Category Archives: Misclassification

Employer Fraud in Workers’ Compensation

Today’s post comes from guest author Thomas Domer, from The Domer Law Firm.

Legislatures around the country (including ours in Wisconsin) seem to be preoccupied with employee fraud in workers’ compensation, despite overwhelming evidence that employee fraud is virtually nonexistent. 

Employer fraud, however, continues to plague the industry.  Over the last decade, my friend and colleague Len Jernigan has published a Top 10 Workers’ Comp Fraud Claims.  The list from 2015 can be found at this link.

None of the Top Ten includes only an injured worker.  The top six of the Top Ten stem from California claims.  Others are from New York, Washington, Utah, and Massachusetts. 

This year’s dollar amounts were particularly substantial, with nearly $850 million in total frauds, the largest being a $580 million kickback scheme out of California.  The California kickback scheme involved surgeons and the owner of a hospital.  The other California claims included FedEx mislabeling their drivers as Independent Contractors in order to avoid insurance, and the owners of a translation service fraudulently billing the workers’ compensation system.  Additional mislabeling involved California truck drivers from Pacer Cartage, which owed over $2 million to seven truckers, due to unlawful payroll deductions and misclassifications as Independent Contractors.

The single case involving a worker is a professional football player from the New York Giants who colluded with a claims adjuster, providing fictitious invoices and statements for more than $1.5 million.  The New York, Washington, and Utah claims also involved misclassification in which no workers’ compensation insurance was paid for actual employees.

Another popular theme is the under-reporting of earners in order to be granted lower insurance premiums.  That scheme was uncovered in Massachusetts, avoiding more than a half million dollars in insurance premiums.

The workers’ compensation insurance industry has done a marvelous job in diverting attention from the real culprits (employers, medical providers, and insurers) to the very rare, but sometimes spectacular claims involving employee fraud.  (A worker claiming permanent and total disability climbing around on rocks is far sexier than a financial officer mischaracterizing his employees in a closed office.)

2015 Top Ten Workers’ Compensation Fraud Cases

Number Value
Non-Employee Fraud Cases 9 $ 848,000,000
Employee Fraud Cases 1 $ 1,500,000
Total $ 849,500,000

The top six of our top ten fraud cases of 2015 are from California, a perennial offender. The other four cases are from New York, Washington, Utah, and Massachusetts. As we continue to discover each year, non-employee fraud cases dominated the list. This year’s dollar amounts were particularly large, with nearly $850 million in total frauds. The largest fraud was a $580 million kickback scheme out of southern California. Authorities have begun to enforce the law against companies who have misclassified their workers and we expect to see a continued increase in these enforcement actions, both against our traditional offenders and against some of the sharing economy companies who are now the subject of multiple lawsuits.

1. (California) Surgeons and Owner of Hospital Charged In $580M Kickback Scheme (11/26/15)

(Credit: MoneyTimes) The kickbacks involving millions of dollars are increasing the insurance costs for patients.Such practice corrupts the relationship between doctor and patient, thus polluting medical profession.

(Credit: MoneyTimes) Kickbacks involving millions of dollars are increasing insurance costs for patients.

Five people have been criminally charged for their involvement in a medical kickback scheme that defrauded the California workers’ compensation system and insurance companies of $580 million over eight years. Two of the five charged were surgeons and one was a former owner of Pacific Hospital. The scheme benefited doctors and chiropractors who referred their patients to two Southern California hospitals for thousands of operations.

 

2. (California) FedEx Settles Misclassification Case For $228 Million (6/16/15)2. fedex
FedEx has agreed to pay $228 million to resolve claims by 2,300 FedEx Ground pickup and delivery drivers in California. FedEx was labeling drivers as independent contractors in order to avoid the costs of trucks, branded uniforms, scanners, fuel, maintenance of the trucks, insurance and much more. Drivers were also not paid for missed meals, rest periods, or overtime compensation.

 

3. (California) Spanish Translators Caught in $24 Million Workers’ Compensation Fraud Case (12/17/15)Screen Shot 2016-01-16 at 12.21.25 AM
The owners of G&G Translation services and over 200 of their employees fraudulently billed $24.6 million in workers’ compensation cases for services never rendered.  For example, one bill was for $422,000 for translation services by a translator who was actually in prison at the time. G&G obtained a list of patients who needed translation services at medical facilities and used those names to submit bills to large self-insured employers.

