The president of an Orange County, California cleaning company was convicted and sentenced recently for under-reporting his payroll by more than $8 million, which brought a premium loss of almost $900,000. He plead guilty to all of the felony charges, which were aggravated white-collar sentencing enhancement, three counts of misrepresentation of facts to the Workers’ Compensation Insurance program and six counts of misrepresentation of facts to the State Compensation Insurance Fund. In addition to the restitution fee of almost $900,000 and a $250,000 fine, the business owner received a stayed five-year state prison sentence pending the successful completion of a 10-year probation period.
California’s state law requires all employers to pay workers’ compensation insurance for their employees. The EDD and the Workers’ Compensation Insurance program both require records to be submitted ever year to ensure payroll taxes are paid. A specific formula is used to calculate the workers’ compensation insurance rates. A company’s injury claims history, the type of employees hired and the number of people in the workforce determine an employer’s rate. Premium insurance fraud occurs when a company deliberately falsifies loss history, payroll numbers, employee numbers or the type of duties the workers perform to pay less for insurance. In many cases, employers try to hide their workers under other uninsured businesses. If a worker under that entity is injured, he or she will be transferred to the insured entity.
Insurance companies are then liable for the injured workers. Illegally misrepresenting workforce facts allows employers to pay lower premiums or avoid buying insurance coverage. This puts competitors at a major disadvantage by forcing them to work against a company with much lower but fraudulent operating costs. When this happens, the cost of insurance goes up for legitimate companies due to fraud. In addition to this, employees who are injured may not be able to collect the workers’ compensation funds they need to recover from work-related injuries.
The convicted company president referenced at the beginning of this article had been in business since 1998. His company distributed and manufactured commercial and household cleaning products to sell throughout the United States. The business owner received the SCIF policy in 2001, but he did not report the majority of his workforce, which he leased from one of the multiple leasing companies he owned. In 2008, the owner insured those leasing companies but did not disclose his policy to SCIF. From that time until 2010, he under-reported his payroll. After one of the employees working for one of the labor leasing companies filed a workers’ compensation claim, SCIF started investigating. While the injured worker was employed by a leasing company, the individual also worked at the cleaning product company. SCIF reported the incident to the Bureau of Investigation of the Orange County District Attorney. The DA then took over investigating the case and filing charges.
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