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.
