Workers’ compensation premium fraud is costing honest employers millions of dollars every year – and endangering workers who are frequently exposed without workers comp protection.
Most people are familiar with fraudulent claims of injury on behalf of workers who fabricate or exaggerate their injuries to collect claims they aren’t entitled to.
That’s small potatoes next to employers who commit premium fraud.
In one recent case, California prosecutors announced the arrests of three individuals – Osvaldo Molina, 40, of Fresno, Fortino Galeno, 46, of Fresno, and Alicio Galeno, 41, of Los Angeles – for committing workers comp insurance fraud via their company, Floor Care Systems. The company solicited other businesses to clean their store and showroom floors, generally at night.
According to prosecutors, these men had concealed over $5 million in payroll from their insurance carrier. Molina and Fortino Galeno were each charged with 61 felony counts. Alicia Galeno was charged with 23 felony counts. Prosecutors alleged that they paid workers under the table, failed to pay them minimum wage or overtime by both federal and state laws, and even locked employees in their worksites without supervision. According to the State of California, the fraud has cost insurers an estimated $782,000 in workers’ compensation premiums and caused the State to miss out on $187,000 in withholdings.
In a similar case last year, the Liberty Mutual Insurance Company obtained a $1.4 million judgment against a company called Viking Industrial Security. In that case, Viking had maintained a false set of books. One set had a very small payroll, and that was what they disclosed to their insurers and tax officials. That payroll was much smaller than their actual payroll. The fraud scheme was detailed and deliberate.
In that case, the insurance company got a court order to download the company’s computer records, including its QuickBooks records. This court order allowed Liberty Mutual to prove the payroll fraud, and get a handle on the amounts at stake.
Viking’s owners compounded their error by attempting a fraudulent conveyance. That is, they attempted to transfer assets out of their corporation into a brand-new entity. The transfer had no legitimate business purpose other than to shield them from Liberty Mutual. This is illegal, and the courts entered a judgment against the new entity as well as against Viking.
This kind of fraud is much more difficult to detect than worker fraud. But the dollar amounts involved can be substantial.
Workers comp premium fraud, by its very nature, is almost always accompanied by tax evasion, including payroll tax fraud. While prosecutors come down heavy on fraud, the courts have taken a particularly hostile attitude toward employers who illegally withhold payroll taxes and who fail to deposit Social Security and Medicare taxes with the IRS. Don’t count on your corporation to separate your assets from your business assets, if you are guilty of this kind of fraud. Courts can and do routinely “pierce the corporate veil,” disallowing the limited liability benefits of corporations and LLCs to attack the personal assets of business owners who commit this kind of fraud.
Workers’ compensation fraud is generally governed by state law, so specifics vary with your jurisdiction. Business owners who commit egregious violations of the law are subject to severe fines and long jail terms, in addition to whatever civil penalties may apply. If a worker is injured, the business and possibly the owner who allowed the workplace fraud generally face liability for the worker’s cost of treatment.
And that’s before the IRS gets done with you for payroll tax fraud.
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