Commission on Health and Safety and Workers’ Compensation

CHSWC RECOMMENDATIONS
TO IDENTIFY ILLEGALLY UNINSURED EMPLOYERS
AND BRING THEM INTO COMPLIANCE

Background

In February 1997, the Commission conducted a public fact-finding hearing on workers’ compensation anti-fraud activities and determined that some employers were not complying with the requirement to secure workers’ compensation coverage for their workers.

Commission staff and a research team developed an issue paper containing recommendations to identify illegally uninsured employers and bring them into compliance. The Commission then voted to engage in these proposed pilot projects and to create a CHWSC Uninsured Employer Roundtable to consider and suggest Legislative changes.

The goals of this project are:

In addition, several roundtable meetings were conducted to develop legislation to improve enforcement on uninsured employers.

This report focuses primarily on the results of the CHSWC multi-agency matching records pilot projects.

Problem

Illegally uninsured employers impose substantial costs on the State of California, its employers and workers. The Commission Task Force identified numerous issues.

The Division of Workers' Compensation (DWC) Claims Unit paid out an average of $22.6 million per year over the last five years from the Uninsured Employers Fund. Recoveries and penalties averaged $2.3 million per year over this period. This has resulted in a net loss to the State's General Fund of over $100 million during the last 5 years.

Many injured workers are likely to be losing medical and/or indemnity benefits to which they are entitled. Numerous injured workers, whether or not they receive UEF payments, may be shifting the cost of uncovered injuries to other state services or private health care.

Insured employers are placed at a competitive disadvantage with respect to uninsured employers. Especially in industries with high premium rates, the uninsured employer is able to unfairly underbid the responsible employer. Insured employers are doubly disadvantaged when taxes or premiums are raised to cover costs shifted to other government or employer supported services.

Project Description

The Commission multi-agency endeavor consisted of three pilot projects designed to identify illegally uninsured employers and bring them into compliance. Each pilot project targets a specific group of employers.

Pilot 1

The first pilot followed-up on a sample of 350 experience-rated employers for who policy coverage could not be identified at the time of recalculation of experience modification. Policy information was requested from the employer. Each employer that failed to respond (120) with confirmed policy information was matched to EDD records of reported wages. In April 1998, fifty-eight of the 120 were identified as apparently uninsured employers with reported wages. These employers were referred to DLSE for follow-up notification and investigation. This pilot concentrated on a sample of employers whose X-mod calculations were performed during April 1997.

Pilot 2

The second pilot targeted several industries that are responsible for a disproportionate demand upon the state General Fund through claims against the UEF. These industries are also suspected of high rates of noncompliance with the requirement that employers secure the payment of compensation.

Using specific industries (Auto/Truck Repair, Restaurants/Bars), the Employment Development Department (EDD) created random samples of 250 employers in each targeted industry based on primary SIC code. In addition, a random sample of 250 firms was drawn from all other employers.

The Workers’ Compensation Insurance Rating Bureau (WCIRB) then matched these employers to policy information. During April and May of 1998, the WCIRB notified each employer with apparent lapses in coverage or for whom coverage could not be determined, requesting an explanation for current or historical lapses in coverage.

The Division of Labor Standards Enforcement (DLSE) followed-up with a mail request for policy information (Form 601). For those employers (221) who failed to respond or failed to adequately demonstrate insurance coverage, DLSE attempted on-site inspection.

Pilot 3

Pilot 3 tested methods of improving new employers’ knowledge of the need for compensation coverage and identification of new employers who willfully avoid compliance. Information received from other states indicates that 40% of new employers fail to secure payment of compensation. Efforts by other states have also been very successful at bringing new employers into compliance.

EDD drew a sample of 500 new employers that reported wages for the first time in the second quarter of 1997. Each of these employers was matched to policy data by the WCIRB. All apparently uninsured employers were sent a copy of the notification that will appear in EDD’s "California Employer’s Guide" and a request to provide policy information or reason that insurance was not required.

A second notice was sent to all employers who did not respond. This notification reiterated the requirements for insurance, reminded the employer that lack of coverage is a crime, and informed the employer that if policy information is not returned, the employer’s identity would be turned over to DLSE for follow-up which could result in penalties of up to $10,000 per employee.

If no response was received to the second notice, DLSE followed-up in the same manner as for the targeted employers in Pilot 2. DLSE followed-up on 208 employers in Pilot 3.

For each employer in the pilots the following information was recorded:

If not covered:

This information would permit estimation of the percent of, number of, employment at, and premium avoided by:

The pilots also tested the ability for notification to bring employers into compliance without the need for penalties and investigations. Many employers, especially new employers may be unaware of the need for compensation insurance. Other employers who are temporarily out of compliance may be encouraged to obtain and maintain insurance if they are aware that compliance is being enforced.