4. (California) Sewing Subcontractors Charged With Running $11 Million Dollar Workers’ Comp Insurance Fraud Scheme (4/16/15)
Caroline ChoiJae KimTwo CEOs of a sewing company were arrested on April 15, 2015 for conspiring with their CPA, Jae Kim, to underreport $78.5 million in payroll to multiple insurers. They were arrested on 18 felony counts of workers’ compensation insurance fraud totaling more than $11 million in losses.

 

5. (California) Truck Drivers Awarded More Than $2 Million Due To Misclassification By Employer (2/3/15)

Pacer Cartage drivers protesting in November (Photo from the Teamsters Union)

Pacer Cartage drivers protesting in November (Photo from the Teamsters Union)

Pacer Cartage, Inc. (one of the largest port trucking companies in the U.S.) owes $2,026,483 to seven truckers due to “unlawful payroll deductions and expenses as part of a wage theft scheme” by the company. The employees were incorrectly classified as “contract laborers” who were forced to lease their trucks by their employer, and the employer avoided paying workers’ compensation premiums. Their leases were deducted from their paychecks, and the employees were not allowed to use the trucks for any other business purpose or drive them home.

 

 

6. (California) NFL Player and Gallagher Bassett Adjuster Plead Guilty to Wire Fraud & Filing False Workers’ Comp Claims for $1.5 Million (10/1/15)

Marcus Buckley (55) played for the New York Giants from 1993 to 2000.

Marcus Buckley (55) played for the New York Giants from 1993 to 2000.

Claims Adjuster Kimberly Jones filed fraudulent workers’ compensation claims on behalf of former NFL player Marcus Buckley between 2001 and 2011. In 2006 Buckley filed a workers’ compensation claim that was settled for $300,000 in 2010. After the case was settled, Buckley and Jones filed numerous requests for reimbursement under Buckley’s closed cases providing fictitious invoices, statements and credit bills. Buckley received more than $1.5 million.

 

7. (New York) Plumbing and Heating Contractors Settle for $1.4 Million(4/21/15)
USDOL_Seal_circa_2015.svgFour Long Island City plumbing and heating contractors misclassified and underpaid a total of 300 employees. At least 25 employees were misclassified as independent contractors, several hundred were not paid overtime, and the companies’ recordkeeping did not meet the Fair Labor Standards Act requirements. The companies settled out of court when the Wage and Hour Division’s New York City District Office investigated and litigation began for a total of $710,000 in back wages to cover September 2010-April 2014 and damages for 300 employees equaling $1.42 million dollars.

 

8. (Washington) Drywall Contractor in Walla Walla Must Pay More Than $1 Million in Workers’ Compensation Premiums and Penalties (4/17/15)
drywallShawn A. Campbell and his wife were held personally liable for over $1 million in unpaid premiums, interest and late penalties for their company. Campbell listed his employees as co-owners in order to avoid paying workers’ compensation premiums.

 

9. (Utah) Construction Company to Pay $700,000 for Misclassification Scheme (5/1/15)
CSG Workforce Partners (a.k.a. Universal Contracting, LLC and later as Arizona Tract/Arizona CLA) required their workers to classify themselves as “members/owners” which limited their legal rights and gave them no minimum wage guarantee, no time-and-a-half overtime pay, no workers’ compensation insurance and no unemployment insurance. When the employers found out that the state of Utah was investigating, they packed-up and left for Arizona. However, they were tracked down and charged $600,000 in back wages to employees as well as $100,000 for their willful violations of employment laws.

10. (Massachusetts) Roofing Business Owners Indicted for Workers’ Comp Fraud Totaling $615,000 (3/25/15)
Two business owners allegedly failed to accurately report their payroll and underreported earnings in order to be granted lower insurance premiums in three roofing companies between 2008 and 2014. They avoided paying a total of more than $615,000 in insurance premiums alone.

 

For more information, contact:
Leonard T. Jernigan, Jr.
Adjunct Professor of Workers’ Compensation Law
N.C. Central University School of Law

The Jernigan Law Firm
2626 Glenwood Avenue, Suite 330
Raleigh, North Carolina 27608
(919) 833-0299
ltj@jernlaw.com
www.jernlaw.com
Twitter: @jernlaw
Blog: www.ncworkcompjournal.com

Unpaid Intern or Employee?

