Publius reveals specific steps public officials can take immediately to help prevent the 10 to 23% of California payroll involved in premium fraud. Find out the numbers, who the bad guys are.
We have heard this story many times before, especially in the construction business: Misclassified or underreported payroll figures allowing contractors to compete against shady operators who bid on projects while brazenly fudging their numbers.
The Commission on Health and Safety and Workers’ Compensation recently published two reports dealing with this problem. Not surprisingly, one of the culprits was identified as the “split classification,” an accommodation made to labor decades ago so as not to penalize higher-wage skilled laborers whose better loss experience should compensate for lower-wage-earning non-union laborers in the same classification.
But the Commission studies didn’t stop there. In a more fundamental revelation, the Commission also estimated that the amount of underreported or misreported wages for purposes of determining workers’ compensation insurance premiums could be in the billions of dollars – an estimated 10% to 23% of California’s payroll. To the extent these figures are correct, the system clearly extracts this extra percentage out of honest employers.
Though it is easy to focus this inquiry on the competitive world of construction contracts, the fact is that this amount of money cannot be generated solely by contractors trying to game the system and gain a competitive advantage over their union competitors.
Add to the list PEOs that misclassify, underreport and fail to provide carriers accurate lists of employers that they provide employees for. If you think this might not be true, try placing coverage for a PEO in this or most other states. Carriers run. That is, except for State Fund, which is forced, as the insurer of last resort, to accept them, and AIG, which is, well, AIG.
Then there are employers that decide to hide the ball when it comes time for the dreaded premium audit. These folks may keep an extra set of books, pay some claims in cash or conveniently keep the auditors at bay until they go away and another insurer picks up the risk.
In this case, it would appear the legislature is doing a little something about this problem. Last year it dumped on roofing contractors and required them, even one-man shows, to carry workers’ comp and be subject to audit.
This year, Assembly Bill 812 (Hernandez) would allow insurers to extract a heavy penalty if employers do not provide access to payroll records when it comes time for a premium audit. It looks like this bill, also supported by the Chamber of Commerce and the unions, will get to the governor’s desk for signature. What this bill does not do is require payroll representations to be under penalty of perjury and to provide some real-world criminal penalties.
But AB 812 is not the be-all and end-all solution for this pervasive problem. A number of steps need to be taken, and the sooner the better.
First, as the Commission recommended, the split-class system needs to be done away with. This is a rule, not a statute, and the Commissioner could end this fraud incentive practice tomorrow if he so desired.
The second is for the Department of Insurance and Labor and Workforce Development Agency to cooperatively develop a system where insurers have real-time access to payroll reports made by employers for unemployment insurance purposes. Believe it or not, payroll fraud is not always across the board. While not a global solution, it is a step in the right direction.
Third, outside “claims reviewers” need to be licensed by the Department of Insurance; meet the same educational requirements as demanded of insurers’ claims reviewers, administrators, and self-insureds; and be required to make disclosures to their clients about services they perform and laws that apply to workers’ compensation.
Fourth, the Insurance Commissioner should revisit a plan presented by State Fund to the Bureau (and voted down by the governing committee—State Fund’s competitors) allowing issuance of separate workers’ comp policies to each employer client of a PEO. This would permit carriers not only to audit the primary employer but also to know who they are and what exactly the risk really is.
Finally, while the Insurance Commissioner is reviewing the experience rating plan, he also should consider excluding claims under a certain dollar threshold- say $1,000 from inclusion in the calculation of the X-Mod. Doing so would help ease the abuse of first aid and take one more incentive for premium fraud out of the system.
Taking these real steps would help ease the effects of premium fraud on honest employers. If public officials would recognize that employers are not automatically the victims of insurance companies if they do not have the resources to self-insure, then the system would perform much better than it does now. That, of course, would require elected leaders to acknowledge that sometimes employers’ hands are not entirely clean—a revelation the Commission finally has made clear but that those in the industry have known for a long time.