Michael Sanchez was cleaning the interior windows of a large office building when he fell three stories to his death.

When the workers’ compensation insurance carrier investigated the claim, they discovered Sanchez’s employer was paying a legacy workers’ compensation premium, procured when the company first opened with just two employees. Between then and Sanchez’s accident, the organization hired over 100 workers, but failed to add the increased risk to their policy. 

Once the carrier made this discovery they conducted a premium audit on the employer and discovered tens of thousands of dollars were due in back premiums. As soon as the bill was issued, the employer closed up shop and the carrier was left paying for a fatality claim and cheated out of the premium they were due. Was this done intentionally? Is this premium fraud by the employer?

Premium Avoidance Comes in Multiple Flavors

Workers Compensation fraud is usually blamed on individual workers who falsely claim they’re injured. However, employers are often found to be guilty of fraud too, when they knowingly circumvent the system. The most common forms of workers’ compensation premium avoidance fraud include: 

  1. Underreporting payroll. Premium is calculated as a function of a business’ payroll. If you have an annual payroll of $1 million, but mislead your Workers’ Compensation insurance carrier and claim you only have $100,000 in payroll, you’re guilty of premium avoidance, as in the case of Sanchez’s employer above. Similarly, if you pay employees $10 on the books and another $10 off the books, you’re also guilty of the premium avoidance (tax evasion, too!). The employee believes they are entitled to benefits based on their “Full” wages and most court systems agree with them. So, the carrier hast to pay full benefits while only collecting a percentage of the true premium. 
  2. Falsely reporting job classification. States rate each job class per $100 of payroll, and therefore premium costs for each job category vary. For example, in Massachusetts, the rate is $.07 for every $100 of payment for clerical workers, and as much as $30 for every $100 of payroll for high risk employees, such as roofers. If a business falsely classifies its high-risk employees as clerical workers, and there’s a workers’ compensation claim, the employee is still entitled to benefits. The carrier must pursue the employer for the additional premium. The employer has intentionally misclassified their employees and they are subject to criminal charges.
  3. Not procuring a WC policy. Workers’ compensation insurance is required in almost every jurisdiction. In most states, it’s against the law to operate without workers’ compensation insurance even if you have a single employee. Employers that do not maintain coverage, or adequate coverage, can be punished with significant fines; jail time for the company’s president, treasurer or insurance decision maker; civil penalties and criminal charges as well as other court injunctions. Know the workers’ compensation law in every state you do business. Check out this state by state comparison

Everyone Pays for WC Fraud 

When it comes to workers’ compensation fraud committed by workers and/or employers alike, both parties share in the financial repercussions. Employers pay for it in loss of profits and higher workers’ compensation insurance premiums. Employees pay in loss of jobs, lower wages and benefits. 

Contact your HUB broker to determine if your business has the right coverage for your workers’ compensation risk.