California Trades Contractors: The Workers Comp Audit Mistake That's Costing You Thousands
A San Diego general contractor just got hit with a $63,000 surprise bill after their workers comp audit. Here's what happened—and how to make sure it doesn't happen to you.
If you're a trades contractor in California—whether you're a general contractor, plumber, electrician, HVAC specialist, or framer—there's a good chance you work with subcontractors regularly. And there's an even better chance that your subcontractor documentation could cost you tens of thousands of dollars during your next workers compensation audit.
Most contractors don't realize they have a problem until the audit letter arrives. By then, it's too late. Missing or expired Certificates of Insurance (COIs), gaps in coverage dates, and incomplete paperwork can turn a routine audit into a financial nightmare.
In this post, I'll walk you through exactly what happens during a workers comp audit, the three biggest mistakes California contractors make with subcontractor documentation, and how to build a system that keeps you audit-proof.
What Actually Happens in a Workers Comp Audit?
Workers compensation audits happen at the end of your policy period (typically annually). Your insurance carrier wants to verify that the premium they charged you accurately reflects your actual risk exposure.
During the audit, the auditor will review:
Payroll records
Cash disbursements (including payments to subcontractors)
Certificates of Insurance from all subcontractors
1099-NEC forms
W-9s
Subcontractor agreements
Here's the critical part: If you can't prove that your subcontractors had their own workers compensation insurance during the time they worked for you, the insurance carrier will treat those payments as YOUR payroll—and charge you premiums accordingly.
According to Travelers Insurance, auditors specifically request "certificates of insurance covering the time the contractors perform work for you." Without valid certificates, you could be "responsible for employees of uninsured independent contractors/subcontractors."
The Three Biggest Mistakes California Contractors Make
Mistake #1: Missing or Expired Certificates of Insurance
This is the most common—and most expensive—mistake.
What happens: You hire a subcontractor, they do the work, you pay them, but you never get (or never properly file) their Certificate of Insurance proving they had workers comp coverage.
The consequence: During your audit, when you can't produce a valid COI for that subcontractor, the auditor adds every dollar you paid them to your payroll calculation. If you paid a framing sub $100,000 for the year and don't have their COI, that's $100,000 added to your premium base.
According to Fisher Phillips, "If you can only provide certificates of workers' compensation insurance for a handful of contractors, or the certificates of insurance produced only cover a portion of the policy period, the auditor will treat the fees you paid to the contractor for the period at issue as payroll. And when those contractor fees total millions of dollars, your unexpected additional premium charge could equal $500,000 or more."
California-specific note: California CSLB requires all licensed contractors to carry workers' compensation insurance or file an exemption. You can verify a contractor's license and insurance status on the CSLB website.
Mistake #2: Coverage Date Gaps
Even if you have a Certificate of Insurance on file, you're not necessarily protected.
What happens: Your electrician's COI shows coverage from January 1 through June 30. But they continued working for you through December. Their policy wasn't renewed, or they didn't provide you with an updated certificate.
The consequence: You're liable for workers comp premiums on every dollar you paid them from July through December—even if they actually had coverage and just didn't give you the updated paperwork.
Berry Insurance emphasizes: "Having proof of coverage will also come in handy when your workers' comp audit comes up and you can show your insurance company proof that your subcontractors had insurance so that you do not in fact have to pay for them on your policy."
The timing problem: Most contractors discover these gaps during their annual audit—which means 6-12 months after the coverage lapsed. By then, the subcontractor may be long gone, making it nearly impossible to get updated documentation.
Mistake #3: Incomplete Documentation (W-9s, 1099s, Contracts)
A Certificate of Insurance isn't the only thing auditors want to see. They're looking for a complete paper trail that proves your subcontractors were truly independent contractors—not misclassified employees.
