The accessibility of monetary benefits through workers’ compensation makes it a lucrative target for criminals. And while dishonest employees are sometimes the culprits, employers can also commit workers’ comp fraud – either willfully or inadvertently. To protect their business, employers must know how to not only spot potential workers’ comp fraud, but also classify employees correctly so they don’t violate the law themselves.

What is workers’ compensation fraud?

Workers’ comp fraud is an attempt by someone to benefit financially from a workers’ comp policy by falsifying information. There are two main types:

  1. Claims-based workers’ comp fraud – an employee files a false claim to receive workers’ compensation benefits.
  2. Policy-based workers’ comp fraud – an employer misclassifies employees or falsifies data in their payroll system to reduce premium payments.

Workers’ comp fraud examples

Though health care providers sometimes commit workers’ comp fraud, the most common examples involve employees and employers.

Employee fraud

Employees who commit workers’ comp fraud usually do so for personal financial gain. They may desire to receive disability payments without a legitimate injury or want the policy to cover ineligible medical expenses. Whatever the ultimate reason, employees may be guilty of a violation if they:

  • File a claim for an injury that never occurred
  • File a claim for an injury or illness that is not work-related
  • Exaggerate the extent of an injury or illness
  • Misrepresent that they are unable to work while receiving temporary disability benefits

Employer fraud

Workers’ comp premiums are primarily based on the number of people employed by a business and its history of workplace accidents, i.e., experience modification. As such, employers may be guilty of workers’ comp fraud if they seek to lower their payments by:

  • Misclassifying employees as independent contractors
  • Submitting erroneous payroll data to the insurance carrier
  • Lying about the existence of a workplace or office safety program
  • Failing to purchase workers’ comp insurance when it’s required

How to help prevent workers’ comp fraud

Workers’ comp fraud is an expense most employers can’t afford. The more claims filed, the more premiums may increase, so it’s important to ensure every claim is valid. In addition, employers who commit workers’ comp violations, even those due to unintentional error, may be fined.

To help prevent such costly consequences, employers may want to:

  • Create strict disciplinary policies for employees who commit fraud.
  • Ensure injured workers know when and how to file a workers’ comp claim.
  • Keep payroll records up-to-date with the latest number of employees.
  • Seek legal counsel when an employee’s classification status is unclear.
  • Look for previous convictions of fraud in new hire background checks.
  • Encourage employees to report suspected cases of workers’ comp fraud.

Workers’ compensation insurance fraud red flags

Employers need to be proactive with workers’ comp fraud. Waiting for an audit to spot fraudulent activity only increases the risk of fines, penalties or policy cancellation. Here are some red flags to look for:

  • An employee’s explanation of the incident is inconsistent or doesn’t seem plausible.
  • Security footage, if available, doesn’t corroborate the workers’ comp report.
  • The work-related injury or illness cannot be validated by witness testimony.

Frequently asked questions about workers’ comp fraud

Why do people commit workers’ compensation fraud?

People usually commit workers’ comp fraud for personal financial gain. For example, an employee may want to stay home and receive partial wage replacement without suffering a work-related injury. In other instances, workers’ comp fraud results from an honest mistake, such as when an employer accidentally reports inaccurate payroll data to the insurance carrier.

Who pays for workers’ compensation fraud?

Penalties for workers’ comp fraud can include fines, policy cancellation and jail time. The person who committed the infraction may also have to pay back the misappropriated funds.

How do you report a false workers’ comp claim?

The appropriate state department should be notified of any instances of workers’ comp fraud. Those reporting workers’ comp fraud should list all pertinent details, including the name and address of the suspect and specific evidence of fraudulent activity.

This guide is intended to be used as a starting point in analyzing workers’ comp fraud and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services. Please consult your personal tax or legal advisor should you have specific questions related to your circumstance.