Challenging Fraud by Employers in Workers’ Compensation

March 6, 2015 | Appeals | Insurance Coverage

Workers’ Compensation insurance carriers face a variety of employer schemes intended to defraud them out of insurance premiums in one way or another. After briefly discussing the requirements of New York’s Workers’ Compensation Law (WCL), this column explores some of the methods disreputable companies sometimes use to avoid their obligations. It concludes with a discussion of a recent decision by the Appellate Division, Third Department, that illustrates how the courts seek to balance the harm stemming from Workers’ Comp fraud to limit burdens being placed on employees.

The System in New York

The WCL requires employers to pay benefits to workers who are injured or disabled during the course of their employment, regardless of fault.1 These benefits include medical care, replacement of lost wages (“indemnity payments”), and death benefits.2 To assure that these payments are made, the WCL requires employers to obtain insurance coverage in one of the following ways: by purchasing Workers’ Compensation coverage from an approved insurance carrier; by securing coverage from the state’s insurance fund; or by obtaining approval from the New York State Workers’ Compensation Board to act as a self-insurer.3

The benefits provided under the WCL are the exclusive remedies for injuries sustained by employees in the course of employment, and the WCL forecloses any suit by an employee against an employer in tort.4 An injured worker who seeks benefits under the WCL must file a claim with the board or his or her employer.5 The carrier is afforded the opportunity to dispute the claim,6 with any dispute addressed in the first instance by a Workers’ Compensation Law Judge (WCLJ).7

A party dissatisfied with the decision of the WCLJ may seek administrative review by a three-member board panel and, if review is granted and the panel does not make a unanimous decision, review by the full board is mandated upon request of either party; if the decision is unanimous, any party may seek discretionary review by the full board. The statutory scheme allows a party to seek judicial review of the board’s administrative decision in the Appellate Division, Third Department.8

When employers purchase Workers’ Compensation insurance, the insurer assumes the employer’s statutory obligation to pay medical, indemnity, and death benefits under the law. Premiums reflect the employer’s potential liability for claims based on individual experience, wages paid to employees, and the type of industry in which they are engaged.9

Employers must keep accurate records of the number of employees, classification of employees, wages paid to employees, and accidents involving employees for four years.10 Failure to keep adequate or accurate records may result in a fine of $1,000 per every 10-day period of noncompliance or two times the cost of compensation. Additionally, the fine for a criminal conviction ranges from $1,000 to $50,000.

The self-reporting nature of this record-keeping requirement on occasion can lead to fraud as employers seek to pay lower Workers’ Compensation premiums. For instance, they may:

  1. Pay workers “off the books”;
  2. Fail to report wages paid to undocumented workers;
  3. Misclassify employees as “independent contractors”;
  4. Misclassify the work of a business to a classification that is considered less hazardous (for example, by identifying all roofers as secretarial staff); or
  5. Intentionally misrepresent or conceal information pertinent to the calculation of Workers’ Compensation insurance premiums that must be paid.

New York’s original Workers’ Compensation law took effect on Jan. 1, 1914, and it has been amended frequently. In 2007, in an attempt to combat fraud, the Legislature enacted WCL §52(1)(d). Section 52(1)(d) provides that “[i]f at any time an employer intentionally or materially understates or conceals payroll…so as to avoid proper classification for calculation of premium paid to secure compensation, …such employer shall be deemed to have failed to secure compensation and shall be subject to the sanctions applicable to this section.” Pursuant to WCL §52(1)(a), the failure to secure compensation for five or fewer employees constitutes a misdemeanor, while the failure to secure compensation for more than five employees is a class E felony, and fines and civil penalties may be imposed.

Insurer Anti-Fraud Actions

Workers’ Compensation insurance carriers have internal procedures intended to cut down on employer fraud and to make certain that every business is paying the appropriate premiums. For example, Workers’ Compensation insurance contracts generally will provide for an audit by the insurance company of the insured’s books and records following the expiration of a policy. One of the auditor’s duties is to verify the reported payroll amounts and to reconcile the class codes on the policy with the actual job descriptions of the insured’s employees.

