It’s very important that your payroll records break out overtime or double time as you should only be charged for regular time on your Work Comp and General Liability audit. Severance pay and sick time should be broken out as well as these are not chargeable.
The division of labor rules allow you to split out the payroll of an individual employee who performs more than one type of labor into separate classification codes. This can save money if one class code is less expensive than the other. However, your records must show the exact amount of hours and payroll allocated to each classification code. The auditor won’t accept a mere estimate on a percentage break out basis. Also, be aware that you’re not allowed to split payroll for an employee into non labor classification codes such as clerical, outside sales, driver, or executive supervisor.
Its also very important that your subcontractor invoices break out the amount that’s paid for labor vs materials since you should only be charged for labor on uninsured subs. This is called the materials credit. If the original invoice did not include this breakout, you should ask your sub to recreate the invoice to show the breakout. If you can’t get your sub to do this, your auditor can estimate the percentage breakout at his discretion. Many auditors follow rules of thumb and will generally allocate 50% or more to labor in most cases. For example, in the case of a painting sub that supplies the paint, many auditors will assume that 75% of the total cost should be allocated to labor since the paint is relatively inexpensive. However, a different rule of thumb is used for subs that provide heavy equipment such as for excavation or land clearing. Many auditors will allocate only 33 and one-third percent to labor in these cases due to the high expense of the use of the equipment.