When the talk turns to workers comp fraud, the default assumption is that the employee is the culprit. In reality, employer fraud is a huge problem, of a scope that many in the industry would say dwarfs claimant fraud. According to Loretta Worters of the Insurance Information Institute in a recent article in the San Antonio Business Journal, premium fraud may cost the insurance industry as much as $30 billion a year.
In the same article, Dennis Jay of the Coalition Against Insurance Fraud suggests that premium fraud might be committed frequently because there is little enforcement. In describing the nature of the fraud, he states:
Workers’ compensation rates … are based primarily on three areas: 1) the amount of payroll; 2) the degree of risk — construction work is riskier than secretarial work; and 3) the claims experience of the company.
“It’s basically done by businesses that fail to disclose the true character of the risk they present,” Jay says. “A company can lie about these three areas to try to reduce their overall premium.”
Prevalence: an ongoing problem
On any given week, a cursory search of the news turns up multiple instance of employer fraud:
- After the recent electrocution death of a worker in Florida, the owner of the landscaping company is facing felony charges for failure to carry workers comp. If he is found guilty, penalties could include up to 30 years in prison and a $10,000 fine.
- California’s State Compensation Insurance Fund has received $566,480 in restitution from a roofing company owner convicted of workers’ compensation fraud for three felony charges: worker’s compensation insurance premium fraud; furnishing a false payroll deduction statement and filing a false tax return.
- In New York, three employers faced charges and restitution for defrauding the New York Workers Compensation Fund. The wrongdoing included forging an insurance certificate, submitting a false application, and making false statements.
The nature of the beast
Workers compensation is compulsory insurance in every state but Texas. With some few exceptions, all employers are mandated by law to carry workers compensation insurance. Employers commit fraud when they fail to secure or maintain workers compensation coverage for their employees, or try to reduce their obligations by intentionally misclassifying employees or under reporting payroll.
Fraud schemes hurt us all. First and most importantly, injured workers are often left without recourse or forced to bring suit to pay for medical care. Honest employers also pay for the misdeeds of fraudulent employers through higher premiums as insurer costs “trickle down.” In some industries, such as general contracting, honest employers may also suffer a competitive disadvantage since fraud perpetrators have a lower cost of doing business and can offer lower prices in competitive or bidding situations.
Spotting employer fraud
Employer fraud often surfaces after an injury occurs when investigations reveal that an employer lacks coverage entirely or lacks coverage for a portion of the work force, such as workers wrongly categorized as independent contractors. One infamous case of this nature involved the owners of the Station nightclub in Rhode Island who faced a million dollar fine for failure to carry workers compensation insurance. This failure was revealed when the families of four deceased employees were left without benefits.
Certain industries – such as businesses that employ a high number of contract, temporary, or seasonal workers – are rife with potential for fraud. In Florida last year, a sweep of construction sites resulted in more than 90 stop work orders. Some potential fraud indicators that companies may be trying to avoid regulatory compliance include businesses that pay people in cash or that have complex organizational structures and multiple business names. For a more comprehensive list of potential indicators, see Ohio’s list of red flags for workers compensation.
Is my employer compliant?
If you suspect that your employer doesn’t have workers comp coverage, what can you do? Most states have mandatory posting requirements so you can look on bulletin boards to see if these and other employee right-to-know postings and licenses are current. In many states, employees or job candidates can check on whether an employer is insured by calling the state workers compensation authority. Many states also have fraud hot lines where workers can anonymously report suspected fraud. A Google search of workers compensation fraud hot lines turns up many numbers, or you can check with your specific state insurance bureau.