Employers in California are required to obtain workers compensation insurance for their employees. The employer is charged a rate per one hundred dollars of payroll based upon the risk of injury. An example of a classification of employee that is low risk and low cost is an office worker, and rates can be as low as one dollar per $100 of payroll. On the other end of the spectrum is a roofer. Workers Comp insurance rates for roofers can be more than $50 per $100 of payroll.
Workers compensation premium fraud occurs when an employer, for the purpose of lowering workers comp premiums, classifies a worker in a lower risk and lower cost job description than the code for the work the employee is actually doing. A criminal investigation can be initiated if a disgruntled employee or former employee reports the misclassification to law enforcement. An investigation can also be initiated due to a worker suffering an injury that does not typically occur in the classification code of the employee. For example, a farm worker is classified as a vineyard worker but report a lung injury. The investigation reveals the worker was working in cold storage, where lung injuries are common. The insurance company then conducts an audit of all of the company’s employee records and workers comp insurance records or refers the matter to law enforcement for investigation.
Workers comp fraud also occurs when an employer is paying some or all of their employees in cash and not providing workers comp insurance to their employees. Another common type of fraud occurs when an employer improperly and illegally classifies employees as independent contractors. California law utilizes a multi-part test to determine whether a worker is an employee or an independent contractor, and this law is not favorable to employers.
And yet another type of fraud occurs when an employer shuts down a company and reopens the company under another name, but with most or all of the same employees. Employers will engage in this practice when the number of employee workers comp claims is far above the average for the industry. For example, when a new company is started the company starts with an experience modifier of 1.0. An employer who has had twice as much money paid in workers comp claims as the industry average will have an experience modifier (commonly referred to as an “x mod”) of 2.0, which means the company pays twice the premiums of an average company or a company just starting out. The company that closes and reopens under another name with most or all of the same employees to get to start over with an experience modifier of 1.0 is committing workers comp premium fraud.