Employee misclassification on insurance forms: Is your business guilty of it?

Employee-Misclassification

While the economic forecast is beginning to look encouraging based on recent news, the real question is: Did the 1st quarter of 2014 adhere to that relieving news for your business? Or do you feel like you are still feeling the pain of the recent recession?

Entrepreneur.com, a website designed to give business ideas and updates on trends to business owners, recently published “50 Ways to Save Money in Your Business”. Some great ideas they suggest (though some seem a bit questionable) include additional focus on service (“Got a happy customer?”, “Offer expert advice”, etc.), and advertise smartly (Internet Ideas such as search engines, online store, etc.). In the insurance section, some of the ideas they offered are to be prepared by buying appropriate insurance and check your insurance coverage. While you can find such great resources online to save yourself a few bucks and make your business more attractive, do you sometimes generate your own “smart” ideas? Especially when looking at the audit bills from your workers compensation carrier?

In New York City, at least one in four workers, are paid off the books. Nearly 15% of these workers are misclassified as independent contractors. The state of Virginia estimated that approximately 40,000 employers were misclassifying their employees.  Accenture’sWorker's-Comp-Is-Important 2010 survey revealed that more than 75% of consumers are more likely to commit insurance fraud during economic downturn. Some of you (hopefully most of you) may be surprised by these statistics, while other business owners may feel a bit guilty to be one of those “misclassifiers”. For the latter group of employers, I hope you will take the time to finish this blog hoping that it will turn your guilty feelings into some preventive actions.

We will be honest and tell you that classifying your workers correctly will most likely cost you additional premium in the short run. However, being the great planners that you are who have hope and ambition to achieve your goals of long-term success, we can guarantee you that none of the premium you are paying will be wasted. There are two main fraudulent scenarios that we tend to come across with contractors:

(1) Classifying their workers under a lower class code

(2) Excluding 1099 subcontractors from their audits.

For example, many contractors tend to classify their high exposure workers (roofing, siding, tree pruning, etc.) in lower exposure class codes (flooring, drywall installation, landscaping, etc.). Now in case of a claim, one may wonder how the money that they spent on their workers compensation policy provides them the security that all the medical bills and loss income of that claim will be covered?

It is possible that some may provide themselves false reassurance based on personal, previous experiences. However, it is important to remember that past is not a good indicator of future performance in such cases.

Going back to Accenture’s survey that 75% of consumers are likely to commit insurance fraud, could one of your workers be part of the 75%? In other words, are you compensating your workers so well that in case of a claim, they would not hire one of the hundreds of attorneys who are using all kind of fancy and attractive letters promising them all the money they need until retirement? In connection with the second scenario about the 1099 workers, are they really excluded from your workers compensation policy? The Virginia Workers’ Compensation Commission seems to state differently:
“For a contractor or other business that hires subcontractors to assist in their trade or to complete a contract, the contractor / business must count the subcontractor’s employees when counting the number of employees to assess when coverage is required. If the total of the contractor’s employees plus the subcontractor’s employees is more than two, then coverage is required. This requirement applies regardless of whether the subcontractor has their own workers’ compensation coverage.” (http://www.vwc.state.va.us/portal/vwc-website/ComServices/ComSrvcForEmployers).

So in other words, not only should the 1099 subcontractors be added to your audit payroll but you could be responsible for all the bills and expenses in case of an injury if your workers compensation does not cover them due to misclassification! So, how does the workers compensation premium that you paid after excluding your subcontractors and misclassifying your workers provide you the security that an accident at work will not put you out of business?

The intent of this blog is neither to increase your guilty feelings or your insurance premium. It is purely to have you covered for the work you do. Besides from the great advice from the article on Entrepreneur.com (“50 Ways to Save Money in Your Business”), there are many ways to prevent you from paying large insurance bills while providing you the security you need to increase your productivity. One of them is to assess and mitigate your risk in order to prevent claims and hence make your business more attractive to the insurance market place. Please consult your insurance advisor!

 

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Olympia Meola, “Misclassified workers cost Va. millions, JLARC says,” Richmond Times Dispatch, June 12, 2012. www2.timesdispatch.com/news/2012/jun/12/tdmet01-misclassified-workers-cost-va-millions-jla-ar-1980895/ – See more at: http://dpeaflcio.org/programs-publications/issue-fact-sheets/misclassification-of-employees-as-independent-contractors/#sthash.0CMzGyZg.dpuf

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Posted in Business Asset Protection, Business Liability Coverage

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