August 26, 2010

Massachusetts Comp: The Power of "Any 3 Persons"

Massachusetts has been in the forefront of the independent contractor issue. The state has narrowed the definition of "independent contractor" to the point where almost anybody can be defined as an employee. But how do you enforce this? Where is the leverage to confront employers who are avoiding comp premiums by misclassifying their employees as independent contractors?

Under the direct influence of labor unions, the Commonwealth has empowered "any 3 persons" to take action against suspected comp fraud. Governor Deval Patrick recently signed a law that allows any 3 people to file suit against an employer who fails to comply with the workers comp statute. If that sounds pretty broad, well, it is. Here is first section of the new law:

Whenever facts exist showing that an employer has failed to comply with this chapter, then any 3 persons may bring a civil action and that civil action shall be deemed a private attorneys general action....Plaintiffs shall prove a violation of this chapter by a preponderance of the evidence.

I do wonder what those "facts" and the supporting evidence might look like. Beyond that, this language invites lawsuits for any violation of the workers comp statute, a very wide parameter of possibilities, indeed. The focus, however, will be on premium fraud: deliberate misclassification of employees; paying people under the table; and failing to carry workers comp insurance altogether. The plaintiffs can collect up to $25,000 in unpaid premiums and an additional $25,000 in damages, plus "costs and reasonable attorneys fees."

These suits must be filed no sooner than 90 days after a policy ends (how would the "3 persons" know this date?). Then the process will take an additional 90 days. So six months after the policy ends, all hell breaks loose.

Bitter Remedy
Where are the "3 persons" likely to come from? I'm guessing that disappointed bidders on (increasingly rare) construction projects are likely to team up with disgruntled (former) employees of the successful bidder to form a merry band of 3. You might find three laid off employees/independent contractors jumping in to get back at their former bosses. Heck, the standard of "3 persons" is so low, this game is not much more difficult than playing the state lottery.

It will be fascinating to watch this new statute roll out. Simmering rivalries are going to boil over. The frictional cost of doing business in the Bay State is about to go up. The ultimate question, of course, is how effective this new weapon against premium fraud will be. To the extent it exposes unfair business practices, it will help level the playing field for all Massachusetts employers. But given the broad and ultimately vague language of the enabling statute, there is plenty of opportunity for abuse in this cure for abuse. From a blogger's perspective, of course, it's just about perfect.



Nowhere does it say that the "3 persons" cannot be employees of the insurance carrier. How about the premium auditor, underwriter, and claims manager?

I drafted the Massachusetts law. If someone gets $25,000 it's only because they proved a $100,000 premium evasion; that's a big cheater unveiled. The rest of that money, $75,000, goes to the state to reduce a tax on honest employers. That tax is used as a pool to cover injured workers who worked for an employer that did not have any policy for comp, i.e., a cheater. Honest employers have paid litterally millions per year into that fund to cover such workers; that been unfair. And, they have lost billions in contracts to such cheaters. Now, this law creates a mechanism to ferret out cheaters without cost to honest employers, taxpayers (under-staffed government investigations, prosecutions, etc.), insurance carriers, and others. Passage alone sends a message and will result in an increase in proper use of NCCI class codes (roofers coded as roofers, e.g.) which means more premium dollars and less cheating, which results in less comp costs to all. Finally, fewer employers will risk unlawful misclassification of employees as ICs. This national tragedy of illegal premium evasion has costs honest employers billions each year; it's time it ends.

Mickey Long
Boston, MA
PS You seem to hate unions more than criminal cheaters; what's up with that?


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This page contains a single entry by Jon Coppelman published on August 26, 2010 12:37 PM.

Cavalcade of Risk #112 and various workers comp news briefs was the previous entry in this blog.

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