Copyright

(c) 2017 Jon L Gelman, All Rights Reserved.

Monday, April 11, 2011

Employer Fraud is Alive and Well

Leonard T. Jernigan, Jr.
Guest Blog by Leonard T. Jernigan, Jr.  


Perception is reality until proven otherwise, and when it comes to fraud in the workers’ compensation system there is the perception that employee fraud is widespread and costs are up because of employee fraud. Could that perception be wrong? For example, are those individuals who believe in employee fraud sailing down the same course as the naval ship identified in the story below? 

Radio Conversation released by the Chief of Naval Operations, 10/10/95:

Americans: Please divert your course 15˚ to the north to avoid a collision

Canadians: Recommend you divert your course 15˚ to the south to avoid a collision.

Americans: This is the captain of a U.S. Navy ship. I say again, divert your course. 
Canadians: No. I say again, you divert your course.

Americans: This is the aircraft carrier U.S.S. Lincoln, the second largest ship in the United States Atlantic Fleet. We are accompanied by three destroyers, three cruisers, and numerous support vessels. I demand that you change your course 15˚ to the north, that’s one five degrees north, or countermeasures will be undertaken to ensure the safety of this ship.

Canadians: This is a lighthouse. Your call.

(End note: “This is the transcript of a radio conversation of a U.S. naval ship with Canadian authorities off the coast of Newfoundland in October 1995. It may or may not be authentic.”

Perdue, Jim M., Winning With Stories, State Bar of Texas, Austin, Texas, 2006.)


In March of 2010, during a panel discussion on fraud at an American Bar Association meeting, a risk manager for Nestlé U.S.A. told the audience that workers’ compensation fraud was suspected in 35% of all claims. When asked where she got that statistic she paused, then said she thought it came from an insurance company. That’s not surprising. There’s been so much misinformation about employee fraud out there you’d think we are in a run-up to a war. Well, there is a fraud war going on against injured workers and it’s been going on for decades. Workers’ compensation lawyers often hear injured workers say “I’m really hurt. I’m not like those other people you hear about who fake their injuries.” Sadly, even injured workers have bought into the employee fraud myth. 

Let’s look at some facts. First of all, there have been several studies that have evaluated employee fraud, and these studies show that employee fraud is less than 1% of all claims filed.1 Texas Mutual Insurance Company, who uses the slogan Fighting Fraud. Some Advertise It. We Do It.,2 publishes fraud statistics on its website and their percentages of employee fraud are also low (in 2008 there were 9 convictions of employee fraud in 1,544 reported cases; in 2009 there were 13 convictions out of 1,443 reported cases).3 This company also offers a $1,000.00 reward for information leading to arrest or indictment of workers’ compensation fraud perpetrators, but its advertisement is clearly directed at employee fraud (see poster attached to this article). 

The most surprising information contained in these statistics, however, was the amount of money discovered from employer fraud. In 2005 there was $446,826.00 in employee fraud, but $12 million dollars in fraud by employers.4 Texas Mutual reported the following statistics in July of 2009: 

Claimant Fraud Discovered 

2007 $462,611.00 
2008 $467,435.00 
2009 $406,028.00 

Premium Fraud Discovered (in Millions) 


2007 $8.0 

2008 $9.3 
2009 $4.35 


As can be seen from the above numbers, the amount of money being recovered from employer fraud dwarfs the amount of money recovered from claimant fraud. Also, the average claimant fraud in Texas between 2006 and 2009 was $2,152.00 per claim.6 

Premium Fraud is where the employer misclassifies its workforce and gets a lower rate on its premium (like telling the workers’ compensation carrier the employer has 15 clerical staff when it actually has 15 construction workers), or when the employer reports that it only has 5 employees but actually has 105, or where the employer doesn’t bother to take out insurance at all. Nearly every state requires mandatory coverage for employees so they get medical and disability benefits if they get hurt on the job. Another way for the employer to defraud the system is to declare its employees to be “independent contractors,” notwithstanding control by the employer over the worker. Obviously, if the employee is truly an independent contractor and not an employee, no coverage is required. So, to avoid any legal requirement to pay premiums the employer just classifies its employees as independent contractors. Voilà. No premiums need be paid. 

By hiding payroll, employers obtain an advantage over competitors. Employers who fail to provide coverage at all not only cheat their employees but also cheat the government by not paying unemployment, Social Security and Medicare taxes, and if a worker gets seriously injured taxpayers pick up the hospital bill as Medicaid, Medicare and Social Security enter the picture. In Ohio a 2009 report by the Attorney General’s office estimated that the extent of annual costs from worker misclassification may be as much as $100 million dollars for unemployment compensation, more than $510 million dollars in workers’ compensation premiums and almost $180 million dollars in lost state income tax revenues. Additionally, the report estimated that Ohio cities and villages lost more than $100 million dollars in local income tax revenues in 2006, and school districts lost $7.8 million dollars in 2008.7 In short, the crooks win. The taxpayers lose. 


