PunchWorkers' Comp Premium Audit: How Your Time Records Decide What You Pay (2026)
Workers' Comp Premium Audit: How Your Time Records Decide What You Pay (2026)
The short answer: Your workers' compensation premium is calculated on payroll. Every rule in the manual that reduces that payroll, the overtime exclusion, splitting one worker's hours across two class codes, proving what a subcontractor's crew actually earned, is written as a condition on your records. Meet the condition and you pay less. Miss it and the auditor is required to use the more expensive assumption. Most small employers lose money at a premium audit not because they did anything wrong, but because they could not prove what they did. Punch is the hours record that turns those assumptions back into numbers.
Premium Is Payroll, and Payroll Is a Manual Definition
Start with the sentence the whole audit runs on. The NCCI Basic Manual, Rule 2-A, says premium "is calculated on the basis of the total payroll paid or payable by the insured for services of employees who are eligible to receive workers compensation benefits." Rule 2-B defines payroll and remuneration as "money or substitutes for money."
Your carrier estimated that payroll when it wrote the policy. At the end of the policy period it audits to find out what the real number was, then bills or credits the difference. Rates are quoted per one hundred dollars of payroll and vary enormously by classification, so the audit is not really about one number. It is about which dollars land in which classification bucket, and which dollars come out of the calculation entirely. That is a records question from beginning to end.
The Overtime Exclusion Most Owners Give Away
Here is the single largest line item small field employers leave on the table.
Rule 2-B-1-e counts "extra pay for overtime work" as payroll, then immediately carves out an exception. Rule 2-C-2-a says extra pay for overtime is excluded from the payroll premium is calculated on, "provided that the insured's books and records are maintained to show overtime pay separately by employee and in summary by classification."
Read that condition twice. The exclusion is not automatic. It is conditional on your records.
The manual then sets out how much comes out, depending on what your records show:
- If the records show the extra pay earned for overtime separately, "the entire extra pay is excluded."
- If the records show total overtime pay in one combined amount at time and one-half, "1/3 of this total pay must be excluded."
- If double time is paid and recorded separately, "1/2 of the total pay for double time must be excluded."
The logic is that only the premium portion comes out. As the manual puts it, "the only portion of the overtime payroll that is deductible is the amount in excess of wages that would have been applied if the overtime were compensated at the regular rate of pay." The worker earning twenty-four dollars an hour who works overtime at thirty-six is reported at twenty-four. The extra twelve is not premium-bearing.
Two conditions narrow it further. Rule 2-C-2-b permits the deduction only where the employee actually receives an increased rate for hours beyond eight in a day, forty in a week, or beyond the hours usual to your business. And the manual is explicit that shift differentials do not count: "premium pay is extra compensation paid to employees who work nights, holidays, weekends, other special hours, or work under unusual conditions. This premium pay is not considered overtime pay when it is the normal pay for working these shifts."
One state caveat. A handful of jurisdictions do not permit the overtime exclusion at all, with Pennsylvania, Delaware, Utah, and Nevada the ones most commonly cited by carriers and brokers. Confirm your own state with your carrier or your state rating bureau before you budget around it.
If your timesheets are a stack of handwritten weekly totals with no overtime broken out by person, you have no exclusion. Everything gets reported at the full rate. That is not a penalty. It is the rule working exactly as written against a business that cannot produce the record.
Splitting One Worker Across Two Class Codes Requires Actual Hours
The second place money moves is classification. A framer who spends part of the week on the roof, a technician who splits between shop work and field installs, a crew lead who runs a machine some days and a truck others: these people may qualify for division of payroll across more than one classification, and the rate spread between two codes can be several dollars per hundred of payroll.
Rule 2-G allows the split, on conditions. The employer must maintain "proper payroll records which show the actual payroll by classification for each employee." Rule 2-G-2-a requires that records "document the actual time spent working within each job classification." Rule 2-G-2-b is one sentence long and decides a lot of audits: "Estimated or percentage allocation of payroll is not permitted."
Then the consequence. If your records do not document the payroll applicable to each classification, "the entire payroll of the individual employee must be assigned to the highest rated classification that represents any part of his or her work."
Every hour that worker spent on lower-rated work gets billed at the highest-rated code. Telling the auditor that Miguel was "about sixty percent shop" is not a record. It is the exact estimate the rule prohibits.
There is a related trap in Rule 2-G-3. Holiday pay, vacation, sick pay, and overtime, meaning pay not directly attributable to a specific classification, must be allocated to the classification carrying the greatest amount of that employee's payroll, and where none does, to the highest rated code that applies. Which again requires you to know where the rest of the hours went.
Uninsured Subcontractors Become Your Payroll
Field employers get surprised by this one every year. Rule 2-H treats an uninsured subcontractor's crew as your exposure, and how much you pay depends on whether you can produce records.
