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August 10, 2007
Employer WCB Fraud Pegged at $100 BILLION in California
Bill Zachary who chairs the California Fraud Assessment
Commission says, " The focus at the commission and among law enforcement is
shifting from employee fraud to . . . employers misreporting payroll . .
Report: Workers' comp fraud rampant
Underreporting of high-risk jobs costs
honest employers Sacramento Business Journal - by
Kathy RobertsonStaff writer
California employers in industries where workers face a
high risk of on-the-job injuries may be hiding 75 percent of their payroll for
those risky jobs, forcing honest employers to pay workers' compensation rates
as much as eight times higher than if everyone paid their fair share, a new
That translates to as much as $100 billion in underreported
payroll in 2002. The report, expected to be released today by University of
California Berkeley researchers Frank Neuhauser and Colleen Donovan, is the
first to quantify the extent of fraud in workers' comp payroll reporting in
"I was staggered," Neuhauser said. "We ran over the figures
a number of times. There are not a lot of employees in these high-risk classes,
but the impact is huge."
State law requires that all employers have workers'
compensation insurance. The premiums are a percentage of wages but vary by job
classification based on risk of injury -- the more dangerous the job, the
higher the rate.
Fraudulent employers seek to cut workers' comp costs by
underreporting wages -- or misreporting workers with high-risk jobs, such as
roofing or logging, as if they worked in low-risk categories such as sales or
clerical work, the researchers found.
Fraud increases when premium rates go up because there's
more incentive to cheat when the potential savings are higher. Premiums in
California peaked in 2004 before dropping to 2002 levels following workers'
comp reform. The report studied rates in 1997 through 2002 because there is a
significant time lag in reporting rates to the public.
The problem is at least as bad today as it was during the
period covered by the study, Neuhauser said.
Fraudulent reporting is a big problem in the construction
trade, especially roofing, said Scott Hauge, president of Small Business
California, a nonpartisan, grassroots advocacy organization in San Francisco
that tracks the issue. Fraudulent employers either neglect to report their full
payroll or misclassify roofers -- whose insurance rate is about $41 per $100
payroll -- as clerical workers or some similar category, paying a rate of less
than $1 per $100 payroll.
Others use day laborers, pay them cash and fail to report
the pay at all, or dub their workers independent contractors responsible for
their own benefits, Hauge said.
"We talk about (workers' comp fraud) extensively," said
Mark Connerly, a senior consultant to the Roofing Contractors Association of
California. The trade group sponsored legislation signed by the governor last
year that requires all roofing contractors, regardless of whether they have
employees, to carry workers' comp insurance and requires insurers to conduct
annual audits of their roofing customers' payrolls.
There were 6,000 licensed roofing contractors in California
last year. The number dropped to 3,000 in early 2007.
"That tells us 3,000 companies were basically operating
fraudulently," Connerly said. Quantify the underground economy
It's been difficult to quantify the extent of
underreporting or misreporting because there have been no accurate estimates of
total wages that are subject to workers' comp premiums. The underground
economy, where employers pay cash to avoid reporting wages, has been outside
the scope of previous studies.
The new report attempts to portray a more complete picture
by using the Current Population Survey conducted by the U.S. Census Bureau to
estimate total wage income, including the cash economy. Other sources were also
used, and researchers compared data from those surveys to payroll figures
reported to the Workers' Compensation Insurance Rating Bureau to identify gaps.
Among the conclusions in the UC Berkeley report:
- Payroll underreporting was at 6 percent to 10 percent of
private industry payroll in 1997, when premium levels in California were a
relatively low $2.47 per $100 payroll. But the figure climbed to between 19
percent and 23 percent of payroll in 2002, when premium levels were $4.28 per
$100. That translates to an increase from as little as $19.5 billion in
under-reported payroll in 1997 to as much as $100 billion in 2002.
- Misreporting also increases dramatically when the
premium rate for a class of workers increases. That can lead to reporting too
much payroll for low-risk jobs. On the other hand, for very high-risk classes,
as much as 65 percent to 75 percent of payroll is being underreported or
misreported, the study concludes.
- As a result, honest employers consistently faced
inappropriately high premiums, with businesses in high-risk industries paying
up to eight times the rate they should.
"I know it goes on," said Hauge, from Small Business
California. "The eight times sounds high, but I know it's significant."
The small business group is sponsoring legislation that
would expand the state labor commissioner's ability to identify employers who
fail to provide coverage, by comparing payroll and other data with information
gathered by other state agencies such as the Employment Development Department.
Senate Bill 869 by Los Angeles Democrat Mark Ridley-Thomas
is pending in the Assembly Appropriations Committee.
"We realize employer fraud has always been an important
issue that has to be resolved," said Bill Zachary, a Safeway Inc. vice
president who chairs the California Fraud Assessment Commission. The focus at
the commission and among law enforcement is shifting from employee fraud to
"cost drivers" such as employers misreporting payroll, he said.
"What a lot of people don't realize is there is a lot of
cost-shifting," Zachary said. The Uninsured Employers' Benefit Trust Fund picks
up the cost of paying benefits to workers who get hurt or ill while working for
an illegally uninsured employer.
The fund tries to collect from the responsible employer,
but these expenses and unpaid care at county hospitals all lead to cost
shifting in the form of higher rates to honest employers.
Surprised by the numbers in the report, Vince Sollitto at
the California Chamber of Commerce agreed that workers' comp fraud occurs "on
all sides," and "hurts those who spend money on premiums and play by the
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