On
November 25, 2015, in Orange County Superior Court in Santa Ana, California, a business owner Darrin
Shawn Wilson was charged with a number of counts which relate to alleged workers compensation “premiuminsurance fraud”:
(1) 15 felony counts
of misrepresenting facts to the State Compensation Insurance Fund (SCIF),
(2) 5 felony
counts of misrepresenting facts to a workers’ compensation insurance company,
(3) 20 felony
counts of failing to file a return with the intent to evade tax,
(4) 20 felony counts
of willful failure to pay employment taxes, and
(5) a sentencing
enhancement for white collar crime and committing a theft exceeding $500,000
and a taking that exceeded $200,000.
Mr.
Wilson is presumed innocent as these are merely charges. Bail was set for $500,000. These charges are being brought
against businesses and their owners for “premium insurance fraud” when audits
show underreporting to workers’ compensation carriers. In this case, Mr. Wilson
is accused of treating employees as independent contractors. The damages rack
up quickly in these cases since the insurance audits go back years. Here they went back four years.
Employers learn from this case
It is never too late to become compliant with the law. Doing so lessens the likelihood that there will be a claim or other occurrence that causes the insurance carriers to perform an audit.
What
is workers compensation premium insurance fraud?
California law requires that all employers maintain workers’ compensation insurance for their employees. Payroll records showing the number of employees and their income must be submitted to both the insurance company and Employment Development Department (EDD), who oversee the audit and collection of payroll taxes and employment records for workers in California.
Workers’
compensation insurance rates are determined by a formula, which takes into
consideration the factors above and the company’s loss history on claims.
Premium
insurance fraud is committed when an employer intentionally misrepresents to
the State or his/her insurance company the number of employees, the nature of
work performed by certain employees, the amount of payroll, and the loss
history.
The
theory is that these misrepresentations allow employers to purchase workers’
compensation insurance at a significantly lower rate, or to avoid purchasing
the insurance at all. The government justifies charging businesses on the
theory that this practice also places their competitors at a disadvantage
because it forces them to compete against a company with lower operating costs.
The government has been aggressive on the additional ground that this type of deceptive under or non-reporting drives up the cost of insurance premiums for legitimate businesses, which pay higher rates for their employee’s workers’ compensation insurance. These legitimate businesses are less competitive against companies who are able to under-bid their competitors due to lower business costs resulting from insurance fraud. This also endangers injured employees who may be denied the workers’ compensation benefits intended to meet their physical, psychological, and financial needs for a work-related injury.
The government has been aggressive on the additional ground that this type of deceptive under or non-reporting drives up the cost of insurance premiums for legitimate businesses, which pay higher rates for their employee’s workers’ compensation insurance. These legitimate businesses are less competitive against companies who are able to under-bid their competitors due to lower business costs resulting from insurance fraud. This also endangers injured employees who may be denied the workers’ compensation benefits intended to meet their physical, psychological, and financial needs for a work-related injury.
In our office, we understand that many businesses have extremely high workers' compensation premiums and often look for legal ways to avoid having to hire employees. Look at Uber which is now facing the issue of "independent contractors" which messenger and delivery companies have dealt with for years.
Alleged Circumstances of the This Case
– The Alleged Fraud Was Triggered By One On the Job Accident
All it takes is one workers' compensation case to start the ball rolling down the hill. Here, Mr. Wilson is the sole principal for American Blacktop Incorporated, dba Seal-It, an asphalt and paving company, and The Mavrick Company, a property management company.
It
is alleged that between Jan. 1, 2009, and July 31, 2012, Mr. Wilson is accused
of obtaining a workers’ compensation policy of insurance for these companies
and failing to report all of the payroll for his workers’ to SCIF in the amount
of $4.3 million for the policy periods of 2009 to 2012.
On
Aug. 1, 2012, Wilson is accused of purchasing a workers’ compensation policy of
insurance from the insurance company, AIG. He is accused of underreporting
payroll for the AIG policy in an amount exceeding $1.3 million for the time
period of Aug. 1, 2012, through Dec. 31, 2013.
The
DA’s Office claims that the alleged insurance fraud came to light when a claim
was submitted to SCIF from an injured worker who reported that he had fallen
approximately 12 feet from a ladder while working for the Mavrick Company and
suffered work-related injuries.
Mr.
Wilson allegedly disputed the claim, stating that the worker was employed by a
painting company subcontractor at the time of the injury. It probably had to be disputed since the worker was not on his company's payroll. SCIF in attempting to
determine whether to accept or deny the claim learned that the painting company
subcontractor was unlicensed and uninsured.
In
construction, to be a subcontractor, one must hold a valid Contractor’s State
License and must have a workers’ compensation insurance policy for its
employees. Without a valid license and insurance, the subcontractors would be
in fact employees of the employing company, thus in this case Mavrick Company.
The
government’s theory is that Mr. Wilson was required to disclose all payroll to
the insurance companies in order to determine the premium for the policy, and
he is accused of hiring numerous unlicensed and uninsured workers asserting
they were subcontractors in an attempt to avoid paying premium.
Defenses
The typical defenses in this case would be reliance on the advice of accountants and lawyers or the advice and performance of employees who handled the reporting.
It is important to ensure that there are no false entries in books and records or other evidence that show "scienter" or intent to defraud.
How to avoid these issues? Compliance is the key and ultimately when a worker gets hurt they will go to the workers' compensation system where the company loses control over the process. Having an "audit" done yourself can be a good basis for a defense.
Every case is different but given the aggressive nature of the insurance companies who put together the insurance fraud criminal cases for the local district attorneys' offices, it is rarely worth the risk in these cases.
It is important to ensure that there are no false entries in books and records or other evidence that show "scienter" or intent to defraud.
How to avoid these issues? Compliance is the key and ultimately when a worker gets hurt they will go to the workers' compensation system where the company loses control over the process. Having an "audit" done yourself can be a good basis for a defense.
Every case is different but given the aggressive nature of the insurance companies who put together the insurance fraud criminal cases for the local district attorneys' offices, it is rarely worth the risk in these cases.
Posted by Tracy Green, Esq.
Green and Associates, Attorneys at Law
