Employee Misclassification

Premium Fraud in the Spotlight

A Grand Jury report suggest that workers' comp premium fraud in New York is rampant.
By: | April 11, 2014

Unpaid workers’ comp premiums are costing New York hundreds of millions of dollars, according to an official. In the wake of a grand jury’s report, New York County Prosecutor Cyrus Vance is calling for major changes to the system.

The release of the report by the New York State Supreme Court Grand Jury coincided with the 103rd anniversary of the Triangle Shirtwaist Factory Fire in Greenwich Village that killed 146 people. The state’s workers’ comp law was closely associated with the tragedy.

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“The widespread premium fraud detailed by this Grand Jury Report is deeply troubling and underscores the critical need to reform the workers’ compensation system,” Vance said in a statement. “My office’s Tax Fraud and Money Laundering Unit will continue to pursue those who cheat the system, but the best protection for New York’s workers is a system that is itself protected from fraud and abuse.”

The report followed investigations by the unit into false information provided to the New York State Insurance Fund in connection with applications for, and audits of, workers’ comp policies, the statement said. Vance said investigations by his office looked at incidents of insurance premium fraud that, among other things, cost New York City and state “substantial revenue.”

As Vance explained, an employer’s premium is based on each covered employee’s job classification. Rates for a relatively safe job can be much lower than that for a dangerous job.

“This system, which requires employer self-reporting, is easily abused by unscrupulous employers who misclassify employees,” Vance said. “Employers can easily lie about what work a particular employee performs, for example, reporting a roofer as a clerical worker, and thus paying a significantly lower premium. More egregious is fraud where an employer misclassifies a worker who is required to be insured under the system as an independent contractor, but is an employee.

Estimates indicate New York City’s construction industry in 2011 cost the city and state about $500 million due to worker misclassifications. This lost money is typically made up by cost shifting from somewhere else.

The grand jury’s report included a variety of recommendations from the following categories:

  • Increased penalties to ensure that sentences are proportionate to the magnitude of the fraud.
  • Increased transparency by reforming the application and audit process, thereby making it more effective and less susceptible to fraud.
  • Increased dissemination of information into the hands of those charged with investigating and prosecuting fraud.
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  • Increased education for employees and the community at large about the workers’ comp system and its value to the public, so that everyone is better able to protect the system from fraud.

“A well-functioning workers’ compensation system not only generates significant revenues for the City and the state, but also fosters equality in the marketplace and allows small businesses to flourish, creating the sorely-needed jobs. It benefits every employer, every employee, every consumer, and every taxpayer,” the report said.

Nancy Grover is the president of NMG Consulting and the Editor of Workers' Compensation Report, a publication of our parent company, LRP Publications. She can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]