Workers compensation costs are a significant portion of business operating expenses especially in difficult economic times when employers look for ways to reduce these expenses.
Work Comp Roundup recommends over and over ways to control workers comp costs. We also recommend a number of ways employers NOT try to reduce WC costs. Using these techniques may lead to canceled insurance coverage, penalties, fines, and even jail time.
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Misclassification of employees
Most employers understand the nature of the work done by employees is used to calculate the workers comp insurance premium. When the skyscraper window washers are classified as janitors the the employer is not charged the correct amount of premium. Classifying construction workers as clerks will be uncovered during a premium audit and the employer pays the price. ( The Ins and Outs of the NCCI and Classification.)
When a state law allows a corporate officer exemption from workers compensation requirements, and most employees are classified as “president,” the employer is committing premium fraud. Corporate officers must have the final say over the operations they are responsible for or they are not corporate officers.
Another way employees are misclassified is by calling them independent contractors and providing them with a 1099 form instead of a W-2, while controlling the when, where, and how the “independent contractor” works. In addition to creating insurance issues for the company, the IRS now has a very good reason to probe deeply into the company’s business model. See: Independent Contractors and Workers Compensation.
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Understating payroll
As the amount of payroll is a factor in the calculation of the workers comp premium, understating payroll lowers the workers comp premium. If total payroll is $4 million but is reported to the insurance company as $3 million, that is a 25 percent reduction in the WC premium. An audit will definitely happen as, most likely, claims will be one-third more than would be normal for a $3 million dollar payroll. In addition to being assessed the unpaid premium, there is the risk having the workers comp insurance canceled and legal trouble for fraud.
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Operating without workers compensation insurance
One of the simplest forms of reducing workers comp cost is not to carry workers compensation insurance. In some states employers cannot be licensed without workers comp insurance. So, in addition to committing fraud, they are also operating illegally. The small employer with five employees may figure no one is going to get hurt and takes the chance no one will. When an employee is hurt and the employer has no workers comp insurance, the employer is considered “self insured” and must pay the employee’s medical bills and lost wages. If the injury is severe, the employer without workers comp insurance may go out of business, owing a large debt.
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Cash economy
The cash economy is a different slant on under reporting actual payroll. Unskilled or semi-skilled employees are often thankful to have a job. When the employer offers to pay them in cash and not deduct taxes, they usually go along. Everything is fine until they get hurt and learn that since they were never an employee on the employer’s official books, they do not qualify for workers compensation. Employees caught in this mess usually end up suing the employer and – the employer pays.
Types of cash economy workers compensation fraud:
- Providing “free rent” or meals in lieu of pay.
- Bartering instead of using a payroll.
- Classifying payroll as “expense reimbursements.”
- Paying minimum wage by check for payroll purposes and the balance of the hourly rate in cash.
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Not reporting workers comp claims
Every employer knows the more workers comp claims reported, the higher the workers comp insurance premium. A dishonest employer may pressure the employee not to file the claim by suggesting the employee report the injury as a non-work related injury to the employee’s health insurance carrier or the employer pays for the medical expenses instead of reporting the claim.
Even otherwise honest employers may think by paying the small workers comp claims themselves they are saving the insurance company money. Failure to report all workers comp claims results in the insurer not charging the appropriate premium. When an employer does report a very severe claim to the insurance company, the insurer must still pay that large claim even though an appropriate premium was never collected.
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Under reporting the injured employee’s income
When the insurance company adjuster contacts the employer for payroll information to calculate the employee’s temporary indemnity benefit, the adjuster is relying on the employer’s honesty. If the employer, either through error or from misunderstanding the workers comp law, leaves out part of the employee’s income, such as bonuses or commissions, the error results in the injured employee receiving less in indemnity benefits. When the employer intentionally leaves out bonuses, overtime, commissions, and other income when reporting the employee’s earning, the employer is committing fraud. The employer may think paying less to the employee in indemnity benefits reduces workers comp cost. However, the employee knows the indemnity benefit is wrong, hires an attorney, the correct indemnity benefit is paid, and the claim ends up costing more due to attorney involvement.
We are all for employers reducing the cost of workers compensation. For recommendations on how to lower your workers comp legitimately, please contact us.
Author Rebecca Shafer, JD, President of Amaxx Risk Solutions, Inc. is a national expert in the field of workers compensation. She is a writer, speaker, and website publisher. Her expertise is working with employers to reduce workers compensation costs, and her clients include airlines, healthcare, printing/publishing, pharmaceuticals, retail, hospitality, and manufacturing. See www.LowerWC.com for more information. Contact: RShafer@ReduceYourWorkersComp.com.
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Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker or agent about workers comp issues.
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