Pub. 1 2021 Issue 3

June 2021 | 31 Employer Fraud Most employers purchase adequate workers’ compensation insurance to ensure their employees will be properly supported and cared for when occupational illnesses or injuries arise. However, some employers utilize dishonest practices within their workers’ compensation programs in an attempt to reduce the related expenses — thus committing employer fraud. Employers can participate in such fraud by intentionally misrepresenting different organizational factors (e.g., listing an incorrect number of employees, falsifying job classifications or exaggerating risk management program features), underreporting payroll or failing to secure coverage altogether. And while employers may think that they can cut costs by committing fraud, doing so can lead to a range of financial, legal and reputational ramifications. Review this guidance to learn about key forms of employer fraud within workers’ compensation programs, as well as the costly consequences that can result from engaging in fraud. Main Forms of Employer Fraud Here are the primary forms of employer fraud: 1. Misrepresenting employees Workers’ compensation premiums are determined by several factors — including the number of staff members that an employer has and the particular job roles of these employees. Specifically, employees are assigned class codes based on the work they perform and perceived level of risk associated with that work. These codes are tied to employee classification rates. The higher the rating, the riskier the employee’s job role is. For example, a roofer would be given a higher rating than a carpenter due to the risk of working from heights for longer periods of time. Higher employee classification rates — as well as a higher number of employees who possess such ratings — lead to greater premium costs. As such, employers may falsely classify their employees to obtain lower ratings and, subsequently, reduced premium expenses. Employers may also incorrectly list employees as temporary workers or independent contractors, or potentially provide an inaccurate number of employees to receive decreased premium costs. 2. Falsifying payroll Payroll is also a key component in the calculation of workers’ compensation premiums. In particular, for each employee classification rate, employers pay per every $100 of payroll.That being said, a higher total payroll will result in elevated premiumcosts. To avoid higher premiums, employers may falsify their payrolls to appear as less than what they really are (e.g., underreporting annual payroll to be $100,000 when the actual total is $500,000). In order to generate falsified payrolls, employers may pay their employees a set salary on the books, as well as an additional amount off the books. By doing so, employees’ wages will be reported as lower than reality — establishing deceptive annual payrolls. This practice is also a form of tax evasion. 3. Embellishing organizational risk management programs Adopting effective organizational programs to help protect and support employees — such as workplace safety programs and return-to-work programs — can play a role in reduced workers’ compensation costs. In fact, employers who inform their insurance carriers that they have these programs in place may receive premium discounts or other benefits. Continued on page 32