I have noted before that the news often reports incidents of workers' compensation fraud. In the Bumped Knee Massacree, I recently noted some fraud observations. Fraud is a tough issue, which many people react to strenuously. I am frequently approached at meetings and seminars to be told that employer fraud is an issue that does not get equal news coverage. Well, fraud is back in the news, but with a somewhat unique twist.
In several other posts, I have noted the challenges of the misclassification issue, with which states are struggling. These include Misclassification - What it is, and Is Misclassification in Trouble? By some accounts misclassification is on the run, and by other accounts it is alive and well. Misclassification is a process through which employees are instead labelled "independent contractors," thus relieving the employer of responsibilities for payroll taxes, workers' compensation and more.
As troublesome as misclassification is, it is not the only way in which employers can act inappropriately. A recent story highlighted a business owner in New York who, instead of misclassifying workers, invented fake workers/employees to commit fraud. He was convicted of payroll misreporting and underpaying employees, and sentenced to serve time in jail as a result. That is fairly unique in the news. There are periodically stories of an employer fined, but jail time is an attention getter.
In several other posts, I have noted the challenges of the misclassification issue, with which states are struggling. These include Misclassification - What it is, and Is Misclassification in Trouble? By some accounts misclassification is on the run, and by other accounts it is alive and well. Misclassification is a process through which employees are instead labelled "independent contractors," thus relieving the employer of responsibilities for payroll taxes, workers' compensation and more.
As troublesome as misclassification is, it is not the only way in which employers can act inappropriately. A recent story highlighted a business owner in New York who, instead of misclassifying workers, invented fake workers/employees to commit fraud. He was convicted of payroll misreporting and underpaying employees, and sentenced to serve time in jail as a result. That is fairly unique in the news. There are periodically stories of an employer fined, but jail time is an attention getter.
This business operates nine franchises of a nationally known company in New York. According to Small Business Trends, this employer did not pay "proper minimum overtime wages as required by New York State law." The employees apparently worked overtime, but the business owner did not want to pay overtime. As a general rule that overtime pay is about 50% higher than regular wages.
Of course, the employer saved money by paying lower wages. Also, however, the employer pays payroll taxes based upon payroll. The lower the payroll, the lower the payroll tax liability. The article does not mention whether the federal government will become involved to collect additional payroll taxes.
Workers' compensation insurance premiums are also based upon payroll paid. This makes sense, because when an employee is injured at work, the amount of indemnity benefits to which she or he is entitled is likewise dependent on that employee's earnings prior to the accident date. Workers' compensation insurance premiums are thus influenced by the level of overall payroll paid by an employer. So the lower wages paid benefit the fraudulent employer in multiple ways.
To hide the overtime wages, paid at the lower amount, this employer created "false identities under which he filed employees’ overtime hours, making it appear as if other workers were actually working those extra hours," at base-wages instead of the overtime rate. These are sometimes referred to as "ghost employees." It was apparently not a small endeavor for this employer; the story says that "about 300 current and former employees were affected." The impact was significant.
Of course, the employer saved money by paying lower wages. Also, however, the employer pays payroll taxes based upon payroll. The lower the payroll, the lower the payroll tax liability. The article does not mention whether the federal government will become involved to collect additional payroll taxes.
Workers' compensation insurance premiums are also based upon payroll paid. This makes sense, because when an employee is injured at work, the amount of indemnity benefits to which she or he is entitled is likewise dependent on that employee's earnings prior to the accident date. Workers' compensation insurance premiums are thus influenced by the level of overall payroll paid by an employer. So the lower wages paid benefit the fraudulent employer in multiple ways.
To hide the overtime wages, paid at the lower amount, this employer created "false identities under which he filed employees’ overtime hours, making it appear as if other workers were actually working those extra hours," at base-wages instead of the overtime rate. These are sometimes referred to as "ghost employees." It was apparently not a small endeavor for this employer; the story says that "about 300 current and former employees were affected." The impact was significant.
Last summer, the Labor Department entered an agreement with the business owner. He agreed "to pay $230,000 in back pay for his workers, $230,000 in damages and $50,000 in civil monetary penalties." The employees of this business were cheated out of $230,000. With 300 employees involved, that is roughly $766.00 per employee (if the process was uniform, but it is possible and perhaps likely that some employees were subject to this scam more than others).
According to the Business Journal, this franchisee is not alone in running afoul of labor laws. The Journal quotes the New York Attorney General calling on all "fast-food companies to step up and stop the widespread lawlessness plaguing your businesses and harming the workers who make and deliver your food."
Is the "downside" in the reported case normal? The back wages are not really a deterrent to this kind of behavior; being ordered to pay what you should have paid to begin with will not deter. That is like making someone pay for the candy bar they are caught shop lifting. If the whole downside is to pay for what you tried to steal, many will not be deterred.
But here, the thief is ordered to pay for the candy bar, $230,000, and then pay double the price, another $230,000, and then pay a fine of $50,000. So, getting caught results in paying what was already owed, $230,000 and then another $280,000 as deterrent. The penalties are about 122%. If this downside is normal, is it sufficient? If it is sufficient, then why is "widespread lawlessness plaguing" businesses in New York?
Perhaps the owner of this business will be deterred by spending 60 days of his life in jail, instead of running his business? Perhaps the news coverage of his incarceration will be persuasive in deterring others?
According to the Business Journal, this franchisee is not alone in running afoul of labor laws. The Journal quotes the New York Attorney General calling on all "fast-food companies to step up and stop the widespread lawlessness plaguing your businesses and harming the workers who make and deliver your food."
Is the "downside" in the reported case normal? The back wages are not really a deterrent to this kind of behavior; being ordered to pay what you should have paid to begin with will not deter. That is like making someone pay for the candy bar they are caught shop lifting. If the whole downside is to pay for what you tried to steal, many will not be deterred.
But here, the thief is ordered to pay for the candy bar, $230,000, and then pay double the price, another $230,000, and then pay a fine of $50,000. So, getting caught results in paying what was already owed, $230,000 and then another $280,000 as deterrent. The penalties are about 122%. If this downside is normal, is it sufficient? If it is sufficient, then why is "widespread lawlessness plaguing" businesses in New York?
Perhaps the owner of this business will be deterred by spending 60 days of his life in jail, instead of running his business? Perhaps the news coverage of his incarceration will be persuasive in deterring others?
