Workers' comp audits and uninsured subcontractors: why you get charged
The policy year ends, a premium auditor asks for your payroll records and 1099s, and a few weeks later there's an additional premium bill, sometimes larger than the original deposit. Very often the cause is the same: subcontractors without a valid workers' comp certificate on file.
Here's why that happens, how the charge is calculated, and how to keep it from happening again.
Want a number first? The workers' comp audit calculator estimates the extra premium from your uninsured subs.
Why you're on the hook
Workers' comp premium is based on payroll, rated by class code. At the end of the policy period, the insurer audits your actual payroll to set the final premium.
Uninsured subs matter because of statutory employer rules. In most states, if a subcontractor doesn't carry workers' comp and its employee is hurt on your job, the injured worker can claim benefits from you, as though you were the employer. Your policy is the one that pays.
Since your policy carries that risk, the insurer charges for it. The auditor treats an uninsured sub's workers as yours and adds them to your premium base.
How the charge is calculated
The method varies by state and carrier, but it usually works like this:
- The auditor lists payments to subs, usually from your 1099s and general ledger.
- For each sub, they look for proof of workers' comp coverage that was valid for the whole period the sub worked for you.
- Subs without proof are treated as uninsured. The auditor uses the sub's actual payroll if you can provide it. Otherwise, they treat all or part of what you paid as payroll, depending on rules for labor versus materials.
- That amount is rated at the class code for the work. Roofing, framing and other high-hazard codes have high rates per $100 of payroll.
A rough example: you paid an uninsured framing sub $120,000. If the auditor treats it all as payroll at a rate of $10 per $100, that's $12,000 of extra premium, before any experience modifier or state surcharge.
The documentation auditors want
| Item | Why |
|---|---|
| Certificate of insurance for each sub | Proves the sub carried workers' comp |
| Policy dates covering the full period of work | A certificate that expired halfway through only proves part of the period |
| Exemption certificates | For sole proprietors or officers who are legitimately exempt under state rules |
| 1099s and payment ledger | Ties payments to each sub |
| Subcontracts | Shows the work and the sub's independence |
Coverage dates are where most GCs get caught. A sub sent a valid certificate in February, the policy expired in August, and they kept working through December. The auditor may treat August–December as uninsured.
Common traps
- Certificates that expired mid-job. Keep renewals on file, not just the first certificate. See COI expiration.
- "Ghost" policies. Some states sell minimum-premium policies that cover no employees. A sole proprietor can have one to satisfy contract requirements while still having workers who aren't covered. Ask questions when a sub with a crew shows a tiny policy.
- Officer exclusions. On the ACORD 25, the workers' comp row asks whether owners or officers are excluded. If they're excluded and working in the field, the rules depend on your state and carrier.
- Lower-tier subs. Your sub's own uninsured subs can roll up the chain in some states.
- Monopolistic states. In North Dakota, Ohio, Washington and Wyoming, workers' comp comes from the state fund. Proof looks different there. See state-by-state requirements.
A prevention routine
- No certificate, no start. Make a current workers' comp certificate (or exemption) a condition of starting work.
- Check the workers' comp row, not just GL. Statutory coverage, employers' liability limits, and SUBR WVD if your contract requires a waiver. See waiver of subrogation on workers' comp.
- Track every expiration date. Get the renewal certificate before the old one lapses.
- Keep everything in one place. When the auditor calls, export a list of subs with coverage periods instead of searching inboxes.
Full audit prep is in how to prepare for a workers' comp audit.
Let software keep the file current
Certy keeps a current COI for every sub. It reads each certificate, flags missing or inadequate workers' comp, and reminds subs 30, 14 and 7 days before policies expire. When the audit comes, you have a dated record for every sub.
This article is general information, not legal or insurance advice. Audit rules vary by state and carrier, so ask your broker how your carrier handles uninsured subcontractors.
Frequently asked questions
Why does my workers' comp audit charge me for subcontractors?
In most states, if your subcontractor doesn't have workers' comp, you can be responsible for benefits to its injured workers as their statutory employer. Because your policy carries that risk, the auditor adds the uninsured sub's payroll, or an estimate based on what you paid them, to your premium base.
How do I avoid being charged for subcontractors on my audit?
Collect a valid certificate of insurance showing workers' comp coverage for each sub, covering the full period they worked for you, and keep it on file. Where a sub is legitimately exempt, collect the state's exemption documentation.
How does the auditor calculate the charge?
It depends on the state and carrier. Auditors commonly use the sub's actual payroll if you can document it. Otherwise they treat part or all of what you paid the sub as payroll and rate it at the class code for the work performed.
Does a 1099 subcontractor need workers' comp?
If they have employees, usually yes. Sole proprietors without employees are often allowed to exclude themselves, but your auditor may still charge you unless you have proof of coverage or a valid state exemption.