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.

Types of workers’ comp fraud

Like any type of insurance fraud, workers’ comp fraud can be split into two broad categories:

  • Hard fraud: An individual or a group deliberately creates a situation to illegally obtain money (e.g., claiming a workplace accident occurred when it really never did).
  • Soft fraud: An individual or group misrepresents aspects of a legitimate incident to illegally obtain money (e.g., claiming a workplace accident resulted in more severe injuries than what actually occurred).

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:

  • Employee fraud: Workers may commit soft fraud when they exaggerate their injuries, but some file false claims altogether, like a Washington couple who were accused of stealing $180,000 from the state’s Department of Labor and Industries. They were seen working despite collecting compensation for their alleged injuries.1
  • Medical provider fraud: Physicians and other healthcare workers commit workers’ comp fraud by billing for unnecessary services or signing off on claims when workers aren’t injured. One particularly egregious event occurred in 2019 when a group of doctors and lawyers set up recruiting and scheduling companies to supposedly help migrant workers navigate California’s workers’ comp system. Instead, they repeatedly referred the workers for unnecessary medical services.2
  • Attorney fraud: Lawyers may commit workers’ comp fraud by encouraging employees to file false claims, but as shown in the example above, they might also guide injured clients towards disreputable healthcare providers.
  • Adjuster fraud: Insurance companies typically send an adjuster to investigate workers’ comp claims. That adjuster may commit fraud if she tampers with evidence to avoid paying a claim. Adjusters have also been known to take bribes from employees to approve false claims or from employers who don’t want a workers’ comp claim on their record.
  • Employer fraud: An employer commits workers’ comp fraud if she discourages injured workers from filing claims. But it’s also fraud if she misclassifies employees as independent contractors or misrepresents their wages to get a lower premium. Employer scams can be complicated, too, like the business owner who set up a shell company so he could “rent” his workers’ compensation certificate to work crews that didn’t have coverage.3

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

Workers’ comp fraud penalties

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

Misclassification penalties for employers

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:

  • Pay a percentage of the worker’s wages and employment taxes.
  • Pay up to $1,000 for each misclassified employee.
  • Spend up to one year in prison.8

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.

How insurers investigate workers’ comp fraud

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.

How to identify workers’ comp fraud

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:

  • Accident occurs without witnesses.
  • Accident occurs before or after a weekend or holiday, which could signify that someone got hurt away from work.
  • Employee’s story is inconsistent or unbelievable.
  • Witness accounts are inconsistent or differ from the employee’s.
  • Employee stops communicating.
  • Employee is about to be fired.
  • Employee’s contract is about to end.
  • Employee has recently seemed disgruntled.
  • Employee doesn’t report the accident immediately.
  • Employee appears to have a side job.
  • Employee suddenly increases medical visits, which can be a sign of malingering.
  • Medical provider bills for services that seem inconsistent with the injury.
  • Medical bills appear higher than normal.

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.


  1. The Columbian. Vancouver Couple Accused Of Workers’ Comp Fraud.
  2. Federal Bureau Of Investigations. Workers’ Compensation Fraud: Fraudsters Took Advantage Of Injured Workers.
  3. The United States Attorney’s Office Middle District Of Florida. Massachusetts Man Sentenced To Prison For Fraudulent Scheme To Evade Payroll Taxes And Workers’ Compensation Requirements In Construction Industry.
  4. Frontline. The Myth Of Workers’ Compensation Fraud.
  5. Federal Bureau Of Investigations. Insurance Fraud.
  6. Missouri Department Of Labor And Industrial Relations. What Are The Penalties Under The New Law For Workers’ Compensation Fraud?
  7. Illinois Workers’ Compensation Act §25.5: Penalties; Fraud.
  8. Burr & Foreman, Llp. Irs Misclassifications And Costly Penalties: Independent Contractor Or Employee?