Employers – the Real Problem Behind Workers’ Comp Fraud

While changing fraud trends affect other lines of coverage, the opposite holds true in workers’ compensation. As organized crime rings become the norm in staged auto accidents and cargo thefts, the three main types of workers’ comp fraud remain unaffected by the latest trend.

According to several state agencies, the three main types of workers’ comp fraud are:

Employer Fraud

Among the three, employer fraud is arguably the most expensive for insurers.

Though some states – Florida, California, Texas and Ohio – aggressively fight all types of workers’ comp fraud, other states do not.

Leonard Jernigan Jr., founder of N.C.-based Jernigan Law Firm which specializes in workers’ compensation law and civil litigation, said that employer fraud has been a problem in his state for several years.

According to a 2000 Department of Labor estimate, which examined audits of firms in just nine states, between 10 percent and 30 percent of employers misclassified some employees.

The lawyer and adjunct professor at North Carolina Central University School of Law said the construction industry, in particular, contributes to the problem.

The main problem is that employees are being misclassified and proper premiums aren’t being paid, said Jernigan.

“For instance, you’ve got a roofer. You’ve got 100 workers, and 80 of them are actually doing the roofing work and 20 are clerical, and you’ve got the numbers reversed. You’re paying your insurance company for 20 actual roofers and 80 clerical people,” Jernigan said.

Another example is when an employer fails to procure workers’ comp coverage.

“I have a civil case … with a logging company. The logger had this machine called a fellerbuncher that cost about $194,000. This thing threw this projectile out and injured my client. When we were taking the guy’s deposition, the logger, although he paid $194,000 for this piece of machinery, he didn’t have any of his workers covered by workers’ comp. Obviously, he had the ability to pay for it. They just don’t pay for it, because nobody’s cracking the whip,” Jernigan said.

Large construction companies are just as likely to misclassify employees as small ones, he said.

“It’s not just mom-and-pop operations, by the way… these are big-time construction projects,” said Jernigan.

Workers often don’t have workers’ comp coverage because employers classify those workers as independent contractors, he says.

“I think you’re seeing it more now because of the economy. People are sort of cutting back on things, and they’re realizing they can not pay workers’ comp [premiums]. It reduces costs to do business. When they’re in competitive bids, they may get the bid and the others don’t,” he said.

In North Carolina, where employers that fail to obtain coverage are not pursued, companies aren’t worried because, “whatever happens; the fine’s not going to match whatever they save.”

Workplace injuries don’t spark tougher oversight either. Jernigan said that even after an incident involving a worker injury, there isn’t aggressive enforcement.

National Problem

The problem is nationwide, according to Jernigan.

“For the growth and the number of people who are actually in the workforce, I think it’s a massive problem,” he said.

Jernigan said he tracks and reviews cases and often it’s not the employees driving up workers’ comp costs.

“When you look at the insurance side, for years everybody’s gotten the perception that the employees are creating the fraud problem that’s driving up costs.” But that’s not the case, said Jernigan.

He cited a study by Texas Mutual Insurance Co. that found that employee fraud cost about $450,000. On the employers’ side, the cost was $9 million arising from seven or eight cases. “When I broke it down, it was $2,500 per individual claim on the employee fraud and it was almost $1 million per employer,” Jernigan said.

Employer workers’ comp fraud costs states millions, too. Washington’s L&I’s Fraud Prevention and Labor Standards program assessed $24.6 million in unpaid employer premiums plus penalties during fiscal year 2012.

Jernigan said insurers should conduct more audits of policyholder employee classification.