·  Companies that shirk workers' comp obligations are likely to get caught by aligned information systems through SB869

By Marton Dunai

CONTRA COSTA TIMES

Article Launched: 06/12/2007 03:05:02 AM PDT

To most California small business owners, workers' compensation insurance is a huge pain in the neck. The workplace injury protection payments, which can be as much as $40 per $100 in payroll in some cases, add up very quickly.

Most entrepreneurs bite their tongue and pay the fee, but an estimated 100,000 businesses statewide don't. Until now, they risked little: Law enforcement was not equipped to detect them. They went about business largely unperturbed, enjoying a hefty advantage over law-abiding competitors.

That hide-and-seek will soon be over. Investigators are about to get X-ray vision.

"We are giving the fraud investigators the tools and the funding to go after the employers who fail to buy workers' compensation insurance," said Sen. Mark Ridley-Thomas, D-L.A., who authored a new workers' compensation bill. "We want a level playing field."

SB869 sailed through the Senate recently and is expected to clear the Assembly and the governor's office in the next few months.

It aims to eliminate the huge noncompliant segment by matching records of employers' reports of payroll with records of insured employers. Currently those records are at two separate agencies and they are not compatible.

"It has to do with straightening out the software," Ridley-Thomas said. "We give (law enforcement) a cleaner set of data."

If the bill is signed into law, those business owners who reported having employees but have no record of insurance will be subject to an automatic

investigation.

The first round will be simple: a letter mailed to the business owner asking for proof of insurance within 10 days.

"The letter of the law leaves a deliberate gap," said Scott Hauge, president of Small Business California, a San Francisco-based advocacy group that sponsored the bill. "If the owner isn't insured, but buys insurance and sends the new proof over within the time limit, that's OK."

In a pilot project conducted a few years ago, most business owners answered immediately, Hauge added. Some had neglected to report their insurance status, others went out and got insurance quickly. Very few owners remained silent.

In the future, those owners will be forwarded to a second database, and their cases will land on their local district attorney's desk, where hefty fines (starting at $1,000 per employee) and even prosecution are possible.

The aim, however, is not to punish as many people as possible, but to eradicate noncompliance, Hauge said.

Hauge, who also leads an insurance firm in San Francisco and does a substantial amount of workers' compensation business, said he didn't plan to profit from the proposed changes because he would have a hard time trusting former nonpayers.

The main advantage of the new system is its wide sweep, its proponents say. Presently, there are occasional sweeps in industries with a reputation for violations. The raids and candid conversations with workers and employers lead to few cases and little incentive to bring cheaters back to the fold.

Conversely, the new system picks up nearly every violator automatically. If it's accepted and indeed leads to dramatic improvement, the state stands to save millions of dollars annually on medical bills it now pays for uninsured workers.

According to calculations by the Commission on Health and Safety and Workers' Compensation, as many as 1,500 cases cost the state some $20 million per year, even as only 1 in 10 workers actually get through a seriously clogged system.

The initial cost of the program, according to Ridley-Thomas' team, will be around $60,000, roughly on par with similar programs introduced elsewhere in the country. It may cost another $45,000 or so to operate per year. The money will come from the Workers' Compensation Administration Revolving Fund.

Money received from fines and penalties will reimburse the fund for the costs, and any extra revenue will go to the Uninsured Employers Fund, which pays the $20 million in unbacked medical bills today.

Noncompliance is a misdemeanor. The lists of nonpaying businesses don't prove criminal intent, but they give a very good starting point for district attorneys to start cases.

That might put extra burden on district attorneys' offices, said Edward Dang, supervising attorney of the Workers' Compensation Fraud Division at the Contra Costa County District Attorney's Office.

Still, "such law would be a valuable tool," Dang said. "It could make it easier to locate those uninsured, and hopefully provide a better deterrent."

Dang said the primary focus for him and his two colleagues right now is fraudulent claims -- people claiming insurance money they are not entitled to. Failing to purchase coverage is a minor segment of their work: In the present fiscal year, which ends June 30, they have filed only 17 misdemeanor charges.

Under the new system, that might spike, but Dang said they will wait and see how many cases they will have to deal with. If need be, they can hire more staff members.

Little reliable information exists about who the cheaters are. In a 1997 study, the Commission on Health and Safety and Workers' Compensation found that auto repair shops and restaurants are most likely to forego workplace insurance, at nearly 20 percent and 10 percent of all employers not having any coverage, respectively.

New employers are often found in violation as well, with 15 percent reportedly failing to get coverage, out of ignorance or negligence. Across all industries, the average is 9 percent, with small businesses heavily overrepresented. (Large companies are often self-insured.)

Those in the sectors named typically disagree with the findings. A 10-year-old study is probably not very reliable today, as workers' compensation costs were much higher than they are today, said Dennis DeCota, executive director of the California Service Station and Automotive Repair Association.

"We are a very large state with a great many repair facilities," DeCota said. "It is important that they be held accountable."

Marton Dunai covers small businesses. Reach him at 925-952-2671 or mdunai@cctimes.com.