DA on the Hunt for Firms Skirting Law On Workers’ Comp
By HOWARD FINE
Amid growing signs that companies are illegally avoiding high-priced workers compensation insurance, the L.A. County District Attorney’s office is preparing to bring criminal charges against violators.
The indictments, the first of which are expected in the coming weeks, would carry misdemeanor penalties, including up to six months in jail, and come on the heels of a first-ever sweep of local employers conducted last month by members of the D.A.’s office and the state Labor Commissioner’s office.
Before a beefed-up workers’ compensation measure was signed into law last year, only fines could be assessed against companies in California found not to have workers’ compensation insurance. No criminal charges could be brought.
“We’ve long known that many companies in many industries are going without workers’ compensation insurance and that the business community at large is very upset about this,” said Tom Higgins, head of the workers’ compensation fraud unit in the L.A. District Attorney’s office. “This is the first time we’ve been able to go after these employers with the threat of jail time if they are convicted.”
He would not say how many employers would be facing charges in this first round.
While some California businesses have gone without workers’ compensation coverage for years, the huge run-up in insurance premiums has raised the urgency of tracking down miscreants. Employers who go without this insurance have lower costs than their law-abiding competitors, often enabling them to undercut those competitors in contract bids.
“If some companies are allowed to go without insurance, every company that obeys the law and pays their insurance suffers from this competitive pressure,” said Lori Kammerer, president of the California Coalition on Workers’ Compensation, an employer lobby.
That was a major reason for the inclusion of the anti-fraud provisions in last year’s state legislation.
Higgins’ unit is funded with $3.5 million, enough for eight trial lawyers and six investigators. He is asking for an additional $1.8 million from the state for five more investigators and four more trial attorneys specializing in workers’ compensation fraud. The funds would come from monies set aside by insurance companies from premiums they charge employers.
Besides going after employers with no workers’ compensation insurance, the D.A.’s office also prosecutes instances where employers under-report or misclassify employees to get lower workers’ compensation premium rates. The unit also pursues fraudulent workers’ comp claim filings and fraudulent billing practices by medical providers.
This latest push from the office of L.A. District Attorney Steve Cooley is a reversal from last year, when the state cut funding for the anti-fraud unit due to inadequate numbers of prosecutions.
For the last fiscal year, ended June 30, 2002, the workers’ comp anti-fraud unit filed charges against 30 alleged violators. Higgins said he expects that number to double for the year closing at the end of this month.
“I came to this division a year ago with the specific agenda of boosting our results on the workers’ comp front,” he said.
This more aggressive approach comes at a critical time in the workers’ comp arena. Thanks to a perfect storm of insurer woes, rapidly escalating medical costs and higher benefit levels, employer premiums have on average doubled over the past four years. By the end of last year, employers paid, on average, a record $5.25 per $100 payroll for coverage, by far the highest in the nation.
Twice the trouble
In some industries more prone to workplace injuries, like roofing or landscape contractors, the increases have been more dramatic, with employer premiums tripling or even quadrupling in the past year, if they can get insured at all. Businesses in these industries now routinely pay $100 in workers’ compensation premiums for every $100 in payroll, effectively doubling labor costs.
It is in these industries that the pressure is most intense to stop paying workers’ compensation insurance altogether.
“We’re seeing employers who are really behind the eight ball drop coverage as they try to preserve their businesses,” said Margaret Wagner, co-chair of the national Employers Fraud Task Force. The task force is composed of employers, insurers, medical providers and enforcement officials and is charged with coming up with ways to stamp out fraud in the system.
Wagner said some employers would fire injured workers on the spot rather than risk having to cover their medical bills. “We hear about this all the time in the garment industry or in the agriculture industry, where workers often don’t know their rights,” she said.
Since employers who don’t pay workers’ compensation insurance tend to be part of the underground economy, they are hard to track. But the state Labor Commissioner’s office, which conducts periodic sweeps looking for employer violations of wage and hour laws, has seen the number of citations issued to employers without workers’ comp insurance jump 50 percent in the last two years.
According to Labor Commissioner spokesman Dean Fryer, the state cited about 1,000 employers each in 1998, 1999 and 2000 for not having workers’ compensation insurance. But in 2001, that number rose to 1,200 citations, and last year, it climbed to 1,520.
“This is in part due to our increased efforts in the area of employer workers’ compensation fraud,” Fryer said. “Some of it could also be due to more cases of this actually occurring, but we have no direct evidence of that.”
Employer ‘shell game’
Besides a growing number of employers without workers’ compensation insurance, there is anecdotal evidence that other types of employer fraud are increasing.
“We’ve run into more and more premium fraud, and some of it can be very elaborate, a shell game to hide the number of workers,” Higgins said.
Higgins and others cited three types of premium fraud:
– Under-reporting the number of employees or payroll. For example, Wagner said, an employer might report $4 million in payroll to their insurer, when the actual figure is $14 million. “If they get caught, they say, ‘It’s just a typo,'” Wagner said.
– Misclassifying employees. The most commonly cited example is when a roofing contractor with 10 roofers and four clerical workers claims he has 10 clerical workers and four roofers. Since roofers have a much higher accident rate, the more roofers on staff, the higher the premium.
– Setting up shell businesses. Higgins said some employers establish multiple companies under common ownership, including one with no insurance. Under this scheme, the business without insurance might have 60 employees, while the business with insurance might have 20. The employer surreptitiously adds the 60 employees to the payroll of the insured business. “All the insurer sees is 20 employees at one business, until the claims start coming in,” Higgins said.
The net result is that the insurer can be swamped with unexpected numbers of workers’ compensation claims. When that happens, insurers can quickly become “under-reserved,” meaning they have not set aside enough money to cover all the claims.
“If an account is under-reserved, it still has to get paid,” said Wagner, who worked in the insurance industry before becoming co-chair of the Employer Fraud Task Force. “In order to pay that account and still keep enough in reserve to satisfy state regulators, they have to raise everyone else’s premiums.”
Wagner said these schemes have been going on for years, but only recently have caught everyone’s attention. “When premiums were low, nobody really cared about all this,” she said. “Now, it’s just killing the legitimate employers.”