In New York, all employers are required to carry Workers’ Compensation insurance. This includes employers with less than five employees. Workers’ Compensation Law imposes heavy penalties against the employer for failure to obtain insurance as well as for defrauding the insurance carrier. [See WCL Section 52]
Penalties are assessed against the employer for misclassifying and concealing employees. The law specifically includes employer’s actions of intentionally and materially understating or concealing payroll, concealing duties to avoid proper classification or concealing any other information pertinent to the calculation of premiums. Section 52 covers misrepresentations such as paying workers “off the books,” not reporting wages paid to illegal aliens and misclassifying employees as “independent contractors” in an attempt to pay a lower premium.
An employer will face a penalty of $1,000.00 for every 10 days without proper coverage. In additional to the monitory penalty, criminal penalties may be imposed against the employer. These penalties range from misdemeanors with a fine, ranging between $1,000.00 and $5,000.00 to a Class E felony with a fine between $5,000.00 and $50,000.00. Repeat offenders will be found guilty of a Class D felony, with fines between $10,000.00 and $50,000.00. Cases investigated by the Workers’ Compensation Board are referred to the Attorney General and the local district attorney’s office for prosecution.
While Section 52 protects injured employees from employers’ fraudulent actions, it offers no protection to the insurance carrier. Liability does not shift from the insurance carrier to the employer when the employer cheats the insurance carrier. Meaning, in the even that an employer commits fraud or misrepresentation while obtaining insurance, the carrier is still held liable to the injured worker.
Recent Case Law.
A New York Appellate Court decision is an examples of this. See Matter of Urbano v. Bletsas Plumbing & Hearing Corp., 124. A.D. 3d 1025.
In its January 15, 2015 decision, the court ruled that insurance carriers are held liable even when an employer commits fraud in obtaining insurance coverage. After being defrauded by its insured, the insurance carrier is still held fully liable to the injured worker as though the insurance policy was properly obtained.
In the above mentioned case, an employer underreported the number of its employees in its application for coverage. Additionally, the employer committed payroll fraud by paying the claimant “off the books.” Based on the employer’s misrepresentation, the carrier controverted the claim, citing to Section 52 (1)(d) which essentially says if an employer conceals payroll to avoid paying the correct premium, “such employer shall be deemed to have failed to secure compensation and shall be subject to sanctions.”
The insurance carrier took the position that since the employer “failed to secure compensation”, no coverage was available, and therefore, the carrier should not be liable to pay benefits to the injured employee. The Workers’ Compensation Law Judge did not release the insurance carrier from liability. The insurance carrier filed a timely appeal and the Board Panel affirmed the Law Judge’s decision.
The appellate court did not agree with the insurance carrier’s position either. The court reasoned that because of the additional language regarding sanctions being imposed on the employer, the intent is to punish fraud, rather than release the insurance carrier from liability.
The appellate court also considered case law predating the enactment of Section 52 in making its decision. The appellate court noted that the law establishes that employer’s fraud does not release a carrier from responsibility to an injured employee.
Essentially, the insurance carrier is ‘penalized’ by the imposing liability to issue benefits in situations where employers did not properly secure coverage.