What auditors expect to see:
✓ W-9 forms collected before first payment
✓ Written subcontractor agreements
✓ 1099-NEC forms filed with the IRS (due January 31)
✓ Payment records that match the 1099s
✓ Valid COIs covering the work period
What triggers red flags:
Missing 1099s for contractors paid over $600
1099 amounts that don't match your payment records
No written agreements defining the contractor relationship
No W-9 on file (how did you know their correct EIN/SSN for the 1099?)
According to the IRS, penalties for late or missing 1099-NEC forms range from $60 to $330 per form, depending on how late you file. But the bigger problem is that missing 1099s signal to auditors that your contractor documentation is messy—which invites closer scrutiny of everything else.
Metropolitan Risk notes: "If you are unable to prove the vendor or independent sub contractor did have coverage, the payments your company makes to this sole proprietor will be picked up on your workers compensation audit. This will become a chargeable event under your policy."
California-Specific Rules You Need to Know: SB 216
If you're a California contractor, the stakes just got higher.
What is SB 216?
Senate Bill 216, signed into law in 2022, dramatically expands California's workers compensation requirements for contractors.
The timeline:
January 2024: High-risk trades (C-8 Concrete, C-20 HVAC, C-22 Asbestos Abatement, C-39 Roofing, C-61/D-49 Tree Service) must carry workers comp—even if they have no employees
January 2026: ALL licensed contractors in California must have workers comp insurance, regardless of employee count
According to Pogo Insurance, "Starting in 2024, California's new SB-216 law requires more contractors, even those with no employees, to have workers' compensation insurance. At first, this law mostly targets high-risk trades such as plumbing, electrical work, HVAC, roofing, and concrete work."
What this means for you: Even solo subcontractors who previously filed exemptions may now be required to carry coverage. This makes COI verification even more critical—you can't assume a one-person sub is exempt anymore.
California's Strict ABC Test
California uses one of the strictest tests in the nation to determine if someone is truly an independent contractor.
Under California's ABC test, a worker is presumed to be an employee unless the hiring entity can prove ALL three of these conditions:
A. The worker is free from control and direction in performing the work B. The work performed is outside the usual course of the hiring entity's business C. The worker is customarily engaged in an independently established trade or business
This is particularly tricky in construction. If you're a general contractor hiring a framing subcontractor, the framing work is arguably within "the usual course" of your business—which could fail part B of the test.
Visionary Law Group explains: "Under the ABC test, a worker is presumed to be an employee unless the hiring entity can prove all three of the following conditions." This presumption of employee status puts the burden of proof on you.
Penalties for Non-Compliance in California
California doesn't mess around when it comes to workers comp violations.
According to Make Me A Contractor, penalties include:
Fines up to double the amount of premium that would have been due
Minimum fine of $10,000
License suspension or revocation
Imprisonment for up to one year
Stop-work orders from the Division of Labor Standards
These aren't theoretical penalties—California actively enforces workers comp requirements.
How to Verify Your Subs Are Compliant
Step 1: Check the CSLB Website
Before hiring any subcontractor in California, verify their license status:
Go to CSLB License Search
Enter the contractor's license number or business name
Verify:
License is active and current
Whether they've filed a workers comp exemption
Any disciplinary actions
Eclipse Insurance notes: "All licensed contractors in California are required to carry Workers Comp, unless they file an exception with the Contractors State License Board (CSLB) by signing an affidavit stating they have no employees. This statement then becomes part of their public record visible on the CSLB website."
Step 2: Collect and Verify COIs
When a subcontractor provides a Certificate of Insurance, verify:
✓ Named Insured: Does it match the business name and license? ✓ Coverage Dates: Does it cover the entire period they'll be working for you? ✓ Policy Number: Is it clearly listed? ✓ Insurance Carrier: Is it a legitimate carrier licensed in California? ✓ Your Business Listed: Are you named as the certificate holder? ✓ Coverage Amounts: Does it meet your requirements (typically minimum $500,000)?
Don't just file it away—actually read it and verify the details.
Step 3: Create a Tracking System
This is where most contractors fall short. You collect COIs, but then you don't track when they expire.
