Premium fraud and payroll misclassification have been big topics of discussion in workers compensation, especially after a recent report showed that New York City’s construction industry cost the city and state approximately $500 million. The main reason for this loss was unpaid premiums, in which businesses paid salaries off the books or purposely misclassified employees as independent contractors.

Executive Summary

Flagging workers compensation policies that are above certain premium thresholds for audit may result in wasted energy and expense, according to Valen Analytics CEO Dax Craig, who notes that larger insureds expect and are prepared for physical audits. Here he recommends some basic steps for setting baselines to develop an audit scope and to fine-tune an audit strategy.

Fraud, or “moral hazard,” is one cause of payroll misclassification for which carriers ultimately pay the price. When employers misrepresent the type of work an employee performs or falsely classify employees as independent contractors, it creates revenue and expense implications for carriers reliant on self-reporting.

This issue extends beyond the borders of New York. According to Valen’s data consortium, nearly half of all workers comp policies have some level of misclassified exposure. Not surprisingly, some industries are worse than others. Between 2008 and 2012, construction had the largest percentage of misclassified payroll, totaling $76.8 billion.

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