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Report: Worker Misclassification Shortchanges Workers Compensation Programs

The misclassification of workers as “independent contractors” could leave a shortfall in the nation’s workers compensation programs of up to $1.6 billion, according to an insurance industry analyst. Bret Shroyer, a solutions architect for Valen Analytics, told an interviewer with the Insurance Journal that companies that classify their workers as independent contractors, rather than as employees, contribute to $22 billion in misclassified payroll, which can adversely affect the amount employers pay in workers compensation insurance premiums.

Details of the Workers Compensation Shortfall

The interview presented many statistics on how misclassification can affect shortfalls in workers compensation premiums. Businesses that are required to carry workers compensation insurance may misclassify as much as 15 percent of their payroll amounts as going to independent contractors. Companies are not required to carry these workers on their policies, which allows them to pay lower premiums. The reduction in premiums can be as high as 30 percent of the amount the company would have paid under the correct classification methods.

California Top State for Workers Compensation Deficits

The report also revealed how thousands of businesses in California avoid paying workers compensation premiums by classifying their workers as independent contractors. The numbers showed that the rate of misclassification in California is 12 percent of the state’s payroll, nearly 50 percent higher than the national average. The misclassification leads to a shortfall in the state’s workers compensation premiums of almost $500 million.

Construction Industry Leads Workers Compensation Misclassification

The assessment also showed that the construction industry leads the nation in both workers compensation shortfalls and worker misclassification. The data revealed that misclassification led to workers compensation insurance premiums that were $500 million less than if independent contractors were classified as employees. Although the rate of employee misclassification was just slightly higher than the national average, the total shortfall contributed to nearly one-third of the total nationwide deficit.

Are Workers Compensation Deficits Accidental or Intentional?

The report does not reveal the full reasons why a company’s failure to pay its full workers compensation insurance premiums are less than expected. The interview attributes the misclassification to a variety of reasons, ranging from clerical errors to business growth. Other reasons could be related to deliberate fraud. Companies save money when they can find reasons not to pay their full share of workers compensation insurance premiums. Also, insurers may want to keep policy holders happy by not conducting audits that could reveal such fraudulent practices.

Source: Insurance Journal

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NOTE: This blog post is a news story and does not constitute and endorsement of the Amaro Law Firm by any parties mentioned herein.