When we think about workers' compensation insurance fraud, we think about the man blinded in a work accident who gets caught driving a golf cart, or the woman who limps into court wearing a neck brace and then skips back to her full-time job as a yoga instructor.
That’s not the problem.
Employee insurance fraud pales in comparison to the billions of dollars lost – or more accurately, charged to taxpayers – each year from fraud perpetrated by unscrupulous business owners.
If they’re successfully prosecuted, employees who commit workers’ comp insurance fraud – working while receiving benefits, faking injuries, getting hurt in a weekend misadventure and claiming it happened at work – typically pay anywhere from $2,000 to $5,000 in penalties.
Meanwhile, the National Insurance Crime Bureau reports workers' compensation fraud costs employers about $7.2 billion each year, or a staggering 20 percent of all workers' compensation payments.
Why is the gap so large? Typically, employers who commit workers’ comp fraud do so over a period of several years. In fact, there are several increasingly sophisticated ways that employers try to defraud the system.
As with any crime, the more sophisticated workers’ comp fraud gets, the more costly it gets.
Employers submit claims for employees that do not exist. They underreport their payrolls. They misrepresent full-time workers as independent contractors, or misrepresent workers as desk employees when in fact they perform relatively hazardous tasks.
Case in point: California, 2009. Michael Petronella and his wife Devon Kile, owners of three construction-related companies, used the non-profit California State Compensation Insurance Fund to cover their workers.
The couple simply didn’t tell the Fund that it had so many employees. Over the next eight years, they submitted 42 claims for workers that were not covered, which resulted in a loss of $253,000.
They also reported only $2.9 million in payroll, instead of $29 million. The total damage: insurance premium losses exceeding $38 million. At the time, officials said this was the largest workers’ compensation fraud case in California history.
This kind of thing can be especially tricky in the staffing industry, where health and workers’ comp insurance expenses may fall with either the employer or the staffing agency.
Why is this a problem?
I have no particular sympathy for large insurance companies. But the $7 billion annual fraud total has to go somewhere, and it generally goes into higher premiums. That, of course, gets passed directly to the small business; more often than not, it gets passed to the individual workers.
All of this is only part of a larger issue: the Coalition Against Insurance Fraud in Washington, D.C. estimates that insurance fraud as a whole costs U.S. taxpayers about $80 billion annually.
But among staffing-related scams, workers’ compensation fraud looms large.