The bad news: Some employers commit workers’ comp fraud to reduce costs so they can underbid honest companies. The good news: Many of the cheaters get caught and face serious penalties, as in this case.
The president of a now-defunct New Jersey construction company faces eight years in prison plus financial penalties for workers’ comp fraud.
Herlindo Garcia-Merlos of Trenton, NJ, pleaded guilty to two criminal counts of theft by deception.
Garcia-Merlos provided false and misleading information to his company’s workers’ comp insurance carrier, New Jersey Manufacturers (NJM) Insurance Group.
As a result of the fraud, Garcia-Merlos paid reduced premiums that his company wasn’t entitled to. The difference in premiums was calculated to be $315,680 over a period of three years.
Garcia-Merlos also pleaded guilty to stealing more than $135,462 by failing to file tax returns for five years. An investigation also determined that he under-reported wages on his individual tax returns during the same years.
Under a plea agreement, the state will recommend Garcia-Merlos be sentenced to eight years in state prison and have to pay more than $450,000 in restitution. His sentencing is scheduled for January.
Unfortunately for honest businesses, the number of companies that attempt this type of workers’ comp fraud is significant.
Earlier this year, an investigation by a North Carolina newspaper found 6% of businesses had expired workers’ comp policies.
Other studies put that number at 13%.
Another tactic used by companies: ghost policies.
Here’s how that works: Businesses classify workers as independent contractors instead of employees. However, the business still buys a workers’ comp policy that would cover a “ghost employee,” someone the company might hire to work for just a short period. Therefore, the business owner is able to show a paid workers’ comp insurance policy.
The price differential can be substantial. A small contractor with just five employees might pay $30,000 a year for a full workers’ comp insurance policy. But a ghost policy can be bought for just $850.