Are You Next On The Audit List?
April 12, 2004
By Patricia A Kotze
The rising cost of Workers' Compensation may seem unfair, but avoiding it through dishonest tactics will cost you a lot more if you’re caught.
Any name company found what they thought was a unique and clever way to cope with and lower their rising cost of workers’ compensation…they lied. In fact, they totally misrepresented the identity of their workforce and their roles within the company. Instead of reporting the employees as laborers, drivers or construction workers, they characterized them as clerical or sales associates. But as fate would have it, the company’s owners were surprised with a workers compensation audit from their workers’ compensation carrier and the improper classifications were discovered.
In real cases of such fraud, company owners have been investigated and convicted of felony workers’ compensation fraud. Those found guilty have been sentenced to years of probation and ordered to pay fines well into the six figures. Keep in mind that when you lie about the number or role of your employees, you’re committing fraud against the Employment Development Department and the Franchise Tax Board.
As president of a workplace investigation company, I recently had the opportunity to do some research on Workers’ Compensation as it relates to the rising costs to employers, especially California based businesses. I came across some interesting information comparing fraudulent reports of employees vs. those of employers exploiting the system. Employer fraud is significantly on the rise. The estimate of premium fraud is in the millions, and the deceitful employer puts the honest ones at a competitive disadvantage.
The Insurance Department refers to employer fraud as one of the fastest-growing problems in workers’ compensation. Reports estimate that one in every four companies misclassifies their workers to illegally cut costs. Another form of employer fraud in this area is to under report the number of employees, paying under the table, or eliminating the insurance all together--by not buying coverage at all.
Putting an accurate number to this area of fraud is difficult because of the underground economy. California Employment Development Department estimates the underground economy to be between $60 – $140 billion annually. A joint enforcement strike force led by the EDD conducted over 1100 investigations in several different industries, and identified $245 million in unreported wages in 2002.
A recent investigation involved the Underground Economy Task Force, the Franchise Tax Board, EDD and a San Diego County-based construction company. State Fund actually was awarded $800,000 in the workers’ compensation insurance and tax evasion case. The owners of the fraudulent company, Covington and Huffman, were ordered to pay a total restitution of $1.2 million, and serve up to 5 years and 5 months jail time in state prison and 4 years probation. Formal sentencing is scheduled to take place in San Diego County Superior Court.
Fighting Workers' Compensation fraud is a team effort. Without the employer’s honest involvement, the overall campaign to stop Workers' Compensation fraud will not be successful. Premium fraud is only a portion of the problem but a growing and significant one: it’s not just the employee anymore…
About the Author:
Patricia A. Kotze, is Managing Partner at Diversified Risk Management, Inc. (DRM), a licensed, nationwide investigation firm and has over 20 years of experience in labor and employment related workplace investigations. The firm offers a broad range of specialized risk management and investigation services that are designed to control loss and minimize exposure by providing innovative and strategic business solutions. DRM assists corporations, non-profit organizations and law firms in identifying, mitigating, and responding to risks through a comprehensive and integrated suite of professional service offerings. Ms. Kotze can be reached at 800.810.9508 or by email at by email