Minimum viable tracking system:
Spreadsheet with: Subcontractor name, license #, insurance carrier, policy #, effective date, expiration date
Monthly review: Which COIs are expiring in the next 60 days?
Process for requesting updated certificates
Organized file storage (digital or physical)
State Fund California reminds contractors: "You should obtain a certificate of workers' compensation insurance from all subcontractors who have employees of their own. If you are unable to provide a certificate of insurance from a subcontractor at the time of audit and the subcontractor does not have a valid license, we may consider the subcontractor an employee for workers' compensation purposes, and will charge the appropriate premium."
Your Audit-Proof Checklist
Use this checklist for EVERY subcontractor you hire:
Before Work Begins:
Verify active CSLB license
Collect signed W-9
Get executed subcontractor agreement
Obtain current Certificate of Insurance
Verify COI coverage dates match project timeline
Confirm insurance carrier is legitimate
Add expiration date to tracking system
During the Project:
Monitor COI expiration dates (set 60-day and 30-day alerts)
Request updated COIs before expiration
Don't let subs work with expired coverage
After Project Completion:
Verify final payment amounts
Prepare 1099-NEC (if over $600)
File 1099 with IRS by January 31
Provide copy to subcontractor
Keep all documentation organized for audit
Annual Audit Preparation:
Review all subcontractor files
Verify you have current COIs for anyone who worked during the policy period
Reconcile 1099s to payment records
Organize everything in one place for easy auditor access
What to Do If You're Already in Trouble
If you've already failed a workers comp audit or received a large additional premium bill, you have options:
1. Dispute the Findings
You can dispute audit results, but you must act quickly. According to Fisher Phillips, "Employers often fail to abide by strict deadlines and procedural rules for audit disputes and appeals and become barred from contesting audit findings and premium increase."
Steps to dispute:
Review the audit findings carefully
Gather any missing documentation you can find
Contact your insurance carrier immediately
Work with your insurance broker or agent
Consider hiring an insurance audit consultant if the amount is significant
2. Get Documentation After the Fact
Even if the audit has started, try to obtain missing COIs:
Contact subcontractors and ask for proof of coverage during the work period
They may be able to get a certificate backdated to show coverage that was active
Some carriers will provide "certificate of coverage" letters confirming coverage dates
It's not ideal, but it's better than nothing.
3. Negotiate Payment Terms
If you owe a large additional premium, many carriers will work out payment plans. Don't ignore it—address it head-on.
4. Get Compliant Going Forward
Learn from the mistake and implement systems so it never happens again. The cost of prevention (proper documentation and tracking) is always less than the cost of failed audits.
How a Specialized Bookkeeper Can Help
Most bookkeepers will file your 1099s and call it done. But if you're a trades contractor, you need someone who understands the unique compliance requirements of your industry.
A trades-focused bookkeeper can:
Set up a COI tracking system with expiration alerts
Flag when subcontractor coverage is about to lapse
Organize all contractor documentation for audit readiness
Ensure 1099s match your actual payments
Reconcile subcontractor expenses to your insurance records
Keep W-9s, agreements, COIs, and 1099s in one organized system
This isn't just bookkeeping—it's risk management. And it can save you tens of thousands of dollars.
Prevention is Cheaper Than Cure
A $500 annual premium for a tracking system or specialized bookkeeping service is nothing compared to a $50,000 surprise workers comp bill.
The contractors who avoid these audit nightmares aren't lucky—they're prepared. They have systems. They track documentation. They verify coverage before it becomes a problem.
Key takeaways:
Collect COIs before any sub starts work
Track expiration dates and request updates proactively
Keep complete documentation: W-9s, agreements, COIs, and 1099s
Verify CSLB license status for all California subs
Understand California's SB 216 requirements
Build systems now—don't wait for an audit to expose your gaps
Need help getting your contractor documentation audit-proof? At Abacus360, I specialize in bookkeeping for trades contractors. I build systems that protect your business—not just balance your books.
