Workers' Comp Cost Changes: A 10-Phase Audit Before You Act

How to use this audit

Workers' compensation cost can move for many reasons. Some are inside your control, some are not, and some are simply a matter of how your insurer or PEO presents the bill. This guide gives you a ten-phase audit for working out which is which. It does not promise that any change in safety practice, provider or structure will lower your cost, and it does not assume that a rise in cost is bad luck or bad management. It treats both as open questions that evidence can answer.

Three labels appear throughout:

• Rule or fact: something set by a regulator, a policy or a contract. Where we cite one, we link the source next to the claim and keep the point short.
• Suggested workflow: our recommended way to review the issue. It is not a legal requirement.
• Opinion: our judgment, offered for discussion.

Workers' comp rules differ by state, and some states run their own monopoly funds or rating bureaus. Anything we say about formulas or terms is limited to a clearly labeled Texas illustration. Your state may work differently, so confirm with your carrier, agent or counsel.

You do not need any documents to start a conversation with us. You will need some documents to complete this audit, and the phases tell you which.

Phase 1: Define the question and name the owners

Goal: decide exactly what you are trying to explain before pulling data.

A "workers' comp increase" can mean at least four different things: the insurer's premium changed, the PEO's workers' comp line item changed, your total cost per employee changed, or your cost changed relative to other employers. Each needs different evidence.

Tasks:

• Write one sentence stating the question, for example: "Why is our workers' comp charge 18 percent higher this policy period than last?" Use your own number, not ours.
• Name an owner for the audit (often finance or operations), a data owner for payroll records, and a claims contact.
• Set a review date and decide who will see claim information.

Output: a one-paragraph scope statement and a named owner list.

Exit gate: the scope names a specific period, a specific cost measure and a person accountable for each data source.

Phase 2: Separate insurer premium from PEO billing

Goal: know which entity is charging you for what.

Rule or fact, with a limit: a PEO arrangement is a co-employment relationship, and how a PEO bills and places workers' comp coverage varies. The NAPEO FAQs describe co-employment and the client service agreement in general terms. The agreement, not a general description, tells you how your coverage is placed and billed.

Suggested workflow: ask for the following in writing, and keep the answers in your register.

• Is your coverage written under a policy that names the PEO, a policy that names you, or another structure?
• Is the charge you see an insurer premium passed through, a PEO-set rate, or a blend?
• Does the PEO apply its own pricing to a pooled program, and if so, how does your own claim history affect your rate?
• Which party issues audit and reconciliation adjustments, and when?
• Does any part of your bill include a markup, fee or credit that is separate from the underlying premium?

Do not assume the answers. Different providers and different programs work differently, and we make no claim that they are all structured the same way.

Output: a one-page description of who issues which charge.

Exit gate: you can explain, in plain words, which invoice line is an insurer premium and which is a PEO charge.

If you would like help reading your invoice lines, you can Discuss your workers' comp review and start with the billing questions above.

Phase 3: Check classification codes

Goal: confirm that each employee is assigned to a code that reflects the work they actually do.

Premium is generally built from payroll multiplied by a rate for each classification. A code that does not match the real work can raise or lower the charge, and it can create an audit problem later.

Tasks:

• List every classification code on the current policy or PEO schedule.
• For each code, list the roles assigned to it and a one-line description of the real duties.
• Flag any role whose duties span two codes, such as a worker who spends part of the week in an office and part in a warehouse.
• Check whether any employees have moved roles during the year without a code change.
• Check how clerical and outside-sales exceptions, if your state uses them, are documented.

Suggested workflow: have a manager who knows the work, not only the person who handles payroll, review the list. Record the evidence for each code, such as a job description, and who approved it.

Output: a code-to-role map with evidence notes and a short list of questions for the carrier or PEO.

Exit gate: every employee maps to a code you can defend, or has an open question assigned to an owner.

Phase 4: Check the payroll basis

Goal: make sure the payroll being charged against matches your records.

Premium is usually estimated from expected payroll and later reconciled to actual payroll. A mismatch in either direction shows up as a surprise at audit.

