What is workers' compensation fraud?
While the vast majority of workers' compensation claims appear to be legitimate, fraudulent claims are harmful to your business. You can protect against fraud by being on the lookout for red flags.
Workers’ compensation (also known as “workers’ comp”) is one of the most important protections employees have. Workers’ comp reduces out-of-pocket medical expenses for employees suffering from workplace injuries or sickness. With a workers’ comp policy, the likelihood of being sued (and having to pay a large award) is greatly reduced. It’s a win-win situation — unless someone commits workers’ comp fraud.
Basically, to get workers’ compensation coverage, business owners purchase insurance to protect themselves from having to pay for their employees’ job-related injuries. The states that mandate workers’ comp — that would be every state but Texas — typically require policies help injured employees pay for their medical bills and lost wages. But workers’ comp fraud throws the system out of whack and ends up costing everyone money.
Like any type of insurance fraud, workers’ comp fraud can be split into two broad categories:
Pretty much anyone involved with workers’ compensation may try to bilk the system, so workers’ comp fraud is often further categorized by the individuals committing the crimes. This includes:
Studies show that only 1-2 percent of workers’ compensation cases are actually fraudulent.4 That said, insurance fraud outside of health insurance is a $40 billion-dollars business, and the costs trickle down to everyone.5
People who commit workers’ comp fraud can face fines, jail time, or both, depending on the state and the severity of the crime. For example, Missouri employees can be charged with a class D felony and subject to a prison term of up to seven years for knowingly presenting a false claim for benefits. That gets bumped up to a class C felony (with a potential prison term of three to 10 years) if they get caught again.6 In Illinois, however, a similar charge is a class 4 felony, which can mean up to three years in prison and/or a fine of up to $25,000.7
Employers generally face the same types of fines and criminal charges as anyone else who is convicted of workers’ comp fraud. However, business owners have an additional concern if they purposefully misclassify workers as independent contractors. By classifying workers as independent contractors rather than employees, business owners can usually avoid covering them on a workers’ comp policy as well as avoid employment taxes.
However, most states allow misclassified workers to sue for their injuries in court, which brings the added risk of business owners having to pay for pain and suffering. Employers who misclassify workers may also face charges of tax fraud and can even see repercussions at the federal level. If the US Department of Labor determines an employer intentional misclassified a worker, that employer may have to:
Misclassification is one of the most common types of workers’ compensation fraud. Unfortunately, employers sometimes misclassify workers unintentionally because they don’t know how their state determines whether someone is an independent contractor or employee. Before you decide whether your worker is an independent contractor, be sure to look up your state’s workers’ compensation regulations and seek expert advice from a licensed insurance agent, broker, or attorney.
Employees in most states report their work-related injuries to their employers who then file a claim with their insurance companies. Usually, this requires a description of the accident and the injury. Once the claim is filed, insurance companies send an adjuster to investigate the event.
This is often the first opportunity for someone to identify fraud. The adjuster will most likely want to talk to the injured employee and other witnesses and to view any video of the area. If the adjuster suspects fraud, your insurance company may put the injured employee under surveillance and check social media for evidence that the employee isn’t injured.
You can still report potential fraud even after a claim has been approved. In that case, you may want to contact your state’s workers’ compensation board’s investigation unit and your insurance company. You may also want to encourage employees to report their suspicions. They’re usually closer to the event and may know things you don’t.
While the vast majority of workers’ compensation claims appear to be legitimate, fraudulent claims are harmful to your business. You can protect against workers’ comp fraud by being on the lookout for these red flags:
None of these automatically indicate that someone is committing workers’ comp fraud, but they do merit further investigation. Most states have agencies inside their workers’ compensation departments dedicated to investigating fraud, and you can contact them with your suspicions.
While the incidence of workers’ comp fraud may be low, preventing it is an important part of making sure the system runs as intended. Fraudulent claims skew how ratings bureaus set base rates, which can mean business owners are paying premiums that don’t match their actual risk. Moreover, workers’ comp fraud in your business impacts how your workers’ comp costs are calculated.
Long story short? Basically, protecting your business involves both getting insurance and looking out for fraud. Thimble can help with that first part. Enter your email and we’ll notify you when workers’ compensation insurance is available to you.
Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.