Employer Fraud in California

Employers’ fraud cost the workers’ compensation system more than the any fraud committed by injured workers ever could.  Simply look at one aspect of fraud in the system: misclassification of payroll.  

Misclassification of payroll is when employers intentionally and incorrectly classify full-time workers as independent contractors vs employees.  This means that employers not only deny certain workers their benefits, but that they pay significantly less in workers compensation taxes than they are supposed to.  This means that employers are paying in a lot less into the workers compensation system and workers that are rightfully owed payments for their injuries may end up being shortchanged.

According to Bret Shroyer, a solutions architect for Denver, Colo.-based Valen Analytics., payroll misclassification is a significant issue for the workers’ compensation industry.  Shroyer estimates that roughly $22 billion of payroll is misclassified each year, and the aggregate impact to the insurance industry is in the range of $1.6 billion in workers’ compensation premiums.  California alone accounts for roughly one‑third of the nationwide total of misclassified payroll.

Although the amount of misclassified payroll is about 2.5 percent of aggregate payroll,  it may be between 8 percent to even 15 percent of the employer’s account when that happens, and the impact on the final premium for an employer can be as much as 20 to 30 percent of the insurance premiums due.

Shroyer claims that the average incidence rate of misclassified payroll in California is almost 50 percent higher than the national average and that the impact when payroll is misclassified is also much larger.  The most prevalent violations occur in the construction industry.

Although the misclassification rate for the construction industry is just a little higher than the national average in terms of percent of policies, it has a huge impact on the premium that’s charged and represents a shortfall in premium collections of as much as $500 million according to Shroyer.  This misclassification of workers is not easy to detect and requires an audit of the employer’s payroll.

This $500 million dollar fraud diminishes the funds available to pay benefits to injured workers who pay the price for their employers fraud.  Think about that every time hear an employer claim that every injured worker’s case is a fraud.   It may be that the employer is viewing the system through the lens of his own shady practices.

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