In New York, after prevailing in trial court, unpaid interns for Fox Entertainment Group were able to receive class credit and minimum wage for their work on the set of the film “Black Swan.” Their win made the Second Circuit Court of Appeals adopt a test to be used in determining whether an unpaid intern should be classified as an employee. Here are the factors that should be applied in determining whether they are actually an employee:

 

  1. The parties’ understanding regarding expectation of compensation
  2. The similarity of the internship training to that available in an educational environment
  3. Whether the internship is tied to the intern’s education and accommodates the intern’s academic commitments
  4. The duration of the relationship
  5. Whether the intern’s work complements, rather than displaces, paid employees
  6. The parties expectation about a permanent job offer at the end of the internship.

 

These factors only apply in the Second Circuit (Connecticut, New York & Vermont), but they do provide some guidance when evaluating and setting up internship programs to comply with the Fair Labor Standards Act.  

For more information see Laura Lawless Robertson’s post on The National Law Review online.

 

N.C. Workplace Deaths Being Under-Reported

The News & Observer recently published an article exposing the under-reporting of workplace deaths by the North Carolina State Department of Labor. The Department reported only 23 deaths for 2013 and for 2014, the Department reported 44 deaths. However, even 44 deaths is significantly less than the 243 workplace deaths reported by the Department in 2001. In a 2009 press release by the Department of Labor, NC was “one of the safest states to work.” However, according to the N&O, this reduction in reported fatalities is due to a change in methodology, not safety.

In 2006 the N.C. Department of Labor began reporting only the deaths that the Department had authority to investigate. That policy change excluded independent contractors (self-employed workers) as well as any death that falls under federal jurisdiction. Federal jurisdiction includes the death of a federal employee, any worker who dies while working on a military base or at a federal facility, any death in the mining industry, and any death that occurs around open waters including firefighters and divers. The State’s total also excludes laborers at small farms, owners of unincorporated companies, most workers who die on roads, and many workers who died months or years after the injury that eventually killed them.

Misclassification of workers as independent contractors (the topic of another investigation by the N&O) not only results in employers cheating the workers’ compensation system by failing to obtain insurance, but it also results in inaccurate data reported by the Department of Labor. This under-reporting is not due to increased safety and enforcement by our State, it is due, in part, to employer fraud of misclassifying workers.

Read more here.

2014 Top Ten Workers’ Compensation Fraud Cases

Number Value
Non-Employee Fraud Cases 9 $ 74,876,000.00
Employee Fraud Cases 1 $ 450,000.00
Total $ 75,326,000.00

Five of the top ten fraud cases in 2014 are from California. The other five cases are from Florida, Texas, Arizona, Washington and Georgia. As usual, non-employee fraud cases dominated the list and the dollar amounts are staggering, led by the $36 million over-billing case out of southern California. An emerging issue is the misclassification of workers, and we will likely see more of these cases in 2015 as enforcement steps up in this area.

1. (California) Medical Equipment Company Overbills $36 Million (3/17/14)

The owners of Aspen Medical Resources were indicted in on 49 felony counts of fraud.

The owners of Aspen Medical Resources were indicted in on 49 felony counts of fraud.

The owners of Aspen Medical Resources had all their assets seized and put into receivership by the Orange County District Attorney. They were indicted in on 49 felony counts of fraudulent overbilling of $36 million for hot-cold physical therapy machines. Although these machines retail between $250 and $500 Aspen often billed Southern California workers’ compensation claims departments thousands of dollars each time a machine was rented.

 

2. (California) 15 Medical Professionals Indicted in $25 Million Scheme – Small Child Dies (6/24/14)

Ahmed Kareem, one of 15 doctors accused of participating in a workers’ compensation scam.

Dr. Ahmed Kareem   is accused of participating in a workers’ comp scam.

Fifteen doctors, pharmacists and other medical professionals in Southern California were charged in a $25 million workers’ compensation scam which was linked to the death of a baby. Prosecutors alleged insurance fraud and conspiracy in the 44 count indictment which detailed that the head of a workers’ compensation claims management firm hired pharmacists to produce a pain-relief cream and then gave kickbacks to the doctors that prescribed it and conspired to submit phony claims. A 5-month old boy ate the cream and died when his mother, who was using the prescribed cream for back and knee pain, allowed her son to suck her fingers to sooth him. The next morning he was found dead and tests showed he had ingested lethal amounts of drugs in this cream.

