Aaron Thomas Roth

This past summer, Denise Bader faced her first workers’ comp audit. “I thought we were in trouble when we got the letter saying we were to be audited,” says Bader, an industry newcomer who co-owns Bader Home Construction, in Ladera Ranch, Calif., with her husband. She was relieved to discover that the audit is a routine annual event, but she still had qualms.

The letter asked that Bader have several items ready for the auditor. While this list may vary by state and even by carrier, in general, the auditor wants to see: payroll records, quarterly payroll tax return (941’s) and/or the state unemployment compensation returns, cash disbursements, income tax returns, and data on subcontractors used.

Exposure Exposed

Audit results determine the remodeler’s correct premium. When you take out a workers’ compensation policy based on payroll, you estimate the exposure. At the end of each year, the auditor looks at actual payroll exposures. The carrier then adjusts the premium up or down based on the actual exposure.

According to Chip Hock, president of Charles E. Hock Associates, in Clifton Park, N.Y., auditors are looking for an audit to make sense. “If we look at an income tax return and find that sales are $3 million and the company owner shows that payroll is $25,000 and they had no subs, then who’s doing the work?” he asks. “That’s a red flag.”


Bader says that she spent a lot of time “getting [her] arms around” the audit, but being organized with all her paperwork made the audit go smoothly.

She now has a system. Every time a new subcontractor is hired, Bader:

  • Writes their name on a form provided by her insurance company
  • Pulls their information from the California state license website
  • Tracks how much the contract will be for a year’s time
  • Asks for a copy of their insurance certificate, contractor’s license, and workers’ compensation information
  • Sends a stamped, self-addressed envelope and a note saying that no payment will be released until she sees their paperwork.

—Stacey Freed, senior editor, REMODELING.