Have you ever considered underreporting your employees’ payroll to your workers compensation insurance provider in an attempt to save money on your insurance premium? Perhaps you have even used the “1099 status” of someone who is really an employee to justify it. Sound familiar? Hopefully not. Doing so is illegal and can lead to serious consequences such as jail time, community service, probation, financial restitution, and fines.
Increasingly the California Department of Insurance (DOI) is investigating and cracking down on companies of all sizes who misreport their employees’ payroll or who do not carry any state-mandated workers comp coverage at all. State Insurance Commissioner, Ricardo Lara, notifies California insurance agents when a “bust” occurs and these notifications have increased in the last year. He has stated that, “When businesses illegally underreport payroll and employees, they create an unfair advantage that places legitimate businesses at a competitive disadvantage.” This statement summarizes why you may be tempted to lower you expenses as a business owner; whether to put the savings into your pocket, into other areas of your business, or to underbid your competitors. However, this approach will eventually come home to roost.
How to become a target of the DOI
The companies the DOI has recently targeted range in size from a few employees all the way to multi-million-dollar corporations. You may ask, “How do they determine who to go after?” Increasingly, your workers comp insurance company is the one that initiates the process when they receive payroll information back from you during an audit that does not make sense given the other details they already know, learn during the audit, or can find about you online. For example, if you run a company claiming to have only five employees, and your social media account shows that you had 20 at the last company golf scramble or 50 at the holiday party, that might be a clue for them. Additionally, your insurance company can work directly with the DOI and the Employment Development Department (EDD) to compare payroll and other information.
You also may not have considered that most workers comp insurance companies either directly employ or contract with 3rd party private detectives and lawyers that are being paid to focus 100% of their energy on finding fraud and planning their approach in how to conduct the next “bust.” Most of the those that will be arraigned in 2021 do not know it now, but they have already been under investigation for several months.
Another way insurance fraud is discovered is when (and probably not if) one of your employees eventually gets injured on the job. Whenever a claim is opened, a light is shone on your company (and its subsequent reported payroll) during the process as auditors and the fraud detectives and lawyers previously mentioned could now be brought in to make sure your employee is reporting legitimate injuries, which are not preexisting and are not being exaggerated. Exposing and punishing employees taking workers comp benefits illicitly or even longer than truly necessary has also been a hot button for the California Department of Insurance lately and is also a type of workers compensation insurance fraud.
Be part of the solution, especially now.
Right now is particularly not a good time to experiment with falsifying payroll information to your workers comp insurance provider. Rather than turn a blind eye on employers during these challenging times of COVID-19, the changes in our economic landscape have brought increased focus on helping businesses compliant to worker comp requirements succeed by rooting out companies that cause inflated premiums to be paid by others. Businesses negligent in paying their entire premium create an environment where a burden must be carried by other businesses who are. Commissioner Ricardo Lara again stated, “We investigate cases like this to protect legitimate businesses and California consumers who pay the price for this type of fraud through higher insurance premiums and increased costs.”
Please let your TIS customer service representative know if you ever have any questions about your existing workers compensation policy, need to obtain a new policy, or just need to increase your payroll.
Helpful resources:
- State Fund – Employment Status Resource Center
(topics like Employee vs. Independent Contractor, AB5, etc.)
Department of Industrial Relations – Workers Comp FAQs - California Department of Insurance – What is Insurance Fraud?
- California Department of Insurance – Insurance Fraud Press Releases