There are consequences when employers attempt to manipulate the system in place for workers’ compensation premiums. When employers try to manipulate by moving payroll from class codes with higher rates into class codes with lower rates, they create a situation where not enough premium has been developed to cover losses. This causes an exaggerated Experience Modification Factor and increased workers’ compensation premiums that can last for several years.
This article is part one of a three-part blog post series on this topic starting with an example of why intentionally manipulating the system is not a good idea.
Part One - An Example of Intentionally Manipulating the System That Backfired
My personal experience involved a claim audit on behalf of an insured where a carrier claimed over $2,000,000.00 in premium was due. A claim audit was performed that established that not only was the alleged premium not due by the employer but over $3,000,000.00 was due back to the employer as a result of unreasonable claim handling.
The employer was forced to give up its claim against the carrier and settle the case after it was established during the discovery that the employer had been manipulating its payroll over several years by burying payroll with higher class rates into lower class rate categories.
The employer allocated payroll from:
Class code 6306 (Sewer Construction-All Operations & Drivers) with a rate of $15.04
Class code 8227 (Construction or Erection Permanent Yard) with a rate of $11.96
Class code 5183 (Plumbing NOC & Drivers) with a rate of $11.00
into
Class codes 5605 (Contractor-Executive Supervisor or Construction Superintendent) with a rate of $4.04 Class code 6306 (Water Main or Connection Construction & Drivers) with a rate of $7.74.
Fortunately for the employer, it avoided criminal action with the settlement of the claim filed by the carrier and the counter-claim filed by the employer against the carrier.
Conclusion
Manipulating the system is not only illegal, but it can impact the employer’s bottom line. To understand the impact, you need first to understand the formulas used to develop premium. It is detailed and complicated.
In part two of our series on this topic:
Understanding the Formulas Used to Develop Premiums
we explain these formulas in more detail. To receive notification for part two of this series, simply subscribe below.