Let’s consider a few real-time examples of employer fraud: 
  • On January 25, 2010 a judge ordered a staffing firm in Bellflower, California to pay 20 million dollars in restitution after a plea bargain was reached in a workers’ compensation fraud case.8 
  • The owners of a roofing company in Orange County, California were arrested on 106 felony counts and charged with $38 million dollars in workers’ compensation fraud. Investigators seized $500,000 in jewelry from their home, as well as two Ferraris, a Bentley and a Range Rover.9 
  • The president and vice-president of a security firm in Los Angeles were charged with failing to pay $9.5 million dollars in premiums. They claimed they had only 20 employees, but it was revealed they had over 1,500 workers.10 
  • 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 and agreed to pay more than $2.1 million in restitution.11 
  • On July 10, 2007 the owner of a gutter business in New York State entered a guilty plea to workers’ compensation fraud. By falsely claiming he only had two employees, when he actually had 15, he avoided $519,907 in workers’ compensation premiums.12 

The list goes on and on. For a top ten list of employer fraud cases for 2009 and 2010 go to the website listed below.13 

There is some good news. Various government agencies are waking up and fighting back. New York conducted a study to determine the seriousness of the problem and on January 25, 2007 the Fiscal Policy Institute Report concluded that 25-30% of all companies in New York were not purchasing workers’ compensation insurance, and that this failure to comply was a growing problem. Non-compliance increased premiums and shifted the cost of medical care of injured workers to taxpayers and other employers. It also concluded that between $500 million and $1 billion dollars was being lost to the system annually.14 New York then authorized its compliance officials to issue stop work orders if a construction site did not have verification of workers’ compensation coverage. Within the first fourteen months there were over 1,000 stop orders executed, resulting in fines of $5.49 million dollars.15 In 2008 its fraud prevention program accounted for more than $20 million dollars in total savings.16 

On March 12, 2008 the governor of Massachusetts entered an Executive Order creating an inter-agency task force to attack the problem.17 Colorado, Delaware, Illinois, Louisiana, Maine, Maryland, Michigan, Missouri, Nebraska, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, and Wisconsin have taken similar steps to crack down on misclassification and other employer fraud.18 Texas, California, and Florida have been particularly aggressive in attempting to go after employer fraud. 

At the federal level, on February 4, 2009 the Treasury Inspector General for Tax Administration issued a report (based on a preliminary analysis of fiscal year 2006) which found that underreporting attributable to misclassified workers is likely to be markedly higher than the $1.6 billion dollars that was estimated in the tax year 1984, the last time a similar study was conducted.19 The IRS is looking at a new definition of independent contractor,20 and on April 22, 2010 Senator Sherrod Brown, D-Ohio and Representative Lynn Woolsey, D-California introduced a bill to get tough on companies that misclassify employees as independent contractors.21 The Secretary of Labor, Hilda Solis, has created a broad based initiative which will use $25 million to fight misclassification. 22 

The United Brotherhood of Carpenters and Joiners of America have an excellent video called 1099 Misclassification: It’s Time to Play by the Rules. Every government official who wants a brief summary of the problem should review this ten minute video.23 In fact, if you’ve read this far, take a few minutes to watch the video yourself, and the next time you hear someone complain about employee fraud in workers’ compensation, ask them to watch it too. Finally, if you happen to know some people who work for Nestlé U.S.A., a company that employs nearly 25,000 people, ask them to tell the risk management department to get the facts straight the next time they address the issue of workers’ compensation fraud. 

1 Wisconsin Division of Workers’ Compensation, Report on Alleged Workers’ Compensation Fraud (Oct.1, 1997); Research & Oversight Council on Workers’ Compensation, Fraud in the Texas Workers’ Compensation System, TEX. MONITOR, Winter 1997, p 2; Report: Workers’ Compensation Fraud Exaggerated, Santa Rosa, Calif., Dec. 8, 1997 (UPI).

2 http://www.texasmutual.com/fraud/fightFraud.shtm#stats (accessed April 29, 2010).

http://web.archive.org/web/20080801153218/www.texasmutual.com/fraud/fightfraud.shtm (accessed April 29, 2010).

4 http://web.archive.org/web/20080801153218/www.texasmutual.com/fraud/fightfraud.shtm (accessed April 29, 2010).

