Workers’ compensation insurance is a two-way, no-fault benefit system that provides wage reimbursement to employees who have suffered from a work-related injury.

Also called workman’s comp, the program differs across states and countries. The overarching goal, regardless of title or location, is to protect employees who are hurt on the job and protect their employers from lawsuits.

How Does Workers' Compensation Work?

Companies buy coverage for each employee from a private or state-run insurance company.

The monthly premiums for coverage vary based on the employee’s field of work (secretarial, labor) and conditions of their employment (contract, apprenticeship, full-time).

An employer can opt-out of the formal program and self-insure instead if they have the assets to cover prospective claims.

Learn more about the fine print regarding injury liability and independent contractors.

How Are Claims Made?

If covered by workers’ compensation insurance, employees file a claim explaining their injury or illness and how it was caused by their job role or by a harmful work environment.

Once a claim is submitted, the insurance company will review it and decide whether or not to begin compensating the injured individual for medical costs and lost wages.

In certain situations, an injury would not be eligible for workers’ compensation. An injured worker would probably not receive compensation if they were violating company policy at the time of the incident (i.e., intoxicated) or if the injury was self-inflicted.

What is Workers’ Compensation Fraud?

When a person commits workers’ compensation fraud they are simply taking advantage of the system for their own benefit.

The most evident example is the disgruntled employee who makes a false injury claim for extra money, but there are many types that range from small- to large-scale.

Employees, employers, and even health care providers or legal professionals can take part in these scams.

How Common is Workers' Comp Fraud and What's the Cost?

According to the National Insurance Crime Bureau (NICB), workers’ compensation fraud is the fastest-growing type of insurance fraud, costing approximately $7.2 billion per year.

This type of fraud creates a domino effect and everyone foots the bill.

• The premiums that the employer pays go up.
• To be able to afford this new premium, the customers pay more at the cash register.
• Thanks to pay cuts, employees can lose out on bonuses and other benefits.
• Sometimes jobs are cut, too.

In the same report, The Travelers Companies Inc. briefly touch on a survey conducted by the Insurance Research Council (IRC). In it, 35% of respondents believe that it’s ok to pad an insurance claim.

Meaning, one-third have no problem with intentionally scamming a benefits program.

Who Commits Workers' Compensation Fraud?

There are three categories of workers’ compensation fraud:

• Claimant fraud (employee)
• Premium fraud (employer)
• Provider fraud (medical or legal).

Each form of fraud can cause varying degrees of damage, and each has a set of “warning signs”.

Claimant Workers’ Comp Fraud

Free money and vacation time are two of the motivating factors for employees who commit workers’ compensation fraud.

Some fraudsters, instead of tending to their “injury”, will choose to take up a second job or start a side business for extra income (on top of what they’re already receiving for their injury).

A claimant fraud scheme begins with a bogus claim using:

• A fake injury
• An inflated injury
• An injury that happened off the job
• An old injury that never fully healed

Never directly accuse an employee of fraud, but keep an eye out for these red flags if you think your employee is being less than honest.

If you end up discussing the incident with the employee, remember our detecting deception tips.

Claimant Fraud Warning Signs

1. There are no witnesses to the incident.
2. The injured employee is refusing treatment or receiving conflicting diagnoses
3. The injured employee waited to report the incident with no valid explanation for the delay.
4. The injured employee’s story is inconsistent or suspicious.
5. The injured employee has a history of making workers’ compensation claims.
6. The injured employee has a history of changing jobs or medical providers often.
7. The incident happened before or just after a weekend, strike, or holiday.
8. The incident happened just before an imminent termination or expiring contract.
9. There is evidence of the injured employee working a side job.
10. There is evidence of the employee doing activities that would be impossible with their claimed injury (e.g., mowing the lawn with a broken ankle).
11. The injured employee is hard to reach while on leave.
12. The injured employee hired an attorney right away or is pushing for a quick settlement.

What is Malingering?

Malingering is a common practice in claimant fraud.

Mr. Jones has been off work for a while due to a back injury he got late last year. He has been receiving pretty hefty workers’ compensation benefits. He was supposed to return to work several weeks ago but insisted he was still injured and didn’t want to risk it.

Then, his manager ran into him lifting heavy boxes into his truck. Mr. Jones is a malingerer.

Premium Workers' Comp Fraud

These schemes by company owners are large, complex, and well-hidden behind creative accounting or other coverups.

