PROJECT ON ILLEGALLY UNINSURED EMPLOYERS

In February 1997, the Commission conducted a public fact-finding hearing on workers' compensation anti-fraud activities and determined that some employers do not comply 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. This is intended to provide proper workers' compensation coverage for workers, to reduce the cost to the state's Uninsured Employers Fund and General Fund, and to level the economic playing filed for insured employers.

The Commission then voted to follow through on those recommendations for legislative changes and potential pilot projects to reduce the number of illegally uninsured employers.

This endeavor consists of three pilot projects designed to identify illegally uninsured employers and bring them into compliance. Each pilot project targets a specific group of employers.

The first pilot follows-up on a sample of experience-rated employers that failed to identify policy coverage when notified by the WCIRB. Each employer that failed to respond was matched to EDDD records of reported wages. In April 1998, fifty-eight apparently uninsured employers with reported wages have been 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.

The second pilot targets several industries that are responsible for a disproportionate demand upon the state General Fund through claims to the UEF. These industries are also suspected of high rates of noncompliance with the requirement to secure payment of compensation. Using specific industries (Auto/Truck Repair, Restaurants/Bars), 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 WCIRB has 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 cannot be determined, requesting an explanation for current or historical lapses in coverage. DLSE will follow-up with employers who fail to respond or fail to adequately demonstrate insurance coverage. These employers will be notified of a time to present information at the local DLSE office demonstrating current and past insurance coverage. It is estimated that DLSE will follow-up on approximately 120 employers under Pilot 2.

Pilot 3 will test 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 350 new employers who reported wages for the first time in the second quarter of 1997. Each of these employers will be matched to policy data by the WCIRB. All apparently uninsured employers would be sent a copy of the notification that will appear in EDD's "California Employer's Guide" with a request to identify policy information or reason that insurance is not required.

A second notice will be sent to all employers who do not respond. This notification will reiterate the requirements for insurance, remind the employer that lack of coverage is a crime, and inform the employer that if policy information is not returned, the employer's identity will be turned over to DLSE for follow-up which can result in penalties of up to $10,000 per employee.

If no response is received to the second notice, DLSE will follow-up in the same manner as the targeted employers in Pilot 2. It is expected that DLSE will follow-up on approximately 65 employers under Pilot 3.

The Department of Industrial Relations has embraced the Commission's project on illegally uninsured employers and is carrying it forward as its "Operation Insure". The illegally uninsured employer pilots have been proceeding rapidly with the assistance of the WCIRB and DLSE. The results to date suggest that the percentage of employers that are operating without compensation coverage may be significant.

Preliminary findings indicate that this interagency proactive effort may be the most effective way of identifying employers illegally uninsured for workers' compensation and bringing them into compliance.

The Report on the CHSWC Public Fact-Finding Hearing on Workers' Compensation Anti-Fraud Activities discusses the problem of illegally uninsured employers. The Issue Paper on Illegally Uninsured Employers outlines the recommendations for the pilot programs and proposed legislation. The reports on the three pilot projects are expected in October 1998.