5 http://www.texasmutual.com/fraud/fightFraud.shtm#stats (accessed April 29, 2010).

6 http://www.texasmutual.com/fraud/fightFraud.shtm#stats (accessed April 29, 2010); http://web.archive.org/web/20080801153218/www.texasmutual.com/fraud/fightfraud.shtm (accessed April 29, 2010).

7 Office of the Ohio Attorney General, Ohio to Crack Down on Employee Misclassification: “Underground Economy” costing state hundred of millions of dollars, http://www.ohioattorneygeneral.gov/Briefing-Room/News-Releases/February-2009/Ohio-to-Crack-Down-on-Employee-Misclassification (accessed April 29, 2010).

8 Workforce Management, Staffing Firm Ordered to Pay $20 Million in Fraud Case, http://www.workforce.com/section/00/article/26/96/84.php (accessed April 29, 2010).

9 ClaimsJournal.com, Couple Arrested with California’s Largest Premium Insurance Fraud Scam, http://www.claimsjournal.com/news/west/2009/05/01/100102.htm (accessed April 29, 2010).

10 The Associated Press, 3 Plead Not Guilty to Bilking $9M In Worker Fraud, http://cbs2.com/local/worker.fraud.Ousama.2.988253.html (accessed April 29, 2010).

11 Smith, Sandy, EHS Today, Contractor Pleads Guilty to Workers’ Comp Fraud, Other Charges, http://ehstoday.com/health/workers-compensation/contractor-pleads-guilty-workers-comp-fraud-charges-6313/index.html (accessed April 30, 2010).

12 New York State Workers’ Compensation Board Press Release, Suffolk County Businessman Pleads Guilty to Insurance Fraud, http://www.wcb.state.ny.us/content/main/PressRe/2007/SuffolkCo_InsFraud.jsp (accessed April 29, 2010).

13 www.jernlaw.com

14 “New York State Workers’ Compensation: How Big is the Shortfall?,” Fiscal Policy Institute Report, January 15, 2007.

15 ClaimsJournal.com, New York State Insurance Fund: Anti-Fraud Efforts Saved $20.7M, http://www.claimsjournal.com/news/east/2009/02/18/90002.htm (accessed Feb. 24, 2009).

16 ClaimsJournal.com, New York State Insurance Fund: Anti-Fraud Efforts Saved $20.7M, http://www.claimsjournal.com/news/east/2009/02/18/90002.htm (accessed Feb. 24, 2009).

17 Governor Deval L. Patrick, Massachusetts Executive Order No. 499, http://www.mass.gov/Agov3/docs/Executive%20Orders/executive_order_499.pdf (accessed April 30, 2010).

18 Michigan has a good executive summary of the problem facing these states. See http://www.michigan.gov/documents/dleg/R08_07_01Rrt_to_the_Gov_240789_7.pdf (accessed April 30, 2010)

19 Treasury Inspector General for Tax Administration Office of Audit, While Actions Have Been Taken to Address Worker Misclassification, an Agency- Wide Employment Tax Program and Better Data Are Needed, http://www.treas.gov/tigta/auditreports/2009reports/200930035_oa_highlights.pdf (accessed April 29, 2010).

20 The IRS, Publication 15-A Employers Supplemental Tax Guide, http://www.irs.gov/pub/irs-pdf/p15a.pdf (accessed April 29, 2010).

21 Workforce Management, New Federal Bill Targets Misclassification, http://www.workforce.com/section/00/article/27/14/22.php (accessed April 29, 2010)

22 Department of Labor OASAM News Release 2/1/2010, Secretary Hilda L. Solis presents US Department of Labor budget request for fiscal year 2011, http://www.dol.gov/opa/media/press/oasam/OASAM20100145.htm (accessed April 30, 2010).

23 http://www.youtube.com, search 1099 Misclassification: It’s Time to Play by the Rules (accessed April 29, 2010).


Leonard T. Jernigan, Jr. practices in Raleigh, North Carolina (The Jernigan Law Firm). Mr. Jernigan is the author of North Carolina Practice, Workers Compensation Law and Practice 4th ed. He previously served as president of the Workers Injury Law and Advocacy Group, and has been recognized by Best Lawyers in America and Super Lawyers. Leonard T. Jernigan, Jr. is an Adjunct Professor of Workers Compensation Law at North Central University School of Law. He is one of only 48 workers' compensation attorneys in the United States authorized by the National Football League Players Association (NFLPA) to represent its members. He is also authorized to represent players in the National Hockey League (NHL) and the Professional Hockey Players Association (PHPA) as well as other professional athletes.