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Employer Fraud in Workers' Compensation
When confronted with the phrase "workers' compensation fraud," most people automatically conjure up the image of an allegedly injured worker caught on videotape doing things he should not be able to do. The fact is, however, that the costs to society attributable to workers' compensation fraud are actually much higher in connection with employer fraud than from employees making false claims for benefits. Furthermore, studies also show that not only is the effect of employer fraud much greater than claimant fraud, but in many locales the incidence of employer fraud is increasing.
Employer Fraud Methods
Generally employers who defraud the worker' compensation system employ methods that fall into two separate categories. The first category is claims related; the second is policy premium related.
Claims Fraud
Employer-claims fraud generally occurs in two different categories in which the employers either
- intentionally misrepresent the truth to either avoid or deny compensation to injured employees or, on the other hand, knowingly misrepresent the truth to obtain compensation on behalf of employees. For instance, employers have been found altering documents or falsifying statements not only in order to avoid payment of claims, but also in some instances to obtain payment for invalid claims.
- lie about employees' rights to benefits in an attempt to keep injured employees from following through on claims. For example, an employer tells the injured worker that benefits do not become available until the worker is off work a certain number of months following the injury.
Employer-premium fraud
Premium fraud occurs on a much greater scale than employer claims fraud and accounts for the majority of workers' compensation programs' losses. Employers intentionally limit their workers' compensation premium costs by lying, thereby obtaining policies at lower than the applicable rates. An employer who does any of the following is likely committing premium fraud:
- Misclassifies workers in categories not consistent than the major purpose of the business
- Reports lower payroll amounts on the insurance application than it reports to state workforce agencies
- Pays a much lower current year's policy amount than prior years' amounts
- Has a much smaller payroll than would be warranted for the size of the company
- Makes frequent changes in coverage, both additions and cancellations, particularly in cases where the same person or entity appears to own several businesses
- Operates a business without the proper licensing or registration
- Fails to give workers payroll stubs and/or pays workers in cash
- Gives workers a 1099 form instead of a W-2
- Submits bids on jobs well below the industry standard
- Pays workers in-kind benefits such as free rent or expense reimbursement rather than in cash or by check
- Has a number of corporate officers listed who all work for the company
- Fails to maintain complete records and accurate employee payroll information
- Pays workers on a piece-work basis and fails to report hours worked
- Reports fewer employee hours worked than actually worked
- Fails to report worker injury and promises to pay the injured worker's medical expenses
- Reports hours on an accident report inconsistent with the hours reported by the injured worker
- Underreports employee hours worked so that employees find that they are not eligible for unemployment insurance when laid off
- Has several corporate officers who have no control of the business operations
Rising workers' compensation costs to blame?
While not excusing employers who commit fraud, it is easy for some to see why such fraud may be increasing. Reports from different states show that in the past few years premium rates have risen dramatically. Workers' compensation and other payroll tax costs increase employer business expenses considerably. One study reported that workers' compensation expenses added more than one-third to employer labor-related costs. Thus, some employers say they must cut workers' compensation costs in order to stay competitive with other businesses.
Reporting Fraud
Just as individuals may report suspected fraudulent workers' compensation claims by workers, they may also report suspected fraudulent activities by employers.
- Many state workers' compensation commissions have fraud hotlines, e-mail addresses, or online forms.
- Many state insurance commissions also provide toll-free numbers and Web sites for reporting fraud.
- Also, nearly every state attorney general and county attorney office will accept the filing of reports with supporting evidence and will follow up with investigations.
Conclusion
Employers, attempting to cut their workers' compensation costs, are creative in finding ways to do so. Unfortunately, many of those ways defraud the workers' compensation programs of the states and leave legitimate employers at a significant competitive disadvantage.
Checklist: Red Flags: Potential indicators of employer fraud
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Red Flags: Potential indicators of employer fraud
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