The end goal for these fraudsters is to reduce the amount they owe in workers’ compensation premiums.

Some of the red flags for premium workers' compensation fraud are rather obvious, such as strictly cash paychecks.

Other warning signs are more difficult to spot. For example, some employers might intentionally misclassify their laborers as administrative assistants. The latter is a less risky job, so the premiums are less expensive too, and so the employer saves money.

To reduce the damage caused by premium fraud, keep a watchful eye for some of these red flags.

Premium Fraud Warning Signs:

1. The employer pays workers in cash.
2. The employer simply refuses to purchase workers’ compensation insurance.
3. The employer denies valid claims by injured employees.
4. The employer has several businesses operating from the same address.
5. The employer uses a PO box as its main address.
6. The company name is inconsistent with the work being done (e.g. Jim’s Roofing delivers flowers).
7. The employer refuses to be audited.
8. The employer underreports the number of employees.
9. The employer misclassifies job types.
10. The employer misclassifies contract types.

Mr. Campbell's Fraud

Mr. Campbell, the owner of drywall business E&E Acoustics, underreported payroll numbers and misclassified employees for a couple of years in the late 2000s. Then in 2015, Campbell was caught and ordered to pay back over $1 million in premiums and interest fees.

Provider Workers' Comp Fraud

The providers of workers’ compensation benefits can and do scam the system as well.

Corrupt medical and legal professionals will sometimes engage in large-scale organized crime that takes advantage of the workers’ compensation program.

Provider workers' compensation fraud is usually the sum of many scams, including:

• Inflated worker injuries or service prices
• Random and unnecessary billing
• Fake clinics
• Kickback schemes

The mere size of these schemes can cost millions of dollars and their warning signs are often complex and difficult to identify.

Provider Fraud Warning Signs:

1. The provider bills for services never received.
2. The provider bills for equipment never used.
3. The provider bills for the treatment of individuals who were never treated.
4. The provider is “duplicate billing” (billing multiple times for something that’s already been paid for).
5. The bills received for the injured employee are higher than usual for the type of injury.
6. The provider bills for services that don’t make sense for the reported injury.
7. There is a random increase in the frequency of visits.
8. The medical services are performed for a long time without any improvement in the injury.
9. The same medical provider and law teams are involved in questionable cases.

Reporting Workers' Comp Fraud

So, a few warning bells have gone off and you’ve decided it’s time to report the issue, what do you do now?

As an employee, if you have been denied benefits or you otherwise believe your employer is involved in a workers’ compensation scam, alert the local labor department.

As an employer, alert the workers’ compensation insurance carrier about the suspicious employee so that they can begin a formal investigation.

Preventing Workers’ Comp Fraud

According to the Coalition Against Insurance Fraud, 20% of small-business owners wouldn’t know how to identify a workers’ compensation scam. Keep in mind that statistic doesn’t include the number of employers who think they could detect a workers’ comp scam, but when faced with one, couldn’t.

If you’re looking to detect workers’ compensation fraud in your company, the best place to start is recognizing the warning signs. Thanks to the helpful tips above, that part is already done.

Injured employee living a lavish life all of a sudden? Wanting to investigate? Use this Lifestyle Audit Report Template to streamline your investigation.

Prevention begins at the hiring process. Conduct thorough background checks of all applicants and vet them properly. Reaching out to references might give you the inside scoop on any of the employee’s peculiar behaviors. You might even uncover a prospective employee’s prior claims.

In the workplace, installing surveillance cameras is a good precaution that one day might confirm or deny the validity of injury claims. In addition to cameras, you can:

• Introduce a zero-tolerance workplace policy for fraud.
• Foster an environment that encourages employees to report their suspicions.
• Launch an official whistleblower hotline and offer rewards for tips if necessary.
• Provide training for employees about workers’ comp fraud.

Being prepared can help you detect and respond to fraud faster and more effectively. Download our free fraud response plan template to get started.

Finding Evidence on Social Media

Thanks to the new, unwavering desire to share all aspects of your life, it’s more common than ever for a claimant to expose their own scheme.

Check out our cheat sheet with tips for finding, using, and preserving online evidence.

Keep an eye on social media. If you do come across an injured employee ratting themselves out online, you'll be able to stop the fraud in its tracks.

Jane Doe tagged in a photo of her riding a jet ski last week? You might want to check up on that “broken arm”.