States Crack Down on Premium Fraud
2014 has been a busy year so far for workers’ comp reform. Recent months have seen state governments cracking down on premium fraud, investigating companies and stepping up criminal prosecution.
Headlining the movement is New York’s Grand Jury investigation from September, 2013 to February, 2014.
The panel found that employee misclassification was a common practice among employers in the construction industry looking to avoid high premiums, costing the city and state millions in lost revenue and uncovered healthcare costs. The investigation built on a June 2013 study by the Fiscal Policy Institute that estimated that employer fraud in the construction industry cost New York about $500 million in 2011.
“We were looking at financial transactions involving workers’ comp fraud, and that developed into a series of investigations. I was then able to see that there were aspects of the system that could use some legislative and administrative changes” said Gilda Mariani, Assistant DA in the New York County District Attorney’s Office.
The Grand Jury found that it was far too easy for “unscrupulous” employers to submit false information on the applications to the New York State Insurance Fund, which covers 40 percent of the state’s workers’ comp needs. While misclassification was the most common offense, employers also skirted high premiums by paying employees off the books, under-reporting the number of employees on payroll, or neglecting to secure insurance altogether.
When companies don’t pay the appropriate premium, “it affects a lot of people,” Mariani said. “The employers who are really legit have to pay all of this overhead. The employees get hurt because they’re probably not getting withholding, or benefits, or all their rights as an employee. It affects consumers and taxpayers as well.”
Michael Newman, partner at Barger & Wolen LLP, a law firm specializing in insurance litigation, agreed that injured employees suffer at the hands of fraudster employers.
“An injured employee who is improperly designated as an independent contractor is not able to obtain the benefits of workers compensation protection,” he said. “If injured on the job, their only recourse is to sue the business for negligence, which may or may not garner them a full recovery.”
The Grand Jury report recommended that New York’s workers compensation law be revised to include stronger criminal provisions, like gradating the degree of felony offense proportionate to the fraud. It also suggested that criminal fines be increased and that judges have the power to impose fines as large as two or three times the amount of the fraud. Currently, fines are sometimes lower than the amount of fraud committed.
The report also recommended the creation of a standard electronic application form for all carriers to be submitted through the Workers’ Compensation Board, as well as an integrated database storing application, audit reports and certificates of insurance.
Finally, the report highlighted the vast trickle-down effects of premium fraud by calling for educational initiatives with a community approach that include both employers and employees.
“We did a joint program with a bar association where we did a series of two-hour classes for small businesses in the community that covered what their obligations are,” Mariani said. “We partner with community leaders and we also reach out to first responders so they can be more aware of what info to collect on the scene of an injury.”
Education is a key component as well in Tennessee initiatives. Earlier this month, Tennessee’s Department of Labor took action on several recommendations made by the Employee Misclassification Advisory Task Force to identify employer fraud. In addition to providing speakers at conferences around the state, the Workers’ Compensation Division also launched a website delineating the differences between employees and independent contractors.
Also similar to New York, Tennessee took a more aggressive approach to criminal prosecutions with the establishment of a referral process, hiring of three additional investigators, and planned implementation of fraud detection software.
California and New Jersey are playing offense as well.
In May, the California Department of Insurance announced that it had issued $95 million in grants over the past three years to district attorneys to target workers’ comp fraud. According to the department website, the district attorneys reported a total of 819 arrests in fiscal year 2011-2012, with 708 convictions. The total chargeable fraud was $341,084,553.
In New Jersey, a roofing company executive got hit with jail time in addition to a hefty fine when he was found guilty of misrepresenting his company to carriers. By asserting that his company did not, in fact, deal with the installation and maintenance of roofs, but rather used subcontractors, he avoided $265,044 in workers’ comp premiums.
“There is no question that employee misclassification in the workers’ compensation context has begun to get more attention from governmental entities in recent months,” Newman said. “It appears that prosecutions are indeed on the rise.”