Results:

R

Pilot 1

None of the experience rated employers tracked under pilot one was found out of compliance. All employers were either insured, out-of-business, or had no employees.

Pilots 2 and 3

Pilots 2 and 3 involved 1250 "employers" sampled from EDD. A number of these employers were no longer in business, had no current employees, or could not be located and were assumed to be out of business. In addition, for several reasons, (for example, no street address) some employers who did not respond, could not be inspected to determine if they were active employers and whether they had coverage. These employers were dropped from the samples.

This resulted in the following sample sizes:

Table 1

SAMPLE SIZES FOR PILOTS

New Employers

Restaurants

Auto/Truck Repair

All Industries

Original Sample

500

250

250

250

Out of Sample*

153

41

28

40

Percent Out of Sample

30.6%

16.4%

11.2%

16.0%

Final Sample Sizes

347

209

222

210

* Closed, no employees, undelivered/can not locate, or employment and insurance status not established.

WCIRB records and notification was able to determine coverage on approximately 75% of active employers in the sample. The portion of employers in each sample with coverage identified by WCRIB or submitted by employers did not differ significantly across the pilots. See Table 2 on the following page.

Table 2

Percent of Active* Employers Identified as Insured by WCIRB

New Employers

Restaurants

Auto/Truck Repair

All Industries

Number of Employers Active*

347

209

222

210

Insurance Coverage Confirmed by WCIRB

210

133

146

134

Insurance Coverage not Confirmed by WCIRB

(as of report date)

40

25

28

26

Total

250

158

174

160

Percent of Active Employers Identified Insured by WCIRB

72.0%

75.6%

78.4%

76.2%

* Active employers are employers from sample confirmed as in business with one or more non-exempt employees.

DLSE

The Division of Labor Standards and Enforcement followed up on any employers for whom the Rating Bureau was unable to identify coverage and who did not respond to the WCIRB notification letter. The following table gives the breakdown of the notification by DLSE and response from employers.

Table 3

DLSE Notification Results

New Employers

Restaurants

Auto/Truck Repair

All Industries

Total

DLSE issued 601 Requests for Proof of Coverage

208

71

76

61

416

Insured at notification

24

11

9

9

53

Insured after Notification

17

4

7

3

31

Closed

5

5

0

1

11

No employees

24

2

4

6

36

Returned Undelivered

23

8

6

5

42

No Response

115

41

50

37

243

DLSE attempted followed up on all employers who failed to respond. DLSE also targeted for inspection a small number of employers who responded but whose response was considered inadequate or otherwise suspect. A number of employers could not be followed up. For some there was no street address, for others the address give was out of state, and for several employers, no action had been completed prior to this report.

The following table indicates the follow-up for each pilot.

Table 4

DLSE ACTION

New Employers

Restaurants

Auto/Truck Repair

All Industries

Total

Subject to Possible inspection*

115

41

53

37

246

Inspected**

90

28

47

29

194

No Action***

25

13

6

8

52

* DLSE considered for inspection those employers failing to respond. If returned undelivered, or no street address was available, DLSE did not inspect.

** Additional inspections were performed by DLSE when inspector found original business closed and a new business in place. These data are not included. A small number of locations that responded to the notification letter were subject to inspection.

*** If no street address was available, or out-of-state address, no action was taken. Some locations may have been subject to inspection after the data were collected.

The DLSE inspections proved to be very successful. A high proportion of inspections resulted in identification of employers who were out of compliance with the requirement to secure compensation coverage. A third of inspections resulted in assessment of penalties for failure to provide coverage. Particularly effective were inspections conducted in the Auto/Truck Repair pilot where over half of employers inspected were out of compliance.

Table 5

DLSE INSPECTIONS RESULTS

New Employers

Restaurants

Auto/Truck Repair

All Industries

Total

Total Inspections

90

28

47

29

194

Insured

21

13

11

10

55

No employees

8

0

4

1

13

Closed/ Could not locate

42

6

6

10

64

Uninsured

19

9

26

8

62

Percent inspected out of compliance

21.1%

32.1%

55.3%

27.6%

32.0%

Total Fines

$61,000

$31,000

$66,000

$13,000

$171,000

Overall Findings

The pilot projects indicate that matching records between EDD and WCIRB is an effective method for identifying and bringing into compliance illegally uninsured employers.

All pilot samples exhibited substantial portions of employers out of compliance. Across the all industry sample as well as the targeted sample for restaurants and bars, the uninsured rate was approximately 9% (± 3.7%). This proportion rose to 15% (± 3.2%) to 20% (± 5.0%). for new employers and the target sample for Auto/Truck Repair. These numbers should be considered conservative estimates of the number of employers out of compliance. First, the policy information is only now being examined by the Rating Bureau to determine the number of employers obtaining coverage after notification. These numbers will almost surely be higher than the numbers presented here that depend to a large degree on self-identification by employers of newly established or re-established insurance.

