Wednesday, January 21, 2015

Misclassification - What it is

There is a fair amount of discussion in the news about Florida and "insurance fraud" or "workers' compensation fraud."  Some of the discussion has been stimulated by the discussion of 440.105 and the Brock and Hector cases. Some of the discussion comes from the misclassification issue that is involved with independent contractors and employees alike. 

Misclassification is the term generally applied when worker status is misrepresented to the insurance carrier that will ultimately be responsible for any accident or illness through workers' compensation. It can be a collusive effort between multiple parties or an effort of the employer alone. It has become a part of our workers' compensation world. 

Because workers' compensation is what we do, many of us tend to focus on this industry when we perceive an issue. Certainly, misclassification is an issue that profoundly affects workers' compensation. However, like so much with workers' compensation, this problem sometimes only comes to light when the worst happens, an accident. 

Misclassification is a far broader issue for workers and the economy generally. A misclassified worker may not receive the wages to which an employee is entitled. Payment to a misclassified worker may not be accompanied by the appropriate tax payments or unemployment compensation premiums/taxes. While misclassification affects workers who are hurt in our specific context, it affects all misclassified workers in these broader perspectives.

In order to understand misclassification, we have to understand something of workers' compensation and how it is designed to distribute costs of work injuries to the industries in which they occur. Some occupations are more dangerous than others. In deciding which are the "most" dangerous, one would need criteria. 

One measure might be the occupations in which the most work fatalities occur. The Bureau of Labor Statistics tracks this metric. As reported in Forbes, the most dangerous jobs based on fatality occurrence are (the following quoted from Forbes)

1. Logging workers
2. Fishers and fishing workers
3. Aircraft pilot and flight engineers
4. Roofers
5. Structural iron and steel workers
6. Refuse and recyclable material collectors
7. Electrical power-line installers and repairers
8. Drivers/sales workers and truck drivers
9. Farmers, ranchers, and other agricultural manages
10. Construction laborers

Judges did not make the list. So, logically, a company might charge less premium to insure liability for injury to a judge than for liability regarding a logging worker. In fact, workers' compensation premiums are calculated with multiple variables considered. One is usually the occupation of those who are covered. And the rate charged is higher for occupations with higher risk of injury; it logically costs more to insure loggers than judges.

Another variable of premium charges is "experience." A company whose employees tend to have accidents will likely pay more for workers' compensation coverage than a company with a great safety record and few or no reported claims. A company with few employees and most of its labor performed by "independent contractors" may avoid the "experience" of accidents, and thus maintain lower premium costs for those who are listed as "employees."

Misclassification can involve the employer hiring someone to perform tasks or labor, but  not as an employee. The person is hired, but as an "independent contractor." This employment relationship means less bookkeeping for the employer, relieves the employer from payment of the "matching" social security tax contribution, and unemployment taxes. Since the worker is not an "employee," the worker is not covered by the employer's workers' compensation. If the worker is thus "self-employed" and has no employees, she or he may not be required to have her/his own workers' compensation policy. She or he may have no coverage for an accident.

Misclassification can also be an accounting practice. An employer might seek a lower workers' compensation premium by listing its employees in an occupation that is seen as less risky. For example, a logging company might list its employees as "clerical" workers in reporting its payroll to the insurance company. An insurance company could rely on that representation in calculating premium, believing that the employer's workers are bookkeepers, secretaries, estimators, etc. instead of people who actually cut down trees. 

Misclassification may be caught when that workers' compensation insurer performs a payroll audit. The Florida Division of Workers' Compensation also performs audits and inspections in which such misclassification can be discovered. But recently, the news is about a new partnership between the Florida Department of Revenue and the U.S. Department of Labor.

They announced their colaboration in January. Their efforts will be primarily focused on the characterization of workers as "independent contractors." The press release reports that in 2013 "investigations resulted in more than $83,051,159 in back wages for more than 108,050 workers in industries such as janitorial, food, construction, hospitality and garment." Florida does have a concentration of construction, food and hospitality industries. 

The efforts at misclassification may be focused upon reducing or eliminating the cost of workers' compensation coverage. Those efforts may as likely be focused on avoiding taxes and other regulations. The additional focus brought to the subject by this new partnership may help Florida to better address the issues of misclassification. 

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