If a business has employees they need to procure a workers’ compensation insurance policy. In New York State, if the employees are also officers of the business, two officers may elect to be excluded from the policy.
The workers’ compensation policy can be obtained directly from the New York State Insurance Fund, or with the help of an insurance agent, through private insurers. Workers’ compensation insurance covers wage replacement and medical benefits to employees who might become injured on the job in exchange the employee give up their right to sue the employer. The cost of this insurance depends on the classification code of a particular occupation e.g. the cost of insurance for a clerical employee is much less than that of a construction worker. The more dangerous the occupation the more expensive the insurance since the work related accidents can be potentially more severe. Depending on the type of company and occupations covered, workers’ compensation insurance can be very expensive. For this reason many businesses attempt to circumvent the system and this can lead to their closure.
The major types of fraud committed by businesses to keep the cost of workers’ compensation low are as follows:
1. Under-reporting payroll. An employer reports that workers are paid less than they actually are in order to lower their premiums.
2. Inflating experience. An employer claims workers are more experienced than they actually are in order to make them seem less risky and therefore less expensive to cover.
3. Evasion. An employer fails to obtain workers’ compensation for their employees when it is required by law. Workers are often deceived into thinking they are covered when they are not
4. Mis-classification of employees into a lower classification code.
5. Paying workers off the books or as independent contractors
The penalties for not carrying workers’ compensation insurance are vast.
The failure to secure the coverage for five or less employees within a 12 month period is a misdemeanor punishable by a fine of not less than $1,000 nor more than $5,000. Over five employees within a 12 month period is a class E felony punishable by a fine of not less than $5,000 nor more than $50,000 and is in addition to any other penalties otherwise provided by law. In addition the penalties grow $ 1000 per day for each additional day without coverage.
On an annual basis most workers’ compensation policy holders go through an audit of their payroll, where auditors review not only the number of employee, but their job functions as well. Additionally, any subcontractors are listed and reviewed to ensure they have their own policy, if not a business can be assessed an additional 15-20 % of the amount they paid that subcontractor.
Currently, the New York State Insurance Fund references payroll tax filings and matches the companies identification numbers to see if they have coverage. If not a preliminary penalty letter is sent to the business. If this letter is not addressed the penalties progressively increase.
This is another issue which should be discussed with an experience accountant before you start or expand your business. Non compliance can carry severe penalties that can bankrupt a business.