Second, several groups still require follow-up and so could not be included in the samples. These groups are likely to have higher uninsured rates based on DLSE follow-up of similar groups, for example, employers identifying exempt status because of contract labor or family business. Consequently these numbers should be viewed as conservative.

Table 6:

PERCENT OF ACTIVE EMPLOYERS UNINSURED

AT INITIATION OF PROJECT

New Employers

Restaurants

Auto/Truck Repair

All Industries

Obtained insurance after notification*

33

11

18

10

by WCIRB (est.)

16

7

11

7

by DLSE

17

4

7

3

Percent obtaining insurance after notification

9.5%

5.3%

8.1%

4.8%

Uninsured at inspection

19

9

26

8

Percent uninsured at inspection

5.5%

4.3%

11.7%

3.8%

Total number uninsured at start

52

20

44

18

Percent of pilot not insured at start**

15.0%

9.6%

19.8%

8.6%

* Conservative estimates based on 1) employers notifying DLSE of new insurance. 2) WCIRB estimated from DLSE distribution. Improved data will be obtained from WCIRB records.
** Conservative estimate. Several groups of employers dropped from sample for lack of information may, if in business, may have higher rates of being out of compliance. Also see * note above

Bottom line:

Notification appears effective at achieving compliance for about 60% of employers that are out of compliance. At the same time, inspections conducted after screening employers through WCIRB records and notification by the Bureau and DLSE appear to be an effective and efficient way to produce compliance among the remaining 40% of employers out of compliance even after notification. The following table shows estimates of the costs involved in the DLSE field work related to inspections for the pilot project. These costs compare favorable with the assessments and even with estimated collections. Collections are estimated conservatively at the same rate as other DLSE collection efforts.

Not all costs of the project are represented in table. EDD sampling and WCIRB matching and notification costs are not included. While WCIRB absorbed the costs of this project, future efforts would involve expenditures by DLSE or DWC. Also, costs for notification by DLSE and management staff time are not included. In total these other costs (EDD, WCIRB, and DLSE) would not be expected to be greater than the costs indicated for DLSE inspection.

Table 7

DLSE: Costs*--Recoveries

Investigation Staff  
Hours 313.9
Total Salary $11,460
Travel Expense $1,015
Total staff cost $12,475
Penalties Assessed $180,000
Penalty Collection Rate (1997) 20%
Expected Collections $36,000
* Additional costs not included in table are discussed in text.

Recommendations

Acknowledgements

The Commission would like to thank the following for their assistance in this project:

The following team members made significant contributions to this report:

Christine Baker, CHSWC Executive Officer
Frank Neuhauser, University of California Berkeley
Kirsten Strömberg, CHSWC Analyst
C. L. Swezey, CHSWC Legal Consultant,
Nance Steffan, Division of Labor Standards Enforcement

CHSWC Illegally Uninsured Employers Tracking Project Advisory Committee

David Bellusci, Workers' Compensation Insurance Rating Bureau
Julianne Broyles, California Chamber of Commerce
John C. Duncan, Director of the Department of Industrial Relations
Mark Gerlach, California Applicants’ Attorneys Association
Dianne Gilmore, Employment Development Department
Phil Hardiman, EDD Labor Market Information Division
Gary Herman, Division of Labor Standards and Enforcement
Steve Keil, CSAC
Brenda Keys, Workers' Compensation Insurance Rating Bureau
David Knowles, Department of Insurance
Larry Lee, Division of Workers’ Compensation Claims Unit
George L. Lively, General Contractor
Todd McFarren, California Applicants’ Attorneys Association
Bob Menicucci, ARC Electric
David Nefsky, EDD Disability Insurance Branch
Richard Noar, Lathers Union, Local 68L
James Robbins, Division of Workers’ Compensation
Lloyd Rowe, California Applicants’ Attorneys Association
Jerry Simpson, Department of Industrial Relations
Richard Starkeson, Department of Industrial Relations-Legal
Sandra Sterling, Employment Development Department
Willie Washington, California Manufacturers Association
Edward C. Woodward, California Workers' Compensation Institute
Casey L. Young, California Division of Workers' Compensation

CHSWC Illegally Uninsured Employers Legislative Roundtable

David Knowles, Department of Insurance
Joseph E. Markey, California Self-Insurers Association
N. K. (Keith) Newman, Department of Insurance
Willie Washington, California Manufacturers Association
Edward C. Woodward, California Workers' Compensation Institute
Legal Representative, AFL-CIO

