Workers compensation insurance long has been described as a “grand bargain” arising from the post-Industrial Revolution workers’ rights struggles between laborers and industrialists.
In theory this compromise is quite simple. Injured workers are guaranteed proper medical treatment and wage-replacement benefits. In return, employers can limit their liability by purchasing workers compensation insurance to avoid the uncertainty of civil tort litigation. The economic and social costs of workplace injuries thus are borne by more than just one party.
However, this delicate balance can be drastically skewed when dishonest business owners and managers violate workers-compensation laws in unethical attempts to gain a competitive advantage over law-abiding competitors.
Created in 1929, the North Carolina Industrial Commission administers the state’s Workers’ Compensation Act. This directive includes resolving disputed claims and enforcing the act’s insurance mandates.
Over the past two years, the Commission has developed and launched new enforcement initiatives to combat two of the most significant harms within the state’s workers-compensation system: employer noncompliance and employee misclassification. Both schemes have spread widely in recent years. They impose added costs on businesses, employees and the state.
Several new enforcement initiatives have been implemented over the last two years to stem this growing problem. Key is greatly increased data-sharing among state agencies in real time. New analytics have facilitated increased cooperation among state agencies. It also has expanded the data needed to identify and crack down on dishonest businesses that misclassify employees or avoid securing mandatory workers compensation coverage altogether.
This model of integrated, data driven intelligence-sharing among state agencies gives the Commission a powerful new enforcement tool. A relatively small agency, with limited resources, now can effectively focus its enforcement efforts. These reforms are an integral part of a larger package of other recent reforms launched in North Carolina. Integrated data-sharing is a cornerstone.
Employers knowingly refuse
Let’s review the full scope of recent reforms in North Carolina, and explore how innovative data-sharing fits into the entire package.
With limited exceptions, North Carolina requires employers with three or more employees to carry workers-compensation coverage. Employers that fail to comply face civil fines, and possible felony and misdemeanor charges. This depends on the nature and severity of the offense. Some naïve businesses neglect to acquire or maintain coverage because they lack knowledge of this legal obligation.
Other employers knowingly refuse to purchase workers compensation insurance to avoid this business expense.
A third category of employers intentionally and improperly classifies workers as “independent contractors,” rather than as employees. This avoids the costs of workers-compensation insurance, payroll taxes and unemployment taxes.
Employer noncompliance and employee misclassification harm all parties involved in a workers compensation claim, and pass the costs of treating injured workers on to the general public.
If a workplace injury occurs, and the employer has not secured workers- compensation insurance, the injury’s costs often are too great for the employer to cover. Medical treatment and other lifetime care for a severely injured or disabled employee can run into the millions of dollars.
“Employer noncompliance harms legitimate businesses that follow the law”
As a result, injured employees of non-insured employers often are left without disability compensation or the means to obtain proper medical care. This leaves healthcare providers and state programs such as Medicaid to bear the costs of an employer’s failure to provide proper coverage.
For example, an employee of an uninsured tree-removal firm was struck by a falling tree during his employment. The employee was rendered a quadriplegic. He likely will require Medicaid-financed treatment and other public aid for the rest of his life.
Underbid honest competitors
Employer noncompliance harms legitimate businesses that follow the law and acquire workers-compensation insurance for their employees. When noncompliant businesses refuse to purchase this coverage, they avoid paying premiums and can under-bid honest competitors. This places legitimate businesses at a distinct competitive disadvantage. Noncompliance and misclassification also deprive the state of potentially millions of dollars in lost taxes and other revenue.
Enforcing workers-compensation insurance mandates rests solely with the Commission. Yet the larger problem of employee misclassification touches a variety of state agencies, especially agencies that enforce related tax and labor laws.
Local newspapers published a series of articles in early 2012 outlining the rampant abuses of North Carolina businesses that misclassified employees and failed to carry valid workers-compensation insurance.
About 30,000 North Carolina businesses failed to carry mandatory coverage, the news reports estimated. Roughly 40 percent of audited businesses also improperly classified their employees as independent contractors.1 Misclassification deprived the state of slightly more than $134 million annually in uncollected income, unemployment, and payroll taxes, a 2014 followup story estimated.2
North Carolina fights back
As calls for regulatory action grew in the summer of 2012, the General Assembly passed legislation streamlining information-sharing between the Industrial Commission and North Carolina Rate Bureau, the agency that maintains workers compensation insurance records.3
This legislation also created the Joint Legislative Committee on Workers’ Compensation Insurance Coverage Compliance and Fraud Prevention and Detection. The committee met three times and released a final report in January 2013.
