The Audit Toolkit - Empowering Employers To Take Control© The audit toolkit was developed to help employers focus on the key points of preparing for an audit and the best methods for presenting data to insure a successful outcome. All Rights Reserved 2009 The Flanders Group Classify Payroll Exclude Remuneration Balance Figures Manage Subcontractors Present Audit Package AUDIT TOOLKIT

2 All Rights Reserved 2009 The Flanders Group Introduction Workers compensation premium is determined by 2 exposures: payroll (remuneration) and the cost of uninsured subcontractors (including payments on 1099’s). Policies are written with estimated exposures and the audit is designed to determine the true figures for the policy period. Payroll means gross payroll which includes salaries, commissions, bonuses, vacation, holiday, and sick pay, rental value of an apartment, value of gifts, value of meals or lodging in lieu of wages, auto allowances, and any amount by which an employees salary is reduced to fund a pension or deferred compensation plan. Have any vendor invoices available for the auditor so they can verify the vendor is not really a subcontractor. You also need to be sure that the data being collected matches the policy period being audited. We suggest that you assign a knowledgeable staff person to work with the auditor. Treat the auditor as a welcome guest and escort them if they ask to see your facility. Each tool in this Audit Toolkit is designed to help you prepare for your annual audit so the amount you pay is accurate.

3 All Rights Reserved 2009 The Flanders Group Audit Tool #1: Classify Payroll The tasks each of your employees performs matches one of the classification codes on your workers compensation policy. The first step for your audit is to assign one of your WC class codes to each employee. Be sure that assigned class code appears on your payroll records. If your audit is done at your accountants office, be sure to provide the list of employees and their class codes for their reference. Covered executive officers, individual owners, and partners are subject to minimum payroll of $32,500 and maximum payroll of $98,800. They are also required to have a class code assignment based on their duties – they are not always designated as “clerical” employees. If you have more than one entity, be sure the payroll for each entity is classified separately. A note regarding residential versus commercial work: If you do both types of work, separate the payroll by class code and then by residential or commercial work.

4 All Rights Reserved 2009 The Flanders Group Audit Tool #2: Exclude Remuneration There are specific types of remuneration which can be subtracted from your payroll amount if they are segregated: 1. Severance pay 2. Work uniform allowances (including required safety equipment) 3. Value of special rewards for invention or discovery (bonus) 4. Amount over the corporate officers payroll limitation 5. Over time (you must show the regular rate of pay, the overtime earnings, and a summary by type of operation performed) 6. Payment for active military duty 7. Third party disability pay 8. Payments to inactive employees

5 All Rights Reserved 2009 The Flanders Group Audit Tool #3: Manage Subcontractors Premium must be charged for any uninsured subcontractors since the insurance company would be responsible for any injuries and subsequent claims brought from these employees. It’s important to have the invoices from your subcontractors available with the material separate from the labor so only payroll for labor is charged. Without that breakdown, you will be charged 90% of the total invoice. To verify coverage on any subcontractor, go to choose “On Line Services” (right column) then “Does Employer Have Coverage”. You will answer a few questions, enter the employers name, and then a list will appear with the effective and expiration date of the policy. For all insured subcontractors, make a copy of all certificates for the auditor. Make sure that the policy period being audited is covered on the certificate. If you use subcontractors from outside New York state, the following language must be on the certificate in order for it to be valid: Coverage is extended to all employees in NYS under the NYS Workers Compensation Law. Section 3A of the policy is endorsed to cover New York State.

6 All Rights Reserved 2009 The Flanders Group Audit Tool #4: Balance Figures The auditor will need to be able to balance your payroll with other records such as: Rent Roll –This document is used to verify the value of an apartment when an employee rent as part of their pay. Payroll Book – This is used to verify the actual payroll amounts. Sales Records – This document verifies the annual sales in relation to the annual payroll Cash Disbursements Book, Checkbook, General Ledger, and 1099’s – Each of these documents is used to verify payments to subcontractors or casual labor. 941, NYS 45, Business Tax Returns – These documents are used to cross check the annual payroll figures, subcontractor payments, and to verify executive officers. IMPORTANT NOTE: All of these documents need to be available at the time of audit.

7 All Rights Reserved 2009 The Flanders Group Audit Tool #5: Present Audit Package You will present to the auditor upon their arrival: Your classified payroll spreadsheet (sample on the next page) Include the breakdown for commercial versus residential work if you have a contractor class code Copies of certificates of insurance from subcontractors with correct language Receipts from subcontractors with the labor and materials broken down Evidence/verification of the excluded remuneration The following documents: Payroll Book Sales Records Cash Disbursements Book Checkbook General Ledger 1099’s 941, NYS45 and Business Tax Returns If you have any questions, please call our Workers Compensation Safety Group Department at

8 All Rights Reserved 2009 The Flanders Group