CHSWC Illegally Uninsured Employers Legislative Subcommittee

Christine Baker, CHSWC
Nancy Fox, Division of Workers’ Compensation
Donna Gallagher, State Compensation Insurance Fund
Tom Grogan, Division of Labor Standards Enforcement
Geri Madden, State Compensation Insurance Fund
Frank Neuhauser, UC Berkeley
John Robeson, State Compensation Insurance Fund
C. L. Swezey, CHSWC Legal Consultant
Edward C. Woodward, California Workers' Compensation Institute

COMMISSION ON HEALTH AND SAFETY AND WORKERS' COMPENSATION

MEMORANDUM

Date: December 7, 1998

To: Christine Baker, Executive Officer

From: C. L. Swezey, Consultant

Re: Proposed Legislation for CHSWC Report on Uninsured Employer Project

Pursuant to your request there follows a proposed bill to amend §§3711 and 3722 of the Labor Code to remedy the following two statutory problems identified by the Commission Task Force in the course of the uninsured employer project.

(1) Section 3711 currently authorizes the Director of Industrial Relations to require an employer to furnish the name of its workers' compensation insurer within 10 days. There is a penalty for an insured employer that does not respond to the director's demand, but there is no penalty for an uninsured employer that fails to respond. Section 3711 is also puzzling in that it creates a presumption that an employer that fails to respond within 10 days "has failed or neglected in respect to the matters so required" without clarification as to what those "matters" are.

(2) DLSE believes that if there has been no claim for workers' compensation benefits, it can only assess penalties in connection with issuance of a stop order. Stop orders are only issued if the employer is uninsured at the time of the inspection. Thus, if the employer has been unlawfully uninsured for an extended period of time, but has insurance at the time of the DLSE inspection, no penalty will be assessed.

The proposed legislation would remedy these defects by making failure to respond to the director's request for insurance information prima facie evidence of willful failure to secure the payment of compensation for all purposes and enabling the director to assess a penalty for that failure without regard to whether a stop order is issued. (In determinations of whether an employer is willfully uninsured for the purpose of filing liens against the property of an uninsured employer, failure to respond to the director's request is currently prima facie evidence of willful failure to secure the payment of compensation. See §3715(c).)

PROPOSED BILL to carry out the recommendations of the

Uninsured Employer Project Task Force

[Matter to be deleted is typed in strike through. Matter to be added is in italics. Sections which require no change have not been recopied, only the first few words and the notation [No change] are typed.]

This proposed bill would make failure to respond to a request for insurance information by the Director of Industrial Relations prima facie evidence of willful failure to secure the payment of compensation and authorize the director to assess a penalty of up to $1,000 per employee any time an employer is found to have been willfully uninsured for more than ten days during the preceding calendar year.

SECTION 1. Section 3711 of the Labor Code is amended to read:

3711. The director may, at any time, require any employer to furnish a written statement showing the name of its, his or her insurer or the manner in which the employer has complied with the provisions of Section 3700. Failure of the employer for a period of 10 days to furnish the written statement is prima facie evidence that he or she has failed or neglected in respect to the matters required the employer has failed to secure the payment of compensation. The 10-day period shall not be construed to allow an uninsured employer, so found by the director, any extension of time from the application of the provisions of Section 3710.1. An insured employer who that fails to respond to an inquiry respecting its, his or her status as to his or her workers' compensation security the manner in which the employer has complied with the provisions of Section 3700 shall be assessed and required to pay a penalty of five hundred dollars ($500) to the director for deposit in the State Treasury to the credit of the Uninsured Employers Fund. In any prosecution under this article, the burden of proof is upon the defendant to show that he or she has secured the payment of compensation in one of the two ways set forth in Section 3700.

SECTION 2. Section 3722 of the Labor Code is amended to read:

3722. (a) At the time the stop order [No Change]

(b) At any time the director determines that an employer has been uninsured for a period in excess of ten days the director shall issue and serve a penalty assessment order requiring the uninsured employer to pay to the director, for deposit in the State Treasury to the credit of the Uninsured Employers Fund, the sum of one thousand dollars ($1,000) per employee employed during the period the employer was uninsured or double the amount the director determines that the employer would have paid in workers' compensation insurance premiums during the period the employer was uninsured, whichever is greater. Any penalty assessment issued and served by the director pursuant to this subdivision shall be in lieu of, and not in addition to, any other penalty issued and served by the director pursuant to subdivision (a) for the same period.

(b) (c) If upon filing of a {No other change]

(c) (d) In order to establish [No other change]

(d) (e) Except for penalties assessed under subdivision (b), The the maximum amount of penalties that may be assessed pursuant to this section is one hundred thousand dollars ($100,000). Payment shall be transmitted to the director for deposit in the State Treasury to the credit of the Uninsured Employers Fund.

(e) (f) The Workers' Compensation Appeals [No other change]