Employer non-compliance with the state’s workers’ compensation program is a growing problem in New York. Many companies fail to provide this coverage for their workers. This deprives the workers of coverage and limits the insurance pool of workers covered, in turn increasing the premium costs for other employers and shifting the costs of medical care for injured workers to the injured workers themselves, taxpayers and other employers.
The scope of the problem is significant. Conservative estimates suggest that between 500,000 and a million New York workers who should be covered by workers’ compensation are not. This shocking number comes from two sources of shortfall in the New York State workers’ compensation system. The first is fall-off from coverage under unemployment insurance; many fewer workers appear to be covered by workers’ compensation than by the unemployment insurance system. Second, a growing number of workers are misclassified by their employers as independent contractors in an attempt to evade employer responsibility for payroll taxes and social insurance programs, including both workers’ compensation and unemployment insurance.
All workers who are covered by unemployment insurance in New York should also be covered by workers’ compensation. Yet, in 2003 the total annual payroll of workers covered by workers’ compensation was only 80 percent of the unemployment insurance payroll, meaning that roughly one in every five New York workers covered by unemployment insurance was not covered by workers’ compensation. Although the quality of workers’ compensation payroll data is not what it should be, it is unlikely that poor data explain away the coverage shortfall. “Misclassified” workers miss out on both workers’ compensation and unemployment insurance. The scope of this problem can be estimated by analyzing trends in payroll employment and other economic data.
Premium payments are also dramatically lower than they should be. The total annual payroll for uncovered workers ranges from about $25 billion to $50 billion. These numbers translate into a substantial shortfall in revenues that should be coming into the workers’ compensation system. At about $1,000 per worker, evaded premiums amount to $500 million to $1 billion annually—all lost to the system. These estimates are necessarily rough because there has been so little effective compliance enforcement. New York State has not audited the payroll coverage data to ensure its reliability and indeed has not even compiled the total workers’ compensation payroll before.
How can such a large workers’ compensation coverage shortfall exist? While workers’ compensation in the U.S. was first introduced under President Theodore Roosevelt in 1908, there is no federal oversight or regulation of state workers’ compensation programs. In New York, the administration of workers’ compensation is fragmented with private insurance companies bearing some of the responsibility and the State Workers’ Compensation Board bearing some responsibility. Between the two, there is no overall strategic enforcement capability, much less systematic coordination with the Labor Department’s unemployment insurance system, which does operate under federal oversight.
Other states, including Florida, California, New Jersey and Delaware, have started to respond aggressively to such flagrant employer labor practices. Investigators in Florida close down construction sites for non-compliance and arrest violators. California and New Jersey are seeking to curb the misclassification of workers as independent contractors and California has targeted “consultants” who promote illegal labor practices. Delaware recently strengthened its mandatory insurance requirements and increased penalties for employer violations.
By not enforcing its own laws, the State of New York has allowed extensive non-compliance and the underground economy to proliferate. This harms workers and makes workplaces more dangerous. Not enforcing the law increases the costs for law-abiding employers who do pay for workers’ compensation. It also threatens the viability of the state’s workers’ compensation system, and generates unfavorable publicity about New York’s economic climate.
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