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Understanding remuneration: A year-end strategy for Workers' Compensation

While payroll is often referred to as the basis for Workers' Compensation premium, in most states it is actually remuneration and it's important to understand what is considered remuneration. If your policy renewal date is January 1, your 2013 policy will generally be audited from Jan. 15 to March 1, 2014. Auditors work for the insurance companies and tend to catch the mistakes that cost them money and result in higher premiums. They are not as vigilant about catching mistakes that lower premiums, so it behooves employers to understand their premium calculation and implement bulletproof record keeping strategies.

Below is a list of common items included and excluded from remuneration. States have exceptions to the rules, so it is important to review the list with your WorkComp Advisor.

  1. Inclusions
    1. Wages or salaries
    2. Pay for holidays, vacation, and sick pay not paid by a third-party administrator
    3. Bonuses - including stock bonus plans, except for inventions and discoveries
    4. Overtime pay - less the premium portion (see below)(exception Pennsylvania and Delaware)
    5. Commissions and draws against commission
    6. Employee contributions to a 401(k) or other deferred compensation plan, even if pre-tax.
    7. Employee contributions to a Section 125 Cafeteria Plan, even if pre-tax (exception: California)
    8. Pay for time not worked (i.e. paid for an 8 hour day when only 7 hours worked)
    9. Employer payments of amounts otherwise required by law (i.e. Statutory insurance, Social Security, etc.)
    10. Payment on any basis other than time worked such as piecework, incentive plans or profit sharing plans
    11. Expense reimbursements to employees that were not a verifiable expense
    12. Market value of lodging provided, i.e. free or reduced rent apartment
    13. Value of meals provided by the employer
    14. Pay for travel to and from work or to job site
    15. State Prevailing Wage Fringe Benefits paid directly to an employee
    16. Davis Bacon Wage fringe Benefits paid directly to an employee
    17. Payments for hand tools provided by the employee, either directly or through a third party
  2. Exclusions
    1. Tips and other gratuities received by employees
    2. Overtime. The premium portion of overtime is excluded. For example, if an employee makes $10/hour straight time and $15/hr. overtime, the $5/hr. is excluded from the premium audit. This is the only differential that can be adjusted back to straight time. If there is a shift differential, the higher shift rate must be included. Delaware and Pennsylvania do not allow for the premium portion of overtime pay to be excluded.
    3. Payments by an employer to group insurance or group pension plans
    4. Payments to third party trust: Payments by an employer into third party trusts for the Davis Bacon Act or a similar prevailing wage law provided the pension trust is qualified under IRC Sections 401(a) and 501(a).
    5. The value of special rewards for individual invention or discovery
    6. Dismissal or severance payments, except for time worked or accrued vacation. However, if the employer has a policy where paid time off accrues during an employees' employment and that paid time off is paid in a lump sum following the termination of employment, that payment of accrued time would be included.
    7. Payments for active military duty. For example, if an employee who is a member of the National Guard is paid for two weeks of service.
    8. Employee discounts on goods purchased from employer
    9. Expense reimbursements to employees to the extend an employer's records substantiate the expense was a valid business expense
    10. Reimbursed expenses and flat expense allowances, except for hand or hand-held power tools, may be excluded from the audit if all three of the following conditions are met: (1) the expenses were incurred upon the business of the employer, and (2) the amount of each employee's expense payments is shown separately in the record of the employer, and (3) the amount of each expense reimbursement is a fair estimate of the actual expenses incurred by the employee in the conduct of his/her work. Note: when it can be verified that the employee was away from home overnight on the business of the employer, but the employer did not maintain verifiable receipts for incurred expenses, a reasonable expense allowance, limited to a maximum of $30 a day, is permitted.
    11. Supper money for late work
    12. Work uniform allowances
    13. Sick pay to an employee by a third party such as an insured's group insurance carrier that is paying disability income benefits
    14. Employer-provided perks such as: (1) use of a company-provided automobile, (2) an airplane flight, (3) an incentive vacation (e.g. contest winner), (4) a discount on property or services, (5) club memberships, (6) tickets to entertainment events
  3. What does this mean for employers?
    1. Carefully documenting all exclusions will lead to lower premiums. For example, records should clearly document how much pay was overtime for the year. If the rate of overtime varies, for example, time-and-a-half and double time, be sure the records are distinct, as the adjustment will differ. This information should be in a form that is easily determined by the auditor, summarized by classification on an annual basis. Review the list of excluded remuneration possibilities and capitalize on them by having the necessary data to support exceptions.
    2. How bonuses are given will affect Workers' Compensation premiums. While the specific rules vary among states, in general, year-end bonuses and cash or cash equivalents such as gift cards are included in remuneration. Some state exceptions are Tennessee that includes bonuses only when paid in lieu of wages and specified as a part of a wage contract, Oregon that excludes bonus pay that is not anticipated under the contract of employment and is paid at the sole discretion of the employer, New Mexico that excludes bonuses paid under a state approved safety program and Texas that excludes safety awards paid in accordance with a written safety plan.

      On the other hand, certain gifts or perks for employees are not included in remuneration. These include employer-provided tickets to entertainment events, an airline flight, employer-provided automobiles, and club memberships.