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In most states, you need to buy workers’ compensation (WC) insurance as soon as you hire your first employee. Not only is it the law, it’s also crucial that you have coverage in place as soon as possible. Even if you are a sole proprietor of your business, you may be required to have workers’ comp. For instance, you might need it to get a contractor license depending on what state you work in.

A workers’ comp audit, is an end-of-year review of records. It’s conducted to ensure that your business has paid the correct premium for workers’ comp insurance.

During the audit, your insurance provider usually verifies that the payroll and other records quoted at the beginning of the policy reflect the actual payroll and scope of work performed during the policy period. If the records don’t match, the price of the workers’ comp insurance is adjusted for the policy year.

The audit also assesses whether any subcontractors you hired had their own coverage in place. If not, policyholders may be charged based on payments to uninsured subcontractors as well.

Simply put, an Experience Modification Factor or Experience Mod (EMR or Mod for short) is essentially a company’s safety score in reference to their workers’ compensation insurance coverage. It is partly determined by the industry classification in which a company operates and how many OSHA recordables it accumulates. Depending on your state, either your state rating bureau or the National Council on Compensation Insurance determines your Mod.

The average EMR is 1.0, which means that the employer is found to be no more or less risky than the majority of other employers. Typically, a rating under 1.0 is considered good, or relatively safe. If your rating is above 1.0 it is considered bad or relatively unsafe.

Subcontractors must be covered by workers’ compensation insurance. If your subcontractor does not have coverage, they will be included in your policy and you will be responsible for premium payments and claims filed for that subcontractor. To avoid this, you should obtain a certificate of workers’ compensation insurance from your subcontractor before work is started and annually thereafter. Obtaining a valid certificate of insurance will help you ensure the subcontractor has insurance before they start working for you.

Owner and officer inclusion and exclusion rules vary by state. In most states, executive officers and owners of businesses typically aren’t required to be included in workers’ compensation insurance, but they can be if they so choose. Many states require owners and officers to sign and file specific workers’ compensation state inclusion or exclusion forms depending on how the business is organized.

Prompt reporting of all work-related injuries is a risk management best practice. Most states have laws that require employers to report any potential workers’ compensation injury, even if the injury is not severe. Prompt reporting also provides information that helps claims adjusters investigate and respond to a claim in a timely manner.

If the Workers’ Comp Board does not have an employer’s coverage information, it will mail an inquiry notice to the business, asking the business to show it is complying with the WC laws. If an employer fails to provide this information, the Board will assume that the employer is violating the WC law and will mail a penalty notice.

A business has 30 days from the date of the initial penalty notice to request a review of the penalty, explain why there was a lapse in coverage, and ask for the penalty to be reduced. The Board processes requests for review based on information provided by businesses. This review may result in penalties being rescinded, reduced, or upheld.

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