 

 

3. (California) Lowe’s Settled Independent Contractor Misclassification Case for $6.5 Million (7/3/14)

Lowe’s misclassified its installers as independent contractors, rather than employees.

Lowe’s misclassified its installers as independent contractors, rather than employees.

Over 4,000 “Lowe’s professionals” in California are members of a class action alleging that Lowe’s misclassified its installers as independent contractors, rather than employees, thus depriving them of a variety of employee benefits, from workers’ compensation insurance coverage to 401(k) plan participation. Lowe’s, without admitting liability, recently settled the case after mediation for a sum that could be as much as $6.5 million. The plaintiffs claimed that Lowe’s retained and exercised control over their work by requiring them to identify themselves as working for Lowe’s, wear Lowe’s hats and shirts, and attend training by Lowe’s.

 

4. (California) Paving Company Cheats System of $4 Million (6/19/14)

Sabas & Lucia Trujillo

Sabas & Lucia Trujillo face criminal charges for workers’ comp’ fraud.

Five owners (Sabas Trujilo, Lucia Trujilo, Rick Trujilo, Laura Fitzpatrick and Alex Trujilo), operators and employees of a Corona, California based paving company are facing criminal charges for alleged wage theft, premium fraud, workers’ compensation and payroll fraud. The Riverside County District Attorney’s Office alleges that the individuals’ criminal actions enabled them to illegally obtain about $4 million. After launching an investigation, the state obtained search warrants for both companies, seizing computers and bank, payroll and other documents. The state conducted several wage audits on several hundred projects, which ultimately led to the filing of criminal charges.

 

5. (Florida) False Insurance Certificates Check Cashing Scheme Defrauds Insurance Company of $1 Million (11/18/14)

Arturo Santos Zuniga paid laborers cash to avoid paying workers' comp'.

Arturo Santos Zuniga paid laborers cash to avoid paying workers’ comp.

Arturo Santos Zuniga, who also went by the name David Hernandez, was busted for paying laborers in cash to avoid paying workers’ compensation insurance premiums. Zuniga paid a North Lauderdale man to create and insure a fake or “shell” company, Behar Services Incorporated, and “rented” out insurance certificates to uninsured subcontractors in South Florida. Payments to the uninsured subcontractors were made through checks to the fake company, which were then cashed at check cashing stores. Behar Services Incorporated got its insurance policy by saying it had 10 employees doing carpentry and office work with an annual payroll of $210,000. The annual premium was about $26,500. Law enforcement financial reports show that just in the months from July to October, more than $7.3 million had been cashed out at check cashing stores to Behar Services Incorporated and/or the North Lauderdale man who started the company. A $7.3 million payroll would have cost more than $1 million more than the existing policy. No estimate of lost tax revenue was given.

 

6. (Texas) Man to Pay $806,000 for Underreporting Payroll to Workers’ Comp Carrier (3/11/14)

Howard Douglas Whiddon of Travis County was ordered to pay $806,000 in restitution.

Howard Douglas Whiddon was ordered to pay $806,000.

Howard Douglas Whiddon was ordered to pay $806,000 in restitution to workers’ compensation insurer Texas Mutual Insurance Co. after pleading guilty to workers’ comp fraud-related charges. He intentionally misrepresented the payroll of a related company, thus lowering his premiums. Mr. Whiddon was sentenced by a Travis County, Texas court to 10 years of deferred adjudication and 160 hours of community service.

 

7. (Arizona) Paul Johnson Drywall Inc. Agreed to Pay $600,000 in Back Wages, Damages and Penalties to 445 Employees (5/19/14)

Paul Johnson Drywall Inc. classified its workers as “members/owners” instead of employees.

Paul Johnson Drywall Inc. classified its workers as “members/owners” instead of employees.

Paul Johnson Drywall Inc. classified its workers as “members/owners” instead of employees, which stripped them of workers’ compensation and other protections afforded to employees. The owner, Robert Cole Johnson agreed to take concrete steps to ensure that misclassification of its workforce does not occur again and to pay $556,000.00 in overtime back wages and liquidated damages to at least 445 current and former employees. The employer also agreed to pay $44,000.00 in civil monetary penalties. Investigators found that the drywall contractor violated the Fair Labor Standards Act overtime and record-keeping provisions.

