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Uninsured employers and roofer problems.

Times are hard. The home improvement, home repair and building industry have all been hit hard. Income is down and expenses remain or have increased. Where to cut? Is it time to get creative regarding your workers' compensation insurance coverage? Not on your life!

Roofing contractors have the highest workers' compensation rates in the construction industry and for good reason: injuries, when they happen, are often extremely serious, if not fatal. How then to handle the dilemma of high workers' compensation premiums and what to do when the auditor calls?


Employers traditionally faced with the challenges set forth above have resorted to creative ways to lower, if not eliminate their premiums, such as:

•I. Non-Payment.

Unfortunately, when funds are extremely tight, some employers drop their coverage (or never take it out in the first place). The driving force behind this is hope. It is the hope that there will never be a claim and hence all of that needed money that would have gone to premiums can be diverted practically to other seemingly more valuable requirements. All of that evaporates in the face of an injury of even moderate dimension. Uninsured employers can be fined, have their businesses closed, have penalties assessed in excess of normal workers' compensation benefits, can lose traditional defenses and be sued in both civil court as well as in the workers' compensation tribunals.  In addition, uninsured employers will require some kind of legal defense to diminishing their exposure. ( )

Being uninsured is truly the worst solution to coping in a recessionary economy. Workers' compensation has been estimated to be a 50 billion dollar a year business in the United States with major states, such as California, accountable for a disproportionately large share of that business dollar. Depending upon how you look at the statistics (and there have been many released), the dollars are from eight to twelve billion dollars annually in California, but more shocking than that number is the estimate of the underground uninsured community whose unpaid premium dollars has been estimated to be as high as six billion per year for that state. The biggest loser when there is no insurance is not the injured worker. He is generally taken care of by some state sponsored program, otherwise the complete burden of taking care of him falls on public aid and assistance and becomes an even greater social problem. The state loses payroll taxes, the state loses contributions from assessments on premium dollars paid by carriers and the state or states are not happy with that arrangement. Accordingly, laws are in place nationwide making the lack of insurance massively painful. In California, being an uninsured employer is being guilty of a crime. Criminal prosecutions for those employers on a larger scale who opt for non-payment are happening more and more frequently especially when the carriers uncover significant premium fraud on the part of employers. Million dollar bail situations in the face of criminal prosecution are not uncommon. When the civil suit comes, the employer will find himself divested in many instances of the employer's favorite defenses of contributory negligence and/or assumption of the risk. This is another way the state penalizes the failure to appropriately insure. If you put together the fine, the loss of business if there is a brief closure, the imposition (at least in California) of the possibility of paying the attorney fee to the injured worker and then the pay outs on the workers' compensation case itself, the uninsured employer generally finds himself in a significant financial fix. A typical case in one state (California) can run $60,235 based on reported figures with all pay outs, and most workers' compensation tribunals will not accept an employer's promise to pay in installments. Thus, any apparent saving for non-insurance is illusory, and the payoff can be a high lump sum pay out, criminal proceedings and possible bankruptcy. That may be the last and only refuge for the uninsured employer facing a significant claim. Definitely not worth the trade off.

•I. Under Reporting.

This is most commonly seen with a scenario of $400 a week on the books and $400 in cash off of the books. Insurance still exists so there is coverage for the injury, but the dollar value of the premium is less because the payroll is less. It seems like it might be the answer at first blush, but the fact is that it is fraud. It is tax fraud for both State and Federal authorities and it is premium fraud. It is generally sold to the employee on the basis that he has less money to report so his taxes will be lower so it looks like a win - win situation. It is not because the first person to scream about getting $800 a week, not $400, is the injured employee since his benefits are hinged to the higher payroll figure, so the cash payment is always revealed when there is an injury.

When it does come out, the next thing or person who comes out is the auditor to review your books and assess a retroactive premium demand. In some instances, carriers will rescind the policy of coverage based on material misrepresentations or concealment of material facts, return the premium paid and leave the insured to cope in the capacity of an uninsured.

•I. Mis-Classification

With this approach, we have everybody insured. We have salary and payments accurately recorded so there is no problem with payroll fraud, under reporting of wages or the like. Everything seems fine except this roofing company which is paying far less in premium because they only have four roofers and 12 clerical employees gets into trouble when the auditor comes by and sees five desks for the whole operation. Closer scrutiny reveals six jobs or some other shenanigan that does not stand up to the representation of only four active roofers. The point is that the employer moves his employees into less costly classifications for the purposes of lowering premium. Again, nothing may come out unless there is the occasional onsite audit or unless there is an injury. When that happens, we generally learn the real occupation of the person who is injured and the carrier will check to see whether that was an appropriate classification or mis-classification. If the latter, some of the steps outlined above may be taken by the carrier, ultimately leaving the employer exposed.


Many employers mistakenly believe that they have defenses to the problems outlined above if their employees are undocumented. Not so in many jurisdictions, if not most. Many employers mistakenly believe that if they are a corporation, their corporation can protect them. Not so in many if not most jurisdictions. The most common mythical defense are that of independent contractor status or employee fraud, but both are highly legal defenses best evaluated and mounted by skilled lawyers who cost money. These defenses are difficult to prove in a system of social insurance and benefit delivery.

Workers' compensation is social insurance. It has its roots in rudimentary form to thousands of years before Christ and in legislative form to only 103 years in the United States. The point is that you simply have to have it to safely do business or you need a certificate from the state in which you are practicing in order to self-insure.

Most roofing contractors have such insurance, legitimately report all of their personnel on payroll, properly classify and properly pay their employees. They sleep at night even though times are tough. When the auditor calls, the books do not need cooking. Adoption of any of the foregoing practices may appear to save a buck, but if revealed will cost a bundle.


Managing Partner

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