A floor covering store performing rehab of foreclosed homes for client banks – using unlicensed labor – to a tune of over $600K!
• A Restaurant Manager working 40-50 hrs weekly, directing and supervising staff, but paid as an ‘Independent Contractor’.
• AND probably to most often seen scenario – commissioned Sales Representatives! (Only selling and soliciting products manufactured by the policyholder and often reimbursed for mileage. Sometimes, their commission is reduced by an amount to pay for health insurance.)
My point – it is out there in abundance! Most auditors receive training in reading payroll journals, registers and summaries and in reconciling these to various reports filed with tax authorities. Too few understand, and consistently review, other sources for outside labor.
A few more interesting articles:
States Going After Employers Who Misclassify Workers as Independent Contractors http://www.insurancejournal.com/news/national/2013/10/18/308625.htm
Labor Department’s 6-Part Test for Classifying Employees, Independent Contractors http://www.insurancejournal.com/news/national/2015/07/16/375401.htm
The problem is two-fold.
First,
the Carrier big-wigs tacitly discourage the inclusion of contract labor. Their agents scream their heads off alleging that no other carrier picks them up and their continued relationship is pending on the outcome.
Second,
Who are they going to get to teach the Auditors to get some sand and look for this exposure? The Auditors can’t adequately explain the nuances of contract labor and do not want to get into an explosive situation. If this happens to them once. Never again.
So do we think that carrier Senior Management is going to hire someone to teach the complexities of Employer/Employee relationships?
Due to the ramifications, it would be tantamount to career suicide for Senior Management. The determination of employee status if not only complicated but difficult with recalcitrant Insureds. The only thing BLACK and White is if the work requires a Contractor’s license and the worker is without same, (as defined by the B&P code) he is an EMPLOYEE of the person who engaged him. No other questions are necessary except how to classify him. Fee and company Auditors who persevere and include this type of payroll, might be surprised at how many times it is not billed. So if an Auditor is uneducated in this matter, not backed by his Bosses for causing trouble and yelled at by Insureds, for even asking about it you can see why it is overlooked. Right?
PS. the Collection Manager will be pissed as most Insureds need a Judge to tell them to pay. The Judge and your company lawyer may need some education also. Up on your Control of Details test?
Chow
I don’t see how anyone can say “The situation is worse in California, which accounts for roughly one‑third of the nationwide total of misclassified payroll.”
You could get this number from the California state Test Audit results and many other states have NO Test Audit or Inspection program. This number is not credible anyway due to the relatively low count of Test Audits conducted.
If you can’t even get this number, how can you attribute any result to construction risks (which is probably correct.)?
So how can anyone determine what is the Nationwide total”
The total would have to be an estimate.
Someone said this is a good article. So was the infamous article by
Clifford Irving.