Tasks:

• Compare the payroll estimate used for the policy or PEO schedule with your actual payroll year to date, by code.
• Identify pay types that may or may not count toward the premium basis in your state or under your policy, such as overtime premium, bonuses, commissions or certain benefits. Do not guess. Ask the carrier or PEO to state the rule in writing.
• Note any significant change in headcount, hours or mix during the period.
• Note whether subcontractors or temporary workers are in or out of the basis, and whether certificates of insurance support that.

Output: an estimate-versus-actual comparison by code, with explanations for large gaps.

Exit gate: you can say whether the current estimate is likely to produce a refund, an additional charge or neither, and why.

Phase 5: Understand rate and modifier

Goal: see how base rate and your own experience feed into the charge.

Illustration (Texas only): the Texas Department of Insurance describes how experience rating works for Texas policies on its workers' compensation experience rating page, and defines related terms in its Texas workers' compensation glossary. Use those pages for the actual formula and definitions. Other states use other bureaus and methods, and PEO-pooled programs may price differently again.

Hypothetical math, clearly illustrative: the numbers below are invented to show the logic. They are not real rates, they are not from the Texas pages, and they leave out credits, debits, discounts and fees that a real policy may include.

• Suppose a code has a hypothetical rate of 2.00 per 100 dollars of payroll, and payroll in that code is 1,000,000 dollars.
• Premium before experience adjustment: 1,000,000 divided by 100, times 2.00, equals 20,000 dollars.
• With a hypothetical experience modifier of 1.10, the adjusted figure is 22,000 dollars. With 0.90, it is 18,000 dollars.
• The difference between the two modifiers is 4,000 dollars on this one code. That is arithmetic on invented inputs, not a prediction.

Tasks:

• Ask for the current modifier, the policy period it applies to, and the claim period it was built from.
• Ask which claims are in the calculation and whether any are under review or eligible for correction.
• Ask whether your arrangement uses a modifier at all, or whether your PEO sets its own rate.

Output: a short note explaining the rate, the modifier or equivalent, and how each was derived.

Exit gate: you know which part of the change is base rate, which is your own experience, and which you cannot yet explain.

Phase 6: Consider market and program context

Goal: judge how much of a change might come from outside your business.

Workers' comp pricing can be influenced by regulatory rate changes, carrier appetite for your industry, and a PEO's own program pricing. Evidence matters here, and so does restraint.

Suggested workflow:

• Ask your agent or PEO whether the filed rate or program pricing changed for your classes in your state during the period, and ask for the source.
• Ask whether the carrier or program changed.
• Compare the direction of your change with what your state regulator publishes, where available.

Opinion: it is tempting to say a cost increase is "the market" or "your safety record." Often it is some of each. Resist a single-cause story until the numbers in Phases 3 to 5 are reconciled.

Output: a short list of external factors with their sources and a note on what remains unknown.

Exit gate: each external factor is either supported by a source or marked as unverified.

Phase 7: Reconcile audits and adjustments

Goal: understand how estimates turn into final charges.

Tasks:

• Find out whether a premium audit or payroll reconciliation applies and when it occurs.
• Collect the last audit or reconciliation statement and read the adjustments by code.
• Check whether any adjustments reflect reclassification, payroll differences or both.
• Ask how disputes are raised, who handles them and the time limit.
• Check whether interim billing is based on estimates and how true-ups are charged.

Output: a reconciliation timeline showing when estimates, audits and true-ups occur.

Exit gate: you can predict, in broad terms, when an adjustment might arrive and what documents would support your position.

Phase 8: Review claims at an aggregate level

Goal: understand what your own claim experience contributes, without exposing private medical details.

Claim data is sensitive. Work from summaries, not medical records.

Suggested workflow:

• Request a loss run or claim summary that shows claim count, status, incurred and paid amounts and the date of injury, without medical detail.
• Group claims by cause category, location and role, using codes not names.
• Count how many claims are open, closed or in dispute and how long each took to close.
• Ask who reports claims to the carrier and how soon after the event, then compare that with your internal incident log.
• Look for whether modified duty or return-to-work options were offered and documented.

Share only aggregate or de-identified information with people who do not need claim details, and do not paste employee names, medical information or claim numbers into AI tools or general email.

Output: a de-identified claim summary and a short list of process gaps, such as late reporting or no documented return-to-work offers.

Exit gate: each large or open claim has an owner and a next step, and no private information has been shared beyond those who need it.

Phase 9: Get an independent finance review

Goal: have someone who did not set up the arrangement test your conclusions.

