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:

  • 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.

  • 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 premium costs. 

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.

  • 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.

Unfortunately, employers may take advantage of this arrangement by falsely claiming that they have implemented such programs, even though it’s untrue. 

Employers may also claim that their programs possess added elements or are more robust than they are in reality (e.g., claiming that weekly toolbox talks take place when they actually only occur once every quarter) in an effort to obtain cost savings. 

  • Neglecting to secure a workers’ compensation policy

Despite workers’ compensation insurance being required in nearly every state, employers may attempt to cut costs by not purchasing coverage whatsoever. Employers who lack workers’ compensation insurance typically hide this information from others—including their organizational stakeholders and shareholders. 

In order to convince others that they have insurance, employers may develop fraudulent documentation (e.g., a fake policy) as “proof of coverage.” But in the event that any claims occur, such nonexistent insurance will quickly become apparent.   

Consequences of Employer Fraud

Employers who engage in workers’ compensation insurance fraud can face severe consequences—both from a legal perspective and from a financial standpoint. First, it’s important to note that insurance fraud is illegal. With this in mind, employers who are found guilty of committing fraud could be subject to hefty fines, serious civil penalties, court injunctions, criminal charges and—in severe cases—jail time. 

Second, employers who engage in fraudulent methods to cut premium costs will likely end up experiencing further financial hardship during the claims process. After all, misrepresented employees and false payroll information can lead to the development of inadequate coverage levels, resulting in underinsurance concerns when employees become ill or injured. In these instances, employers could be left financially devastated by a claim and unable to support their employees’ treatment needs or provide necessary benefits—making recovery increasingly difficult. 

Lastly, employers who are found guilty of committing fraud will likely experience serious reputational damages. Employers’ current workers’ compensation insurance carriers (if applicable) may cancel or drop their coverage in response to fraud. When employers with previous records of fraud attempt to secure insurance in the future, carriers may be apprehensive of providing coverage. As a result, carriers may neglect to offer coverage or charge significantly higher premium rates.

Overall, it’s clear that participating in workers’ compensation fraud isn’t worth the severe ramifications that can accompany such an act. By maintaining honest workers’ compensation programs, employers can effectively protect and support their ill or injured employees. 

Contact us today for additional workers’ compensation resources.