The committee made several recommendations and proposed legislation to unify data-sharing among the Industrial Commission, Rate Bureau, Division of Employment Security, and the departments of Labor and Revenue. Similar legislation creating the Government Data Analytics Center was enacted in June 2013.4
Former Gov. Bev Perdue created the Task Force on Employee Misclassification via executive order in August 2012.5 She appointed Commissioner of Insurance Wayne Goodwin as chairman and charged the task force with developing strategies to reduce misclassification through increased enforcement actions and greater inter-agency information-sharing.
The task force also was directed to prepare biannual reports outlining its recent activities and recommendations for future action. The task force filed its first report in January 2013, but failed to issue any follow-up reports.
The Industrial Commission’s fraud and compliance efforts came under scrutiny in February 2013 when the Office of the State Auditor released its performance audit of the agency.6 The audit revealed lax enforcement practices such as a failure to both assess mandatory penalties and follow up on reports of lapsed or canceled workers compensation policies.
For example, the Industrial Commission investigated only 331 noncompliance cases and assessed only about $80,000 in civil penalties in FY 2011. The Commission agreed with the audit’s recommendations and began to study improvements to its fraud and compliance programs.
Reforms take shape
After his confirmation in May 2013, Chairman Andrew Heath quickly moved to implement reforms to the commission’s Fraud Investigative and Compliance Division.
Using a designated appropriation, Heath more than tripled the division’s staff — including hiring three more sworn law-enforcement officers as fraud investigators.
Chairman Heath also appointed Bryan Strickland, a former investigation supervisor with the Office of State Auditor, to be the division’s director. Strickland brought more than 20 years of fraud audit experience.
“. . . more than $341,921 in noncompliance penalties [were collected] in FY 2013-2014, nearly doubling its previous fiscal-year collections.”
The division assigned several staff, including a special deputy commissioner, to review business filings and other records provided by the Secretary of State, Division of Employment Security and Rate Bureau. The primary goal was to preemptively identify businesses that operate without workers-compensation coverage before a workplace injury occurred.
The Industrial Commission now takes corrective measures when a noncompliant employer is identified. The commission imposes a civil penalty based on the size of the employer’s workforce and number of days it has gone without proper coverage.7 Each penalty order also directs the noncompliant business to provide proof of workers compensation coverage within 30 days or face more criminal penalties.
The Industrial Commission collected more than $341,921 in noncompliance penalties in FY 2013-2014, nearly doubling its previous fiscal-year collections.
In April 2014, the commission unveiled an innovative new tool: the Noncompliant Employer Targeting System (NETS).
This cross-agency, data-analytics program was created in conjunction with the Government Data Analytics Center and SAS Institute Inc. NETS is a secure, web-based application. It uses data from various state agencies to create a prioritized list of potentially noncompliant businesses. The Commission the can review the list for possible enforcement action.
Data from the Division of Employment Security, for example, allows the Commission to determine if an employer meets the three-employee threshold. Coverage data from the Rate Bureau also is funneled into system and compared to a list of employers shown to have at least three employees. Through analytics, the Commission can see a clear picture of a business’s noncompliance.
After fully implementing NETS, the Industrial Commission collected nearly $1 million in penalties and successfully closed more than 3,800 fraud and compliance cases in FY 2014-2015 (see Exhibit 1).
While warnings and civil penalties may temporarily bring some dishonest employers into compliance, the Commission has found that more- aggressive action is needed to combat repeat offenders.
The Commission began conducting on-site enforcement operations on businesses that NETS identified as being uninsured despite having past contact with the Commission. Fraud investigators filed 101 misdemeanor charges of failure to carry workers compensation following operations conducted in Durham, Guilford, Mecklenburg, Pitt and Wake counties.
Though prosecution is left to the local district attorney, these operations send a strong message to repeat offenders. The Industrial Commission plans to expand these initiatives in the near future.
The Commission also has increased public outreach to educate business owners on their workers-compensation obligations. The commission sends informational materials to newly registered businesses, and gives presentations on the basics of workers-compensation law at small-business seminars throughout the state.