On occasion, insurers challenge alleged fraud in court. This can rise to the level of a federal action that includes claims under the federal Racketeer Influenced and Corrupt Organizations Act.11

Another possible option by insurance companies was explored recently by the Third Department, in Urbano v. Bletsas Plumbing & Heating Corp.12

The Urbano Case

Eduardo Urbano alleged that he was injured while employed by Bletsas Plumbing & Heating Corporation. He sought Workers’ Compensation benefits pursuant to a policy that had been issued to Bletsas by Oak River Insurance Company.

Oak River said that it discovered that Bletsas had been paying Urbano “off the books” and had underreported the number of its employees in its application for Workers’ Compensation insurance coverage. Oak River then controverted the claim on the ground that WCL §52(1)(d) relieved it of its obligation to pay benefits to Urbano under the policy it had issued to Bletsas. In essence, Oak River contended that, based on Bletsas’ apparent fraud in its application for coverage, Bletsas should be “deemed to have failed to secure compensation” under WCL §52(1)(d); in the absence of coverage, the carrier continued, it had to be relieved from paying benefits.

A WCLJ denied the carrier’s objection, the board affirmed that decision, and the carrier appealed to the Third Department.

The Third Department affirmed. In its decision, the appellate court reasoned that Oak River’s interpretation of the phrase “deemed to have failed to secure compensation” required a reading that ignored the context of the phrase that followed: “and shall be subject to the sanctions applicable to this section.” The Third Department then said that WCL §52 as a whole governed “fraud and failure to secure compensation” and provided for “criminal and civil penalties.”

In the Third Department’s view, the 2007 amendments to the WCL that added Section 52(1)(d) merely expanded the ability to hold an employer liable pursuant to the WCL. The amendments, the Third Department added, increased the penalties for employers that failed to secure coverage and added subsection (d) to “define[] failure to secure compensation to include intentional misrepresentation or concealment of payroll or information relevant to premium calculation.”13 Thus, the Third Department decided, Section 52(1)(d) was designed to punish fraud perpetrated by the employer, and was not intended to “rescind coverage or release the carrier from liability to an injured employee.”

The Third Department then noted that case law14 predating the 2007 enactment of WCL §52(1)(d) suggested that an employer’s fraud in obtaining coverage did not implicate a carrier’s responsibility to pay benefits to an injured employee and that cancellation of a Workers’ Compensation insurance policy must conform to the requirements of WCL §54(5) to be effective. It concluded that nothing in the plain language of WCL §52(1)(d) or its legislative history had altered that precedent.

Conclusion

Challenging Workers’ Compensation fraud by employers requires a careful balance between penalizing the business owner who has engaged in fraud and avoiding, or at least limiting, the harm to an innocent employee. Coverage may not be easily voidable, but statutory remedies, criminal penalties, and insurance company attentiveness can help to cut down on this form of fraud.

Endnotes:

1. WCL §10(1).

2. Id. §§13, 14, 16.

3. Id. §§10(1), 50.

4. Id. §11; see also O’Rourke v. Long, 41 N.Y.2d 219 (1976) (the WCL “was designed to provide a swift and sure source of benefits to the injured employee or to the dependents of the deceased employee” in return for “the loss of the common-law tort action in which greater benefits might be obtained”).

5. Id. §20.

6. Id. §25(2)(a); N.Y. Comp. Codes R. & Regs. tit. 12, §300.22(a).

7. See WCL §150; N.Y. Comp. Codes R. & Regs. tit. 12, §300.1(a)(10).

8. WCL §23.

9. See, http://www.wcb.ny.gov/content/main/Employers/understandInsurance.jsp.

10. WCL §131.

11. See, e.g., Oriska Ins. Co. v. All Staffing, No. 09 Civ. 4024 (DAB) (S.D.N.Y. March 2010) (RICO claims dismissed on statute of limitations grounds).

12. 2015 N.Y. Slip Op. 00416 (3d Dept. Jan. 15, 2015).

13. Quoting from Governor’s Program Bill, Bill Jacket, L 2007, ch 6 at 7.

14. See, e.g., Matter of Cruz v. New Millennium Constr. & Restoration Corp., 17 A.D.3d 19 (3d Dept. 2005).

Read more: http://www.newyorklawjournal.com/id=1202719761019/Challenging-Fraud-by-Employers-in-Workers-Compensation?slreturn=20150206111837

Reprinted with permission from the March 6, 2015 issue of the New York Law Journal.  All rights reserved.

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