Safety and OSHA News

How many of your business competitors cheat on workers’ comp?

What percentage of businesses find a way to skimp on workers’ compensation insurance coverage (and therefore undercut their competitors): 6%, 13%, 18% or 40%?

Depending on the type of cheating and how the cheats are counted, each of those numbers are valid.

But whether it’s 6% or 40%, the result is the same: Businesses that don’t buy the required amount of workers’ comp coverage pocket as profit what they would have spent on the insurance.

And that allows those businesses to make considerably lower bids against competitors who buy the legally required insurance. It’s an unfair business practice.

The News & Observer newspaper in North Carolina recently took a look at how some businesses dodge the workers’ comp system.

The N&O matched data for workers’ comp policies from the NC Rate Bureau and the state labor department’s 4,900 safety inspections last year and found 300 businesses whose comp coverage appeared to be expired at the time of the inspection.

That’s 6% of businesses receiving safety inspections that had expired policies.

Other studies put the number of businesses that don’t buy comp policies at 13%.

Earlier this year, the N&O analyzed the NC Rate Bureau’s database of policies written for companies required to have comp insurance. About 140,000 companies had coverage. About 172,000 businesses are headquartered in North Carolina. That’s an 18% rate of companies not buying insurance.

Ghost policies

Some businesses that don’t buy comp policies may have legal reasons to do without. North Carolina law, for example, requires comp coverage for businesses with three or more employees.

But let’s say you’re a small contractor with just five employees. You’d be required to buy comp insurance. The N&O gives one example of such a company. Its full comp policy would cost $30,000 a year, a significant amount for a small business.

But there’s a way that the same business can get a policy for $850 a year.

The business can purchase what’s known as a ghost policy.

Here’s how it works. The business owner classifies the people who work for him as independent contractors instead of employees. He then attests that he’s the only employee of his business.

However, he buys a policy that would cover a “ghost employee,” someone the business might hire to work for just a day or a few days.

The business owner is able to show that he has workers’ comp coverage if someone asks.

The problems start when an employee is injured. Insurance companies, realizing that the business owner has committed fraud by misclassifying his employees, refuses to pay for coverage of the injured worker.

Then the matter goes to court and gets even more expensive.

Decisions often go against insurance companies, who have to pay large sums when a proper policy wasn’t purchased. What does that do for other companies? It drives up the amounts they pay for workers’ comp policies.

The North Carolina Division of Employment Security says last year, about 40% of companies had misclassified employees.

Worse now than before

Business owners interviewed by the N&O say the problem of competing against companies that skirt workers’ comp rules became worse as the economy failed. It’s not a new problem, but it certainly got worse in the last few years.

On top of that, the N&O articles show that in North Carolina and many other states, regulators don’t have the resources to uncover this workers’ comp fraud until an employee is injured.

Some lawmakers and business leaders are calling for ghost policies to be outlawed.

California and Pennsylvania have laws requiring all construction site owners to provide workers’ comp coverage for all workers on-site regardless of whether they are classified as employees or independent contractors.

What would you suggest as the solution to this problem? Let us know what you think in the comments below.

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  1. Lower the premiums. Also get rid of ghost policies. $30,00 for 5 employees is ludicrous! We have 17 employees & it’s 2/3 of that. Maybe it is a fair price for insurance, I don’t know–I don’t work for an insurance company. I just know that those high costs can kill the small business owner. I don’t agree with the fraud that’s going on by any means, but I understand why it happens…it’s sad.

  2. Simply put, lower the premiums and you lessen the chance for fraud.

  3. Put the whole thing under a Social Security type umbrella. Everybody pays something, but less than current rates and everyone is covered for every injury. No disputes. No courts.

  4. just need to make small business fairly compete with other small and larger businesses. I am a small business of 20 employees and i am trying to compete with competitors with this exact situation…it is very unfair. Unfair until someone gets hurts on a residential or commercial job site and “employer” says a sub-contractor was hurt…not his problem. This is until the Employee is injuryed for life and not able to work. Somebody’s going to pay somewhere…be aware homeowners! Don’t need any real changes in current WComp insurance, just need everyone to buy the same insurance for employees or “workers” and compete on the same playing field…please no more Social Security type programs.

  5. We have a major competitor who calls their employees “franchisees” with the parent company having a policy for 10 Mil. which sounds great to customers but the franchisee is in fact not insured or for far less.
    This also get’s by the situation of using illegal immigrants as well as not paying most other taxes. This company is one of the largest Exterior Building Maintenace contractors around.
    Let the buyer beware!

  6. Jose Alvarez says:

    Stop requiring insurance. No one should be forced to buy anything.

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