THE OWNERS of a California flooring installation company allegedly underreported their payroll amounts to workers’ compensation insurers to the tune of $30 million. The men are each facing three felony charges.

These are the potential consequences for those who deliberately falsify their payroll records and reports to the companies providing their workers’ compensation insurance.

To avoid this fallout, it’s important that employers understand the role accurate payroll reporting and records play in determining premiums.

The importance of payroll records

Workers’ comp premiums reflect the amount of a firm’s payroll and the riskiness of its operations.

Carpenters suffer more frequent and severe injuries than do architects, so the rates for construction firms are higher than those for architecture firms.

Monthly, quarterly or after each policy term, the insurer audits the employer’s payroll records to determine the accurate amount of payroll and the proper classification of the work performed.

The carrier applies the reported payroll to the premium rates, calculates the premium and compares it to the deposit the employer paid at the start of the period.

The insurer then returns premium to the employer if the deposit was too high or bills them if it was too low.

If an employer’s records are incomplete or not up to date, the insurer may estimate the classification and payroll based on the information available. Those estimates do not often favor the employer.

Avoiding temptation

The consequences can be serious for providing artificially low payroll amounts to insurers (by, for example, labeling some workers as “independent contractors” rather than employees). If the insurer determines a customer was untruthful, it will usually cancel coverage.

Also, the contract gives them the right to pursue the employer for the shortfall in premiums in court.

Deliberately concealing information about workers to reduce premiums is also a crime in many states.

For example, a New York construction labor broker conspired with his insurance broker to mislead five insurers about the size of his operation and work performed by his employees. Their actions cost one insurer $1 million in uncollected premiums and left injured workers without workers’ comp benefits for more than a year.

The insurance broker pleaded guilty to two felony charges.

The labor supply broker is awaiting trial.

The lesson: Keep accurate and honest payroll records for your insurance company and pay the premiums you owe. It will be better for you and your business in the long run.

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