Charged for Uninsured Subcontractors at Audit? How It's Calculated and How to Fix It
If your audit bill includes payroll for subcontractors, it's likely because the auditor didn't see proof those subs had their own workers' comp. Here's how the charge works and how to challenge it.
Educational information only. Not insurance, legal, or consulting advice. TrueUpAudit is not an insurance agency or consultant. Rules differ by state and carrier. Always check your policy and your carrier's audit notice.
What an "uninsured subcontractor" charge is
When you hire a subcontractor, you're counting on that sub to carry its own workers' comp for its own workers. If the sub doesn't, and one of its workers gets hurt on your job, your policy can end up responsible. Because your carrier is carrying that risk, the premium audit can treat what you paid the sub as if it were your payroll and charge premium on it.
On a contractor's audit worksheet this can show up as a line for each sub, or as a lump of extra payroll in a construction class. Either way, it's often the single biggest reason a contractor's audit bill jumps.
The good news: this is also one of the most fixable charges, because it usually comes down to paperwork.
What auditors look for
For each sub you paid during the policy period, the auditor generally wants to see a certificate of insurance showing the sub had its own workers' comp coverage in force during the dates it worked for you. Expect them to check:
- Dates. The coverage period should overlap the time the sub worked for you. A certificate that expired halfway through the job may only cover part of the payments.
- Workers' comp specifically. A certificate that shows only general liability doesn't prove workers' comp coverage.
- The right entity. The name on the certificate should match the business you paid.
- Your records of payments. Auditors usually work from your general ledger, 1099s, or check register to find who you paid and how much.
Rules about what counts, including exemptions some states allow for sole proprietors, vary by state and carrier. Ask your carrier what it accepts if you're unsure.
How the charge is calculated
States and carriers differ, but North Carolina's published rule is a clear example of the logic. It works in a set order:
- If you have the sub's complete payroll records, the sub's actual payroll is used.
- If you can document a labor amount (for example, the contract or invoice breaks out labor), the charge is based on the higher of that labor amount or a minimum percentage of the contract price for that type of contract.
- If you have neither, the full contract price may be treated as payroll.
North Carolina's minimum percentages by contract type:
| Contract type | Minimum share of contract price treated as payroll |
|---|---|
| Equipment rental with operator | 33 1/3% |
| Labor and materials | 50% |
| Labor only | 90% |
| Piecework | 100% |
That amount is then charged at the rate for the class the work falls under, and your experience mod and other factors apply. Your state may use different percentages, or none, so treat this as an illustration and confirm what your carrier used. Source: North Carolina Rule 2-H as summarized in this contractor subcontractor audit guide.
A worked example (made-up numbers)
Say you paid a drywall sub $30,000 on a labor-and-materials contract, the auditor used a class with a rate of $7.50 per $100 of payroll, and your mod is 1.00.
- No records at all: $30,000 treated as payroll → $30,000 ÷ 100 × 7.50 = $2,250.
- Invoice shows $12,000 of labor: the higher of $12,000 or 50% of $30,000 ($15,000) is $15,000 → $1,125.
- Valid certificate covering the job dates: typically $0.
Multiply that across five or six subs and it's easy to see how an audit bill reaches five figures.
How to get the charge reduced or removed
1. Ask for the sub-by-sub breakdown
Ask your carrier for the audit worksheet showing which subs were charged, how much was treated as payroll for each, and which class and rate were used. You can't fix a lump sum.
2. Chase the certificates
Contact each sub on the list and ask for a certificate of insurance showing workers' comp coverage for the dates they worked for you. Their insurance agent can usually issue one quickly. Many subs had coverage all along and simply never sent the paperwork.
3. Document labor where you can
If a sub truly wasn't covered, see whether you have contracts or invoices that separate labor from materials, or equipment from operator time. Under rules like North Carolina's, a documented labor amount can lower the charge compared with the full contract price.
4. Check that the payments belong to the policy period
Make sure the amounts the auditor used were paid during the policy period being audited, and that they were actually payments to subcontractors for labor, not material suppliers, equipment rentals without operators, or reimbursements. Ask about anything that looks miscategorized.
5. Dispute each line in writing
Send a written dispute to the address on your audit invoice or notice. Go line by line: the sub's name, the amount charged, why it should be removed or reduced, and the attached certificate or invoice. Our dispute letter template is set up for exactly this. For the full process, including escalation, see how to dispute a workers' comp audit.
Whether a carrier accepts a certificate produced after the audit is up to the carrier and your state's rules, but it's very often worth sending.
What if the sub really had no coverage?
Then the charge may be legitimate. You can still check that the right percentage and class were applied, that the payment amounts are correct, and that only labor-related payments were included. Then consider whether to recover the cost from the sub, if your subcontract requires them to carry insurance. That's a contract question for your own advisor.
How to avoid this charge next year
- No certificate, no start. Make a certificate of insurance showing workers' comp a condition of starting work.
- Track expiration dates. Put each certificate's expiration on your calendar and request a renewal before it lapses.
- Write it into the subcontract. Require subs to carry workers' comp and keep it in force for the whole job.
- Separate labor and materials on invoices. It helps if a sub's coverage ever lapses.
- Build an audit folder as you go: a list of every sub, what you paid them, and their certificate.
- Watch 1099 workers. People you pay on a 1099 without their own coverage can be treated as your payroll at audit. If they work like employees, talk to your agent about how your policy treats them.
Frequently asked questions
Why is my workers' comp audit charging me for subcontractors?
If a subcontractor didn't have its own workers' comp, your policy may be responsible for its workers, so the audit can treat what you paid that sub as your payroll and charge premium on it. A valid certificate of insurance covering the work dates usually prevents that.
Can I send certificates of insurance after the audit?
Usually you can try, and it's often worth it. Send the certificate with a written dispute of that specific line. Whether the carrier accepts it depends on the carrier and state.
Does a general liability certificate count?
Not for workers' comp. The certificate needs to show the sub's workers' comp coverage in force during the dates they worked for you.
Is the full amount I paid the sub always charged?
Not necessarily. Some states use minimum percentages by contract type when there's a documented labor amount. North Carolina, for example, uses 33 1/3% for equipment rental with an operator, 50% for labor and materials, 90% for labor only, and 100% for piecework. Without records, though, the full contract price may be used.
How do I prevent uninsured sub charges?
Collect a certificate of insurance showing workers' comp from every sub before work starts, track expiration dates, require coverage in your subcontracts, and keep invoices that separate labor from materials.