N.Y. Grand Jury Report Recommends Changes to Prevent Workers’ Comp Fraud

March 26, 2014

New York’s Manhattan District Attorney Cyrus R. Vance, Jr. announced Tuesday that a New York State Supreme Court grand jury has issued a report examining the vulnerability of New York’s workers’ compensation insurance system to fraud and misuse.

The grand jury report found that, taking into account a June 2013 study from the Fiscal Policy Institute and other estimates, New York City’s construction industry in 2011 alone cost the city and New York State approximately $500 million based on worker misclassifications.

The report said the largest component of the loss was unpaid workers’ compensation premiums, with personal income tax, withholding, unemployment insurance, and various other business taxes accounting for the remainder.

The grand jury’s report stemmed from by the Manhattan District Attorney’s investigations into false information provided to the New York State Insurance Fund in connection with applications for, and audits of, workers’ comp policies.

“Workers’ compensation insurance provides critical protection to both workers and their employers,” said Manhattan District Attorney Cyrus R. Vance, Jr. “The widespread premium fraud detailed by this Grand Jury Report is deeply troubling and underscores the critical need to reform the workers’ compensation system.”

“My Office’s Tax Fraud and Money Laundering Unit will continue to pursue those who cheat the system, but the best protection for New York’s workers is a system that is itself protected from fraud and abuse,” Vance said.

New York’s workers’ comp law provides a needed safety net for employees who are injured in the workplace, while also protecting employers from lawsuits that could lead to economic ruin. Workers’ comp insurance in New York is approximately a $6 billion per year business, with nearly 40 percent of the workers’ comp market handled by the New York State Insurance Fund.

New York law requires every employer to obtain worker’s comp insurance. An individual employer’s premium is based on each covered employee’s job classification, as determined by the New York Compensation Rating Board.

A rate for a relatively safe job may be as low as two cents for each $100 of payroll, whereas the rate for a more inherently dangerous job could be as much as $35 for each $100 of payroll.

The District Attorney’s office said this system — which requires employer self-reporting — is easily abused by unscrupulous employers who misclassify employees. Employers can easily lie about what work a particular employee performs, for example, reporting a roofer as a clerical worker, and thus paying a significantly lower premium, the District Attorney’s office said. More egregious is fraud where an employer misclassifies a worker, who is required to be insured under the system, as an independent contractor, who is rather an employee.

Since 2013, the Manhattan District Attorney’s money laundering and tax crimes unit recovered $4.8 million from criminal defendants who pleaded guilty to violating the workers’ compensation law.

The grand Jury report proposed a list of recommendations that fall into four general categories:

Increased Penalties to ensure that sentences are proportionate to the magnitude of the fraud. Under current law, a defendant faces no more than a class E felony whether the amount of the fraud is $1,000 or $100,000. The Grand Jury recommends:

  • Gradating the workers’ compensation law and relevant criminal statutes based on monetary thresholds;
  • Amend relevant provisions of the penal law, such as the money-laundering statutes and the enterprise-corruption statute, to include workers’ compensation law felonies as possible predicate felonies.

Increased Transparency by overhauling the application process used by employers and the audit procedure of the policyholder.

  • Design a uniform workers’ compensation insurance application that will be submitted electronically to the Workers’ Compensation Board;
  • Require vigorous audits by all insurance carriers, ensuring that employers pay the correct premium; and
  • Issue every employee a workers’ comp insurance card for the employee to present when seeking medical services or prescription drugs in connection with a job-related injury or illness.

Broader Data Collection and Collaboration to increase dissemination of information in the hands of those charged with investigating and prosecuting fraud.

  • Create an integrated database to combat workers’ compensation insurance fraud, including all application, audit reports, and certificates of insurance; and
  • Create a real-time database of information from commercial check cashers available to the Workers’ Compensation Board.

Broader Education for employees and the community at large about the workers’ compensation system and its value to the public, so that everyone is better able to protect the system from fraud.

  • Employers should know their obligations under the system;
  • Community recognition about the negative effects of premium fraud; and
  • Employees should be encouraged to invoke their rights under the system.

Source: The New York County District Attorney’s Office

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