Home > Fraud Awareness, SID Information > Rippin’ Off the Pot: Employers That Misreport Their Payroll

Rippin’ Off the Pot: Employers That Misreport Their Payroll

Misreporting payroll is another scheme employers use to avoid paying their fair share of premiums to BWC.

Commonly used methods include:

  • Underreporting payroll by misclassifying the type of work being performed by the employees;
  • Underreporting payroll by misclassifying employees as independent contractors; and
  • Failing to disclose any or all payroll.

How Premiums are Calculated

To ensure that employers pay a fair share, BWC assigns manual classifications that correspond with the work being done and the risk of injury due to hazards associated with that work. For example, the manual classification for an office worker carriers a lower rate than the manual classification for a construction worker. This is because there is less hazard and risk of injury for the office worker. Thus, claims costs for office workers are typically lower than claims costs for construction workers.

Misclassifying the Type of Work Being Performed

The manual classification rate can vary greatly based on the type of work being done. Dishonest employers falsely report to BWC less expensive manual classifications (e.g., clerical and office work) rather than the more expensive manual classifications in which their employees actually work (e.g., construction and industry).

Penalties for intentionally misclassifying payroll can cost an employer up to 10 times the difference between the premium owed and the amount paid. In addition, the employer could face criminal liability.  The criminal charge is based on the amount of premium avoided by committing the crime and becomes a felony at $500. 

 A Case in Point
The Employer Fraud Team investigated a company that intentionally misclassified laborers as clerical employees. The investigation revealed that the company avoided paying over $300,000 in premiums over the course of two years by intentionally misclassifying these employees.

 
Misclassifying Employees as Independent Contractors

Misclassifying employees as independent contractors is another way employers attempt to avoid paying the correct amount of premium. Here, dishonest employers falsely report to BWC that an employee is an independent contractor. This relieves the employer from paying applicable workers’ compensation premiums, as well as other employer-employee responsibilities such as: unemployment insurance premiums; local, state and federal income taxes; and Social Security and Medicare taxes. Employees often realize that they are improperly classified as an independent contractor when it’s too late… they file a workers’ compensation claim and it’s denied.

If the employer controls the working hours, the selection of materials, the traveling routes, and the worker’s performance reviews, an employer-employee relationship exists, and the employer must provide workers’ compensation coverage for the worker.

Failing to Disclose Payroll

Finally, there are employers that have secured coverage, but fail to report their entire payroll. This also includes employers that report zero or no payroll being paid.

A Case in Point
The Employer Fraud Team received information from BWC’s Premium Audit Department alleging that a Canal Winchester, OH landscaping company had falsely reported zero payroll to BWC. Employees had filed four claims against the employer’s policy. The investigation determined that for three years the landscaping company had failed to disclose its employees’ payroll wages to BWC. The owners of the company pled guilty to three felony counts of workers’ compensation fraud and were subsequently ordered to pay BWC $34,984 in restitution.

Be on the Lookout

Red flags that indicate that an employer might be misreporting payroll include:

  • Large variances in payroll reported;
  • Amount of payroll reported in classifications are inconsistent with its line of business;
  • Variances in the payroll amounts reported to multiple agencies; and
  • Employees receive a 1099-MISC form instead of a W-2 form.

If you suspect that an employer is misreporting payroll, let us know. You can report it online at http://bit.ly/reportfraud or you can speak with a fraud hotline agent by calling 1-800-OHIOBWC.

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