8. (Washington) Summit Drywall, Inc. Ordered to Pay $550,000 in Unpaid Wages and Damages to 384 Workers (2/20/14)

The owner of Summit Drywall, Inc. was ordered to pay damages to 384 employees.

Summit Drywall’s owner was ordered to pay damages to employees.

Thomas Kauzlarich, the owner of Summit Drywall, Inc. was ordered to pay $550,000 in overtime back wages and liquidated damages to 384 current and former employees. An investigation showed that the company violated the Fair Labor Standards Act’s overtime and record-keeping provisions from October 15, 2009 to April 15, 2013. The article did not report the amount of reduced workers’ compensation premiums paid.

 

 

9. (Georgia) Nurse Gets 5 Years in Prison for $450,000 Bogus Workers’ Comp Claims (8/26/14)

A VA nurse from Glenwood, GA, will serve five years in prison for mail fraud and fraudulent claims.

A VA nurse from Glenwood, GA, will serve five years in prison for mail fraud and mailing fraudulent claims.

Loretta Smith, a VA nurse from Glenwood, GA, will serve five years in prison and must repay $450,000.00 in federal funds by filing bogus workers’ compensation claims, pleading guilty to two counts of mail fraud in the mailing of fraudulent claims, in which she received more than $450,000.00. She agreed to forfeit the equivalent of $454,740.06 in cash, real estate and other property. She was also sentenced to three years probation after her release.

 

10. (California) Drywall Company Owners Arraigned on $420,000 in Fraud Charges (12/11/14)

The owners of a defunct drywall company, National Drywall in San Bernardino, CA, were arraigned on charges that they defrauded their workers’ compensation insurance carrier of $260,000.00 and stole $160,000.00 from their workers.

 

Honorable Mention – (Oregon) Uncooperative Hillsboro Businessman Convicted of $481,519 Tax Evasion – Only Gets 30 Days In Jail (9/30/14)

Stephen Nagy engaged in fraudulent schemes to evade payment of payroll taxes.

Stephen Nagy engaged in fraudulent schemes to evade payment of payroll taxes.

Stephen Nagy was the former president of Hillsboro-based S&S Drywall Assemblies. The IRS assessed the company $481,519 in federal employment taxes, penalties and interest between June 2009 and September 2010. Nagy met with the IRS and chose not to comply with the payment plan and engaged in a variety of interrelated fraudulent schemes to evade the payment of the delinquent payroll taxes. Nagy intimidated, manipulated, and threatened the loss of much needed jobs to gain the cooperation of his employees. Special agents of the IRS learned that Nagy had transferred all of S&S Drywall Assemblies income, contracts, receivables and assets to ASM Drywall, Inc. a shell company he created and placed in his sister’s name. The Oregon attorney general prosecuted Nagy in 2011 on allegations of criminal anti-trust and racketeering. He was sentenced to 30 days in jail and five years of supervised probation.

For more information, contact:
Leonard T. Jernigan, Jr.
Adjunct Professor of Workers’ Compensation
N.C. Central University School of Law

The Jernigan Law Firm
2626 Glenwood Avenue, Suite 330
Raleigh, North Carolina 27608
(919) 833-0299
neb@jernlaw.com
www.jernlaw.com
@jernlaw
Blog: www.ncworkcompjournal.com

Misclassification: Cheating the System in North Carolina

A yearlong McClatchy public-records investigation of government construction projects spanning 28 states discovered widespread misclassification of construction workers as independent contractors instead of employees (News & Observer, September 8, 2014). By misclassifying their employees, construction companies were able to undercut their law-abiding competitors while at the same time exploiting those desperate for work. As a result, the study found that North Carolina loses approximately $467 million per year in tax revenue from construction firms and their employees.

Such a scam is simple. Companies declare that hourly wage earners working for them are independent subcontractors, not employees. These companies do not withhold income tax or file payroll taxes on those workers. They also do not pay unemployment tax and are not required to provide workers’ compensation insurance. Thus, there is less paperwork and more profit for the companies. The McClatchy investigation estimated that these companies can save 20% in labor costs by treating employees as independent contractors.

