Workers' Compensation

WILG Report on Employer & Insurer Fraud: Boosting Bottom Line Profits at the Expense of Workers and Society

The vilification of injured workers was big business’ modus operandi during the 2011 legislative session. Stories were placed in newspapers about employees gaming the workers’ compensation system and inaccurate, and unverified statistics on employee fraud were spoon fed to state legislators and the media. These aggressive efforts were orchestrated by big business in an attempt to shape public opinion for raising insurance rates and enacting restrictive legislative measures that would limit the rights of injured workers.

Empirical research demonstrates, however, that employee fraud throughout the U.S. is less than 1% of all claims. For example, out of 65,000 workers’ compensation claims in Wisconsin, there were only 3 prosecutions related to employee workers’ compensation fraud.[fn1] The overall legitimacy of injured workers’ compensation claims is further supported by the fact that 90% of all the claims are approved. Similar findings are documented in other states.

Employer Fraud: The Real Problem

Employers engage in several schemes in an effort to increase their profit margins including: underreporting the number of workers, failing to provide mandatory workers’ compensation coverage, and intentionally misclassifying their employees. The later is the largest problem. It includes, for example, employer misclassification of construction workers as clerical staff to save higher premium dollars usually associated with more risky work with greater injury rates.

The State of New York has identified the highest number of misclassified workers with over 60,000 in 2010.[fn2]  Conversely, while California has the highest number of employers, with over 1.1 million, the state only identified 1,682 misclassified workers in 2010. Several factors may have contributed to the decline in the number of audits conducted in California: budgetary constraints, lack of resources or other priorities by state leadership.

Audits: Key to Identifying Employer Fraud

In 2010, New York completed the most audits (9,803) with the State of Texas coming in second (9,143) and Florida third (7,500). The State of California only completed 645 audits in 2010 and 840 in 2009. Based on the number of taxable employers in 2009, the State of California only audited 0.07% of taxable employers in the state. State audits of employer fraud are critical given the symbiotic relationship between big business and the insurance industry.

Employee Misclassification: Loss of Revenue

The losses in taxes across the spectrum have been severe. State losses involve the taxes on unemployment insurance, as well as income at the state and local levels. Some states have reported over $200 million in losses, like Indiana in 2008. The state of Maryland lost over $50 million in 2009. Additionally, the IRS reported in 2009 that it estimated the federal government has a potential deficit of $54 billion due to the underreporting of employment tax and about $15 billion in unpaid federal unemployment taxes due to employee misclassification.

Insurance Industry’s Unfair Sphere of Influence

The National Insurance Crime Bureau recently reported that workers’ compensation fraud costs companies of all sizes $7.2 billion annually. However, the insurance industry’s close relationship with NCIB makes the objectivity of the information very questionable. The NCIB is funded with an investment of $28 million dollars by the property and casualty industry. Questions have also risen about their use of the FBI to intimidate policyholders.

Recommendations & Conclusions

Possible legislative solutions would be to close the current IRS “safe harbor” provision (Section 530 of the Revenue Act of 1978) that prevents the IRS from collecting employment taxes from employers who misclassify their workers as independent contractors as long as they can provide reasonable justification. Closing this loophole would be a first step to closing the “tax gap” and collecting money that is owed to the federal government but not paid. Other recommended “fixes” include developing aggressive procedures for going after employer and insurer fraud, conducting statistically- based audits like in Maryland and imposing meaningful fines.

Big business attacks on injured workers deflects legislative attention away from the root cause of insurance company losses and related increases in insurance premiums - big business insurance fraud and corruption.

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1. State of Wisconsin Department of Workforce Development Worker's Compensation Division, Report on Allegations of Worker’s Compensation Fraud, (Nov. 1999), available at:

2. Maryland Department of Labor, Licensing and Regulation, Annual Report of the Joint Enforcement Task Force on Workplace Fraud, Dec. 2009, available at:

© Copyright 2012 Workers’ Injury Law & Advocacy Group. All rights reserved. Reprinted with permission. This article was excerpted from “Employer and Insurer Fraud: Boosting Bottom Line Profits at the Expense of Workers and Society”, written by Roselyn Bonanti, WILG’s research director.