The Workers’ Compensation Insurance Rating Bureau (WCIRB) wants to eliminate the standard requiring a physical audit of high-wage employers’ actual payroll records. But members of the bureau’s Classification & Rating Committee say the plan is ill-conceived and threatens to undermine one of the more effective tools for fighting fraud that undermines the system.
Currently, the Uniform Statistical Reporting Plan (USRP) requires an annual physical audit of accounts generating at least $10,000 in premium and all roofing contractors. But accounts under $10,000 in premium require only a physical audit “at sufficient intervals to ensure determination of proper payrolls.”
But there’s a little-noticed requirement in WCIRB’s test audit program — which the bureau concedes it has not enforced — that any policy generating exposure in a high-wage construction classification undergo a physical audit regardless of the amount of premium it generates. The bureau wants to eliminate that standard and bring the test audit program into line with the USRP.
Dual-Wage Classifications Problems
“If anyone is violating the rules, it’s these little guys. Put it in, don’t take it out.”
—C&R committee member
One of the most common types of fraud in this area is to misreport the hourly wage of some workers to qualify for the lower-cost high-wage classifications.
At the behest of its insurance carrier members, WCIRB is studying how to dismantle the dual-wage classification system for the construction industry and possibly replace it with a series of construction credits. Carriers maintain that California’s program is unique, expensive to administer, and an unnecessary holdover from the
But employers and big labor are not convinced the dual-wage system’s best days are behind it. They are working collaboratively to identify ways to save the program through enhanced enforcement. There is some talk on the street that the bureau is trying to sabotage these efforts.
The same day the C&R committee approved moving forward with the study to replace the system, bureau staff attempted to change the audit rule.
WCIRB’s test audit program is designed to ensure that carriers accurately report employer payroll and claims experience and assign them to the proper classifications. Inaccurate reporting is detrimental to the ratemaking process and also can impact employer X-Mods.
But members of the C&R committee were quick to question the wisdom of the bureau’s plan and said it should move in the opposite direction.
“If anyone is violating the rules, it’s these little guys. Put it in, don’t take it out,” noted one C&R committee member. “If you do anything, then clarify in the USRP that [a physical audit] is required.”
Industry insiders note that many of the employers in question are insured by State Compensation Insurance Fund (SCIF), which is embarking on a major reorganization. A primary target of SCIF’s layoff plan happens to be its audit unit. Some in the industry wonder if this is a coincidence.
The bureau’s Warren Clark noted that the physical audit standard for these high-wage classifications was implemented in 1985 through a WCIRB bulletin. But he says the standard was repealed along with minimum-rate laws in 1995 and removed from the USRP. He says the bureau is not enforcing it and he dubbed elimination of the language from the test audit program a “housekeeping” measure.
Facing opposition from the committee, bureau president Bob Mike retreated. He said staff “will dig deeper” and come back with a recommendation. He said they would study a change to the USRP to add the audit requirement back in, but he indicated that the test audit requirement could be enforced without the change to the USRP.
Study Gets Green Light
Before the uproar over the physical audit requirement, the C&R committee did approve a bureau study of the overall dual-wage classification system. The study will proceed on a parallel path. One path will prepare an update to the wage level thresholds to update classifications in 2013 if the bureau decides to keep the dual-wage system, while the other will study eliminating the program outright, perhaps as early as 2014.
The dual-wage system was devised to address disparities in loss rates between high- and low-wage construction workers. The former, often in unionized shops, have significantly lower loss rates per $100 of payroll, but their employers were not always rewarded with lower rates under the prior system. But now in a competitive rating environment, the question is whether experience rating modifications (X-Mods) and carrier credits adequately address the disparity. The study also will look at how other states address this disparity and whether an advisory system, a construction credit program, or some other system would better meet California’s needs.
The bureau also will look at what impact elimination would have on employer X-Mods. Returning each of the dual-wage classifications to a single-risk pool likely would drive up X-Mods for employers in the former lower-wage classification and drive down those in the higher-wage classifications.
Wage Level Surveys Continue
Since elimination of the system isn’t certain at this point, the bureau also will continue its wage level studies to review some of the remaining classifications. The bureau started the study last year and completed eight of the classifications. It recommended raising the threshold in seven classifications from $2 per hour to $5 per hour while holding painters steady.
The wage threshold is the dividing line between high- and low-wage classifications. Employer representatives are concerned whenever there is an increase in the threshold because of its impact on honest contracting firms and for its propensity to drive more fraud.
They note that employers that are already falsifying payroll records to get the lower rate will have no qualms about increasing the size of the lie. But honest contractors paying just over threshold are faced with a dilemma when the threshold is increased — pay their workers more or pay a higher rate for coverage. In the struggling construction industry, many won’t be able to do either and will either have to lay off workers or join the underground economy.
At this point, labor and employer representatives to WCIRB’s governing committee are working together on a separate study to determine if there are ways to better enforce the current system to make it more effective. But it’s unclear if there will be viable enforcement alternatives, given government’s limited resources to take on a new enforcement initiative, and the lack of success of past efforts, hence the interest in better enforcement by carriers.
The bureau’s study begins this month with data collection, and it plans to evaluate continued viability of the system and potential alternatives by May. At that point, it hopes to develop preliminary recommendations for the bureau’s governing committee to consider. The joint labor-management Construction Enforcement Coalition also is beginning discussions this month with regulators, and plans to meet through the year.
The bureau’s Bob Mike indicated that the organization would like to make a decision on the direction of the program by the time of its next annual filing in August. Stay tuned.
(Filed by Brad Cain in San Francisco)