Employer Fraud is Alive and Well (Part 1)

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.

In 2005 there was $446,826.00 in employee fraud, but $12 million dollars in fraud by employers.

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.

The above was a the transcript of a radio conversation of a U.S. naval ship with Canadian authorities off the coast of Newfoundland in October 1995 included in Jim M. Perdue’s Winning With Stories. It may or may not be authentic.

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. Texas Mutual Insurance Company, who uses the slogan “Fighting Fraud. Some Advertise It. We Do It.”, 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. 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.

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. 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.

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.

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. In short, the crooks win. The taxpayers lose.

In the next post on this topic, we will examine a few real-time examples of employer fraud.

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