Wednesday, February 16, 2011
Joining the Fight Against Employer Fraud…A Call for Real Reform in North Carolina Workers Comp Law
This article adapted from a paper and presentation I heard last week. Both were created by my friend and attorney, Leonard Jernigan of the Jernigan Law Firm in Raleigh.
If you were to ask the average person on the street for an example of workers' compensation fraud, you would likely hear a story about an injured worker pretending he or she were hurt, collecting a check and all the while, living a perfectly normal life while receiving a weekly check from a workers' compensation insurance carrier. This story does, of course happen, and I firmly believe that there is zero place for fraud and it should be rooted out, wherever it is found and the person(s) responsible should be held to the full letter of the law. This story is also the one we generally see on television news and in newspapers; it is intriguing and makes for a good story (especially if there are photographs or video). It is not, however, the whole story…
The vast majority of fraud is actually committed by employers in the form of premium fraud. Over the course of many years, millions, if not billions of dollars have been lost to the system through illegal and corrupt practices by employers. They fail to purchase workers' compensation insurance despite a statutory obligation to do so and they misclassify employees either as an independent contractor or other means as will be shown below. The result of these fraudulent schemes is that the good, law abiding employers have been cheated and the crooks have been getting away scot free, but changes have been sweeping the country and the State of North Carolina needs to get on board.
Studies from Wisconsin, Texas and California have shown that employee fraud is less than 1% of all fraud claims filed. Texas Mutual Insurance Company publishes fraud statistics on its website and it shows that the percentages of employee fraud are low. The truly staggering numbers are in the amount of premium fraud discovered, a total of 21.3 Million Dollars from 2007 through 2009 below. Compare that to employee fraud numbers just above 1.3 Million Dollars over the same time frame and it is clear that the real money is in cases of premium fraud. It actually works out that 94% of the money discovered is on the employer side of the coin.
Premium fraud exists in situations where an employer misclassifies members of his or her workforce in order to get a lower rate on an insurance premium. This can be a situation where the employer reports to a workers' compensation carrier that it has 15 employees who are clerical workers when it actually has 15 employees engaged in heavy labor, or reporting 5 workers rather than 105, or by simply ignoring the law and not taking out any workers' compensation insurance. As stated above, another form of fraud is for an employer to classify employees as “independent contractors”, notwithstanding control by the employer over the worker which is the basic rule of thumb when it comes to establishing employer/employee status in North Carolina). If a person is truly an independent contractor, no workers' compensation coverage is required. Therefore, if an employer fraudulently classifies all employees as independent contractors, they avoid the cost of premiums.
When employers commit this fraud, they obtain an advantage over competitors by cheating the government by not paying unemployment, Social Security and Meidcare taxes and if a worker does get hurt on the job, the medical bills are left to the taxpayer when Medicaid, Medicare and Social Security Disability enter the picture. A 2009 report from the Ohio Attorney General’s Office estimated annual costs from worker misclassification to be as much as $100 million for unemployment compensation, over $510 million in workers compensation premiums and nearly $180 million dollars in lost state income tax revenues. The same report went on to estimate that Ohio cities and towns lost more than $100 million in local income tax revenues in 2006 and school districts lost $7.8 million in 2008.
The crooks have been winning this game and it is time for us to fight back. Take a look at these examples.
January 25, 2010—A California judge ordered a staffing firm to pay $20 million in restitution after a plea bargain was reached in a workers' compensation fraud case.
The owners of a roofing company in Orange County, California were arrested on 106 felony counts and charged with $38 million in workers' compensation fraud. Investigators seized $500,000.00 in jewelery, 2 Ferraris, a Bently and a Range Rover from the owners homes.
The owner of a drywall company in Marysville, Washington entered a guilty plea to theft of sales tax and workers' compensation fraud in November 2009, eventually agreeing to pay over $2.1 million in restitution.
The owner of a gutter business in New York State entered a guilty plea to workers' compensation fraud. This scheme involved reporting only 2 employees when he actually had 15. This resulted in avoiding $519,907.00 in workers' compensation premiums.
Just recently, AIG has agreed to pay out $100 million in fines to settle a workers’ compensation lawsuit. Court documents indicate that AIG is accused of taking part in a $1 billion workers compensation under-reporting scheme. A civil lawsuit was filed in 2009 by two firms on behalf of a group of insurance companies, which was then integrated into a class action lawsuit of other insurers that were among those affected by AIG’s conduct in the 1980s and 1990s. North Carolina is set to receive $13.6 million from this settlement.
Across the country, many states have begun to crack down on employer fraud. Task-Forces and the like have been created and given the mission to attack this problem in Colorado, Deleware, Illinois, Louisiana, Maine, Maryland, Massachusetts, Michigan, Missouri, Nebraska, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia and Wisconsin. The states of Texas, California and Florida have been very aggressive in their pursuit of stamping out employer fraud. Conspicuously missing from this list is the State of North Carolina. Call your local Representative and the Governor's Office and tell them it is time for North Carolina to crack down on employer premium fraud.
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