Misclassification has far-reaching effects. The investigation discovered that these cheaters:

(1)    ignored existing labor laws and the IRS by misclassifying employees;

(2)    undercut the bids of law-abiding companies;

(3)    cheated workers by eliminating unemployment insurance, workers’ compensation coverage  and social security payments;

(4)    benefited from lax government officials who could have stopped them.    

NEOC Awards Whistleblower Client Misclassified as Independent Contractor

Today’s post comes from guest author Jon Rehm, from Rehm, Bennett & Moore.

I was happy to have the chance to represent Theron Chapman in his whistleblower claim against his former employer, Midwest Demolition. While the Lincoln Journal Star headline of “Man chased from job by manager with stun gun awarded back pay” is catchy, the real story here is that an employee who was fired for complaining of legitimately being misclassified as an independent contractor won some measure of justice from the Nebraska Equal Opportunity Commission.

Mr. Chapman had a legitimate grievance about being misclassified as an independent contractor. Nebraska law explicitly prohibits the type of misclassification that he questioned. In 2010, State Sen. Steve Lathrop, who authored the legislation outlawing misclassification in Nebraska, said in his bill’s statement of intent, as quoted in Truckinginfo: the web site of Heavy Duty Trucking magazine, that:

“When a contractor misclassifies an employee, the employee is ineligible for unemployment and workers’ compensation benefits, loses labor-law protections and does not receive employer-provided health insurance. Misclassification creates an unfair advantage to unscrupulous contractors who are able to outbid law-abiding employers who must take into account the payment of taxes and insurance premiums when bidding for jobs. The State’s loss in revenue negatively affects the funding of essential programs such as unemployment benefits.”

The deeper story here is that people on the margins of the workforce can sometimes vindicate their rights in the workplace. My client was hired through a job lottery at the People’s City Mission, a homeless shelter, here in Lincoln. People in his situation are vulnerable to abuse in the workplace. Not every instance of bad behavior by management is legally actionable, but that is true from the executive suite to low-wage workers like my client. But fair-employment laws can protect people who are being abused in the workplace and do sometimes provided protections to the people who need them the most.

The Vanishing Concept of a Job

Today’s post comes from guest author Jon Gelman, from Jon L Gelman LLC.

While reviewing some historical cases today, I realized that what is missing from the workplace is the concept of “a job.” America’s economy has dramatically changed, and so have jobs that were once available its workforce.

Even clearer is the fact that the concept of a job has disappeared. The idea of getting up in the morning and going regularly to a job has even vanished. The evolution changed slowly with the young generation claiming that a job cycle transformed from a lifetime position to one lasting two years. Then the next stage in the evolution occurred, where the employee became a transient worker and daily the job changed and no stable employer really exists.

This evolution has eroded the underlining framework of a functional workers’ compensation program and the delivery of benefits. The injured worker becomes lost to the system, and a safe and secure workplace becomes an illusion. Lost in the complexity is the adequate reporting of accidents and occupational disease, and the ability to accurately follow the evolution of latent diseases and medical conditions.

“A new trend in the U.S. labor market is reshaping how management and workers think about employment, while at the same time reshaping the field of occupational safety and health. More and more workers are being employed through “contingent work” relationships. Day laborers hired on a street corner for construction or farming work, warehouse laborers hired through staffing agencies, and hotel housekeepers supplied by temp firms are common examples, because their employment is contingent upon short term fluctuations in demand for workers. Their shared experience is one of little job security, low wages, minimal opportunities for advancement, and, all too often, hazardous working conditions. When hazards lead to work-related injuries, the contingent nature of the employment relationship can exacerbate the negative consequences for the injured worker and society. The worker might quickly find herself out of a job and, depending on the severity of the injury, the prospects of new employment might be slim. Employer-based health insurance is a rarity for contingent workers, so the costs of treating injuries are typically shifted to the worker or the public at large. Because employers who hire workers on a contingent basis do not directly pay for workers’ compensation and health insurance, they are likely to be insulated from premium adjustments based on the cost of workers’ injuries. As a result, employers of contingent labor may escape the financial incentives that are a main driver of business decisions to eliminate hazards for other workers.”

Click here to read “At the Company’s Mercy: Protecting Contingent Workers from Unsafe Working Conditions”