Workers’ compensation insurance is a necessary safeguard, providing financial protection for employees who suffer work-related injuries or illnesses. However, an often-overlooked aspect of workers’ comp coverage is the annual audit. Many businesses unknowingly make mistakes during the audit process, leading to unnecessary costs, penalties, and premium adjustments. If you’re not prepared, your business may be paying significantly more than it should.

In this blog, we’ll break down how workers’ compensation audits work, the impact of experience modification rates (Mods), and how a proactive review can prevent costly surprises. Understanding these factors can help your business remain compliant while optimizing costs.

Every year, businesses that carry workers’ compensation insurance typically undergo an audit to verify payroll, job classifications, and coverage details. These audits ensure that premiums accurately reflect the company’s workforce and risk exposure. They are typically conducted by the insurance provider or a third-party auditor and can take different forms, including:

• Mail Audits – Business owners receive a request to submit payroll and job classification records by mail.

• Phone Audits – An auditor conducts an interview over the phone to verify policy details.

• On-Site Audits – A representative visits your business to review payroll records, tax filings, and employee job classifications in person.

The goal of the audit is to compare actual payroll figures with the estimated payroll reported at the start of the policy period. If the actual payroll is higher than estimated, your business may owe additional premiums. If it’s lower, you may be entitled to a refund or credit (subject to carrier practices and policy terms).

Errors in workers’ comp audits can result in businesses paying significantly more than they should. Some of the most common mistakes include:

1. Incorrect Employee Classification

Insurance carriers assign job classification codes based on the type of work performed. Each code has an associated risk level and premium rate. Misclassifying employees—either placing high-risk workers in a low-risk category or vice versa—can lead to higher premiums or other penalties.

✅ Solution: Ensure employees are assigned the correct classification codes from the start. Keep job descriptions updated and review classifications before audits. (In Florida, classifications and rules are generally administered by NCCI; other states may use different rating bureaus.)

2. Misreporting Payroll

Payroll discrepancies are a major cause of premium adjustments. Some businesses underestimate or misreport payroll to lower upfront costs, only to face hefty back charges during the audit.

✅ Solution: Accurately track wages, overtime, bonuses, and commissions. Maintain clear payroll records and categorize taxable and non-taxable compensation correctly. Follow your carrier’s and rating bureau’s definitions of “remuneration.”

3. Not Accounting for Subcontractors

Many Florida businesses hire independent contractors, but insurance auditors will assess whether these workers should be covered under workers’ compensation. If subcontractors don’t carry their own coverage, the business hiring them may be liable for additional costs.

✅ Solution: Always request a Certificate of Insurance (COI) from subcontractors to confirm coverage before work begins. Verify that the COI is current, matches the entity on your contract, and includes workers’ compensation.

4. Failure to Keep Accurate Records

Auditors may ask for financial statements, payroll records, W-2s, and 1099s. Missing or inconsistent documentation can lead to unfavorable estimates and higher costs.

✅ Solution: Keep detailed and organized records throughout the policy year. Store all payroll documents, contracts, and insurance certificates in a secure and accessible location.

One of the most overlooked but critical factors in workers’ compensation costs is the experience modification rate (Mod). This number is used by insurance carriers to adjust premiums based on a company’s past claim history and safety record.

How the Mod Factor Works

• A Mod of 1.0 functions as the industry benchmark average in systems like NCCI (used in Florida).

• A Mod below 1.0 indicates a better-than-average safety record, reducing premium costs.

• A Mod above 1.0 suggests higher-than-average losses, increasing premiums.

What Impacts the Mod Factor?

📌 Frequency of Claims – A high number of small claims impacts the Mod more than a single large claim.
📌 Severity of Claims – Large claims increase premiums, but frequency has a more significant long-term impact.
📌 Timely Reporting – Delays in reporting injuries can lead to higher claim costs and an increased Mod.
📌 Return-to-Work Programs – Businesses that get injured employees back to work quickly can help reduce Mod increases.

✅ Solution: Implement workplace safety programs, encourage early reporting of injuries, and explore return-to-work options to keep claims costs low.

Being proactive can prevent unnecessary costs and ensure the audit process goes smoothly. Here’s what business owners should do:

1. Review Payroll and Job Classifications

Before the audit, double-check employee classifications and verify payroll figures against actual payments made.

2. Organize Financial Documents

Prepare payroll records, tax filings (941s), W-2s, 1099s, and subcontractor agreements to ensure the auditor has clear and accurate information.

3. Obtain Certificates of Insurance for Subcontractors

If you hire independent contractors, confirm that they have workers’ compensation coverage to avoid being charged for them in the audit.

4. Address Past Audit Discrepancies

If previous audits led to unexpected charges, review them and correct any errors before the next audit period.

5. Consult with an Insurance Professional

An experienced insurance advisor can help review classifications, payroll, and Mod calculations to identify potential cost-saving opportunities. (Specific audit requirements and appeal options vary by state, carrier, and rating bureau.)

Taking a proactive approach to workers’ compensation audits and Mod calculations isn’t just about avoiding unexpected costs—it’s about long-term business stability. Managing risk effectively ensures compliance, keeps employees safe, and protects your bottom line.

Businesses that implement proper tracking systems, maintain accurate records, and stay ahead of audits will find themselves in a stronger financial position.

Workers’ compensation audits don’t have to be a financial burden or administrative nightmare. By understanding the audit process, avoiding common mistakes, and proactively managing your Mod factor, your Florida business can help avoid unnecessary costs and may improve budgeting predictability.

At Comegys Insurance Agency, we help business owners navigate the complexities of workers’ compensation insurance. If you’re facing an upcoming audit or want to review your coverage strategy, reach out to our team today. We’re here to help you keep your business running smoothly while optimizing your workers’ comp insurance costs.

Disclaimer: General information only—NOT legal, tax, HR, or insurance advice, and NOT a guarantee of premium outcomes. Rules, classifications, and experience rating methods vary by state, carrier, and rating bureau (e.g., NCCI). Consult your carrier, rating bureau, and licensed insurance professional for guidance specific to your situation.