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August 10, 2007

Employer WCB Fraud Pegged at $100 BILLION in California Alone

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 study concludes.

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 California.

"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."

Pending legislation

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 rules."

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