Suggested workflow: ask a CFO, controller or outside accountant to review the reconciliation from Phases 2 to 7 without being told your preferred answer. Give them the invoice lines, the payroll comparison and the audit statements, and ask them to answer three questions: Can they trace each charge to a source? Do the numbers tie to payroll? What would they want to confirm before relying on this?

If you are considering a change of provider, ask them to build a full-year comparison that includes all workers' comp elements, any audit exposure and any deposit or collateral requirements.

Output: a written review with open questions.

Exit gate: the reviewer can reproduce your totals, or you have a list of differences to resolve.

If you are weighing a change, you can Discuss your workers' comp review and talk through what a full-year comparison should include.

Phase 10: Decide and build the action register

Goal: turn findings into dated actions.

Possible conclusions include: the charge is understood and fair for your situation, a classification needs correcting, a payroll estimate needs revising, a claims process needs tightening, or alternatives are worth pricing. We will say so plainly if your current arrangement is the best fit.

Action register fields: action, owner, due date, evidence needed, status, and decision date.

Output: a written decision with a dated action list.

Exit gate: each action has an owner, a date and evidence of completion.

Worked example (fictional)

This example is invented. It does not describe a real company and makes no claim about outcomes.

Larkspur Millwork, a fictional 45-person company in a single state, sees its workers' comp line rise between two policy periods. The owner assumes it is claims.

• Phase 2 shows the charge is a PEO-set rate, not a passed-through carrier invoice. The agreement says the rate is reviewed at renewal.
• Phase 3 finds six shop-floor employees coded as clerical because they were hired for the front desk and later moved to light assembly. The code is queried.
• Phase 4 shows the payroll estimate was set before a hiring push, so the estimate is low. A true-up is likely.
• Phase 8 shows two small closed claims and one open claim. Reporting dates are within a few days of each event.
• Phase 9: the controller finds that the increase is partly a correction of codes, partly a payroll estimate that was too low, and partly something the PEO cannot explain.

The decision: correct the codes with documentation, update the estimate, and ask the PEO for a written explanation of the rate change. Larkspur does not switch providers yet, because the unexplained portion is small relative to what a move would involve. The example shows the method. A real company's evidence could point in a different direction.

Decision criteria

Use these questions to decide what to do with the findings. They are our suggested criteria, not rules.

• Can the provider explain every charge in writing and tie it to payroll or a stated rate?
• Do the classification codes reflect real duties?
• Are claims reported and managed on a consistent process you can see?
• Is any improvement you want achievable by changing your own practices, or does it require a different structure?
• If you move, would the new provider's coverage be accepted for your state, classes and claim history?

Master checklist

• Scope statement, owner list and review date written.
• Billing structure described: insurer premium versus PEO charge.
• Code-to-role map completed and questions logged.
• Payroll estimate compared with actual payroll by code.
• Rate and modifier or equivalent explained, with sources.
• External market and program factors listed with sources or marked unverified.
• Audit and reconciliation timeline documented.
• De-identified claim summary reviewed.
• Independent finance review completed.
• Action register created with owners and dates.
• Decision recorded, including the option to stay.

When to bring in specialist help

• A licensed insurance agent or broker for state-specific rating, carrier appetite and coverage structure.
• An employment or workers' comp attorney for classification disputes, contested claims, retaliation concerns or contract interpretation.
• A CPA or controller for payroll reconciliation and cost modeling.
• A safety professional for hazard assessment. See our companion article on safety programs.

Sources and research directory

Checked 2026-10-25. Please confirm details against each page, since rules and pages change.

• NAPEO FAQs: general description of co-employment and the client service agreement.
• Texas Department of Insurance, experience rating: Texas illustration only. Not a nationwide rule.
• Texas Department of Insurance, workers' compensation glossary: Texas definitions only.
• IRS arrangement nuance: for payroll tax responsibility under a PEO arrangement, see the IRS page on outsourcing payroll and third-party payers, and note that a certified PEO is treated differently from other payers. That page concerns payroll taxes, not workers' comp premium.

Talk it through

If you want a second set of eyes on your workers' comp charges, you can Discuss your workers' comp review. No documents are required for the first conversation. Start with your questions. If staying with your current arrangement is the best option, we will say so.

We proactively explain who pays us and how compensation works.