Workers’ compensation insurers lose a lot more money from policyholders who pay less than they should in premiums than from injured workers who received indemnity benefits they shouldn’t. There are no reliable overall figures, but it is noteworthy that Texas Mutual, the largest carrier in Texas, referred only 13 cases out of 47,900 claims it received in 2014 to a county prosecution unit that it financially subsidized (until a few days ago) to expedite enforcement. 

Compare that to Valen Analytics’ estimate from an examination of millions of premium audits that 15% of construction firm payrolls are misclassified, thereby evading workers’ comp premiums.

The employment landscape has changed in a direction that has increased risk of employer abuses, including premium games. The Department of Labor says that employment is now so “fissured” that it is hard to guess whom a person, such as a hotel housekeeper, driver or plumber works for and expects legal employee protections. Add to that the growth of the immigrant workforce especially in jobs where fissuring is endemic: low wage blue-collar work.

On the other hand, changes in laws and practices among insurers, legislatures and law enforcement agencies improve the odds that premium shirkers will be found. The keys are better information and, surprise, getting people to pay attention.

Ranney Pageler, vice president of the fraud investigations department at Employers Insurance, and chair of the Property Casualty Insurers Association of America Fraud Committee, gave me examples of premium shirking of the criminal fraud variety.

On deliberately misclassifying workers, he mentioned complete warehouse staffs being reported as clerical employees; commercial vehicle mechanics being reported as inside-sales employees; concrete fabricators being reported as sales employees; and, truck drivers reported as mechanics.

And for rendering employees officially non-existent, Pageler cited a large restaurant in a pricy section of town reporting minimal payroll with only three working family members and one employee. While eating lunch at the restaurant, an investigator observed no less than 12 working staff. He mentioned a warehouse reporting minimal payroll and three employees, but more than 20 employees and 6 forklifts observed operating in the warehouse.

The first line of defense for the insurer is its underwriting department, backed up by premium audits and its special investigation unit. Valen Analytics, a systems provider for property/casualty underwriting, has been studying several million underwritten policies issued by insurers that contribute to its national database. Bret Shroyer at the firm told me that, over time, underwriters learn patterns of premium problems, but the patterns and the workforces need to be stable for underwriters to stay on top. Predictive software developed from many observations, he says, improves detection, especially when the underwriter is facing new markets and business classes.

Shroyer argues that misbehaving employers are more likely to get their insurance from carriers less adept than their competitors at detecting aberrations at the time of underwriting.

Pageler says that prosecutors have had to learn how to deal with premium fraud. “It’s easy,” he says, “to find fault in the claimant case, and it does not take a whole lot of resources. With medical provider and premium fraud, there’s a higher level of complexity, and they are paper cases, with no video evidence. Your major fraud cases, you’re getting into classification codes, tax forms, payroll and such. It took the workers’ compensation industry time to learn how to apply the criminal statutes to premium fraud, and the prosecutors needed the analysts to go through the data for evidence.”

“Recently in Southern California, when we realized the potential for premium fraud, the DA got on the case fast. You would not see that five years ago.”

As workers’ compensation insurers struggle with premium shirkers, a diverse array of campaigns emerged in the past 10 or so years to keep employers honest. People who ordinarily do not lunch together -- unions, businesses, public officials and public interest groups -- have pressed state legislatures to toughen employment-related laws and law enforcement. Their primary target is what is called payroll fraud of which the victim is the worker, but it is closely linked to insurance, licensing and health and safety violations. Pageler says a good number of premium fraud cases start with a discharged worker requesting unemployment compensation.

For example, some years ago, the Watsonville, California Law Center, whose primary constituents include farm workers, got together with Bill Zachry, then chair of a California commission that distributes anti-fraud grants, to incent county prosecutors to, in effect, protect the employment rights of undocumented workers by attacking premium fraud.

A progressive activist organization, the National Employment Law Project, is the best source today of information about legally-mandated tests defining if a worker is an employee. NELP’s researchers found that a majority of states in 2012 used the so-called ABC test to determine non-employee status for unemployment insurance.

This test creates a presumption of employee status and requires employers to overcome this presumption by showing that: (a) an individual is free from control or direction over performance of the work, both under contract and in fact; (b) the service provided is outside the usual course of the business for which it is performed; and (c) an individual is customarily engaged in an independently established trade, occupation or business. NELP says that the ABC test for non-employee status “is the most objective and the most difficult for employers to manipulate.”

The Department of Labor has signed data-sharing agreements with state governments to enforce employee protections. Empowered by the Fair Labor Standards Act, it and state and local governments went after a scam practiced in Utah and Arizona whereby employers placed their workers into corporate entities devised to evade unemployment insurance and workers’ compensation.  . 

Throughout the shirking spectrum, from casual toying to systemic deception, it appears that the good guys have learned how to get the upper hand, even if they do not enjoy that position all the time.