If you furnish "complete payroll records of the subcontractor's employees," the manual says to "use the payroll detailed in the records." If you do not, and the subcontracted price does not reflect a definite payroll amount, the auditor is instructed to "use the full subcontracted price of the work performed during the policy period by the subcontractor as payroll."
The full contract price. Materials, equipment, overhead, and margin all charged as if they were wages. Collect certificates of insurance before anyone starts work, keep them current through the policy period, and keep the labor detail for anyone who is uninsured. If you are unsure whether the people you pay are contractors at all, read our guide on 1099 versus W-2 classification for field crews first, because that question decides this one.
Refusing the Audit Is the Most Expensive Option
Some owners deal with the audit request by ignoring it. That has a defined price now.
NCCI established the Audit Noncompliance Charge effective January 1, 2017 in most jurisdictions. Where an audit cannot be completed because the employer will not cooperate, and after at least two attempts to examine the records, the carrier may apply a charge of up to two times the estimated annual premium. If the employer later allows the audit or supplies the records, the charge is refunded or applied to the outstanding balance.
So the record gets produced either way. The only question is whether you produce it for a modest adjustment or after paying double.
This audit is separate from a federal wage and hour investigation, and the two ask for overlapping records for different reasons. Our guide on what a DOL wage and hour audit looks like covers that one, and how long to keep employee time records covers the retention clocks that apply to both.
What Punch Puts in Front of the Auditor
Read back through those four rules and notice they ask for the same thing: hours, attributed to a person, to a day, to a place, at real precision, kept for the whole policy period.
Punch is built to be that record. Crews punch in and punch out with real timestamps, and lunch is recorded separately, so unpaid meal time never inflates a paid total. Hours are exact rather than rounded to something convenient at the end of the week.
Overtime is computed against a workweek you fix in settings, with statutory presets for more than 60 countries including the states that run daily overtime and daily double time. That matters here specifically, because the overtime exclusion depends on regular hours and premium hours being separable per employee rather than blended into one weekly figure. If you want the mechanics of how premium hours are derived, our guide on the regular rate of pay covers it.
Hours are recorded against job sites, which is the lever for the classification question. Set up a site per project or per work type and every punch lands in the right bucket automatically, with no one reconstructing percentages in April. Reports show hours and labor cost by person, by job site, and by pay period, and export to Excel or a QuickBooks CSV, or push straight into QuickBooks Online. Square is supported too. The same reporting is what makes labor cost per job knowable during the job rather than after it, and it is the foundation for certified payroll on prevailing wage work.
Owners and managers approve the week in one place, with bulk approve and reject, so the hours that reach payroll are hours a human signed off on. Every edit is attributed, so a corrected punch reads as a documented correction rather than a mystery an auditor has to interpret against you.
Punch does not run your payroll, does not calculate your premium, and does not assign class codes. It produces the underlying hours record that every one of those calculations is conditioned on, at the precision the manual demands.
Why Punch Wins on the Rest of It
Crews punch in from iOS with a job-site geofence, from any browser, or from a shared iPad kiosk with a PIN. Punches work offline and sync when signal returns, which is what a basement, a stairwell, and a rural site all have in common. Time off requests live in the same app instead of a group text, and split shifts stay split.
On privacy, Punch verifies a punch with a job-site geofence, never a camera in your crew's face. No facial recognition, no photo at a punch. Trust beats surveillance, and a geofence record is easier to defend than a folder of employee photographs.
Pricing is flat per organization. Every feature is on every plan, kiosk mode and QuickBooks included. Owners are always free, and nothing is billed per seat. ClockShark, Connecteam, QuickBooks Time, Buddy Punch, and Homebase all bill per user, so the record that lowers your insurance premium costs you more every time you hire. Punch does not work that way. Bringing on a six-week seasonal crew does not move your bill, and the audit trail covers them from their first punch.
The Bottom Line
The premium audit is not an inspection of your judgment. It is a test of your documentation. Extra pay for overtime comes out of premium-bearing payroll only if your records show it separately by employee and in summary by classification. A worker's hours split across two class codes only if you can document actual time in each, because estimates and percentages are not permitted and the fallback is the highest rated code for everything. An uninsured subcontractor costs you their real payroll only if you can produce it, and the full contract price if you cannot. Stonewalling the audit can cost up to twice the estimated annual premium.
Every one of those turns on hours you can prove. Get the punches right all year and the audit becomes a printout instead of an argument.
Start with Punch and walk into your next premium audit with the numbers already proved.
This article is general information, not legal or insurance advice. Workers' compensation rules are set state by state, and independently rated states may differ from the NCCI manual language described here. Confirm your classifications, exclusions, and reporting obligations with your carrier, your broker, or your state rating bureau.