This outreach notifies employers of their legal responsibilities to prevent future noncompliance and misclassification. The Commission also has a team of information specialists to field phone calls and answer general questions from employees, businesses and insurers.
“More than 800 previously uninsured businesses have recently acquired or re-acquired mandatory insurance policies . . .”
Despite its recent success in punishing fraudulent and noncompliant employers, the Commission remains committed to its primary goal of ensuring that every covered employer maintains a valid workers compensation policy at all times.
More than 800 previously uninsured businesses have recently acquired or re-acquired mandatory insurance policies after being contacted by the Industrial Commission. Thousands of workers now are properly insured as a result. These positive effects are a good start and the Commission will continue intensive investigation and enforcement until every North Carolina employee has the workplace protections guaranteed by the Workers’ Compensation Act.
More action needed
Misclassifying employees as independent contractors stretches beyond the purview of any one regulatory agency. A broad, multi-agency strategy is needed to prevent limited, piecemeal enforcement actions and directly attack this dangerous practice.
Gov. Pat McCrory tasked Chairman Heath in Spring 2014 with developing comprehensive misclassification reforms to present to the General Assembly ahead of the 2015 regular session. The Industrial Commission solicited input from multiple stakeholders8 over several months. These efforts resulted in legislative recommendations to build upon the successful new model of inter-agency information-sharing. The proposal sought to:
• Codify and set out in plain language the primary common-law test to determine “independent contractor” status;9
• Define, specifically prohibit and create a new civil penalty for employee misclassification;
• Improve inter-agency information sharing by creating the Employee Classification Division within the state government. This new entity would: 1) receive and investigate all reports of employee misclassifying; 2) assess a civil penalty; and 3) share such reports with relevant state agencies to investigate and enforce;
• Require applicants for state occupational licenses to certify that the applicant has read and understands an employee-misclassification notice;
• Prohibit businesses that misclassify employees from contracting with the state (debarment);
• Empower state licensing boards to revoke licenses of businesses that misclassify employees; and
• Amend the labor department’s workplace laws poster to include an employee-misclassification notice. It would have instructions on reporting suspected misclassifying.
Many of the recommendations were included in S694, which Sen. Buck Newton introduced in early 2015.10 This bill unanimously passed the Senate in April, and was referred to the House Committee on Rules.
Rep. Gary Pendleton introduced a similar bill on April 1.11 H482, languished in committee and was rewritten. The new version penalized unethical business owners only for a second offense of “willful employee misclassification.” It also imposed only debarment and other sanctions, if the state meets an excessively high burden of proof.
These less-stringent provisions, and an overly broad independent- contractor test, significantly weakened the bill and provided inadequate deterrents.
H482 passed the House in late August. The Senate amended the bill to mirror S694. The House declined to vote before the 2015 legislative session ended.12
Gov. Pat McCrory created the Employee and Employer Fairness Initiative in December 2015.13 He directed Chairman Heath to appoint a Director to oversee the new Employee Classification Section. The director will serve as primary contact point for reported instances of employee misclassification. The director will refer cases to the relevant state agencies for investigation and enforcement.
“Enhanced data-sharing among state agencies, especially, has energized the effort and led to far-stronger enforcement.”
Gov. McCrory directed the Department of Revenue, Industrial Commission and Division of Employment Security each to appoint a liaison to work directly with the director. They will ensure their respective agencies take proper enforcement actions and share all necessary information. This initiative also encourages improved coordination and collaboration among the new Employee Classification Section, Department of Labor and Department of Insurance (see Exhibit 2).
The Industrial Commission has made strong gains in combating employer noncompliance and employee misclassification. Enhanced data-sharing among state agencies, especially, has energized the effort and led to far-stronger enforcement.
Gov. McCrory’s new Employee and Employer Fairness Initiative will build off these early gains by facilitating intensive enforcement actions through more efficient information-sharing practices. This executive order ensures all relevant state agencies play a role in stemming employee misclassification.
As these new programs move forward, future legislative or regulatory action may be needed to fully address the misclassification problem. Despite the challenges, the Industrial Commission and McCrory Administration remain committed to ensuring all employers maintain adequate workers-compensation coverage, and to pursuing employee misclassification reforms that fully protect North Carolina’s workers, businesses and taxpayers.