Office of Statewide Prosecution

Report of the Fourteenth Statewide Grand Jury

Report on Workers' Compensation Fraud
July Term, 1997

IN THE SUPREME COURT OF THE STATE OF FLORIDA -- CASE NUMBER 90,703
(This document has been re-formatted for the Internet)

I. INTRODUCTION

We, the members of the Fourteenth Statewide Grand Jury, are investigating insurance fraud committed within the State of Florida.

In the first phase of our work, we have examined workers' compensation premium fraud and employers' compliance with workers' compensation laws. During the course of our investigations, we have taken testimony from investigators with the Department of Insurance, Division of Insurance Fraud (DIF), members of the Workers' Compensation Oversight Board (WCOB), senior management from the Department of Labor and Employment Security (DOL) and Division of Workers' Compensation (Division) as well as representatives of various insurance companies and businesses throughout the State of Florida. We have also reviewed statistics, records and policies provided by DOL.

We have returned four indictments charging nine individuals and one corporation with over thirty felony counts including Racketeering, Workers' Compensation Insurance Fraud, and Grand Theft. These charges concern the theft of over $3.7 million in insurance premiums.

We have also examined the methods by which the State is preventing the criminal activity we have observed. We issue this report in an effort to effectuate true crime prevention, which we believe can be accomplished through effective regulation, education, and enforcement of the law. We are not the first body to issue a report in this area. We hope we are the last.

Chapter 440 was amended effective January 1, 1994, to address what the Legislature viewed as a financial crisis in the workers' compensation insurance industry causing severe economic problems for Florida's business community. The Legislature found that businesses had experienced dramatic increases in the cost of workers' compensation insurance coverage. At that time, Florida was paying the second highest rate in the country.1 Rates had increased 6% above levels that existed before the prior reforms in 1990.2 Because of these and other identified problems, the Legislature found that the magnitude of the compelling economic problems demanded immediate, dramatic and comprehensive legislative action.3 The resulting legislation included strict laws designed to ensure 100% compliance from non-exempt businesses. Unfortunately, the Statute has largely been defanged by a variety of practices, most notably by the Department of Labor's Division of Workers' Compensation.

Under the current enforcement scheme, employers who are caught engaging in premium fraud are prosecuted criminally which can result in severe penalties, including fines and possible imprisonment. On the other hand, employers who buy no insurance at all are rarely, if ever, referred for prosecution, and generally face minimal civil penalties. While we do not mean to suggest that every employer failing to buy insurance be prosecuted, we are concerned that the current imbalance in enforcement literally encourages employers who are inclined to evade premium payments to drop out altogether. The irony is that as things stand now, employers who buy no insurance face significantly less punishment than employers who buy some insurance. As a result we find, as set forth herein, that there is a significant problem with non-compliance in Florida. Non-compliance robs the workers' compensation system of desperately needed dollars, unfairly shifts the burden to honest employers, and ultimately increases the pressure on them to also drop out of the system in order to survive.
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1 Laws of Florida, 93-415
2 Id.
3 Id.

In order to prevent the system from collapsing, it is imperative that the strict mandates of the statute be complied with not only by employers, but by those in charge of enforcement, namely DOL, DOI, and the private insurance carriers. The intent of the statutory revisions, although clear to us, we believe has been misinterpreted. It does appear that most of the necessary safeguards are in place, however they are not being utilized in an efficient and aggressive manner, allowing the dishonest employer to take advantage of our workers' compensation system.

II. BACKGROUND

According to the National Council on Compensation Insurers (NCCI), workers' compensation insurance was a $2.1 billion industry in Florida in 1996. There were over 6 million workers in Florida's labor force in 1996, a majority of which fell under the workers' compensation law. Chapter 440 of the Florida Statutes requires every employer with 4 or more non-exempt employees or every construction employer with 1 or more non-exempt employee, to provide for workers' compensation insurance coverage.

Workers' compensation rates are determined by three factors: the size of the payroll, job classifications and the claim experience of the employer. There are over 600 different job classifications in Florida and the rate ranges from 89 cents per $100 of salary for secretaries to $117 per $100 of salary for steel workers, according to the NCCI. The claim experience of the employer results in a change in what is known as the "experience modifier". For new businesses the premium is multiplied by 1.0. If an employer has a negative claim experience (as a result of prior claims), that modifier could increase, thereby increasing the rates the employer would pay. Employers could also reduce that multiplier down from 1.0 for instituting approved safety programs or by having a positive claim experience with their insurers, thereby decreasing the amount of premiums to be paid.

Effective January 1, 1994, Chapter 440 was overhauled to address a variety of concerns, including non-compliance with the coverage requirements. The law was strengthened and the Division of Workers' Compensation was given new and broader authority to effect compliance with Chapter 440. Unfortunately, we have heard evidence that despite the Legislature's admonitions, the Department of Labor has not taken an aggressive stance toward violators and has grossly under-utilized many of the tools available to it.4

The Legislature also created the Workers' Compensation Oversight Board (section 440.4416, Florida Statutes) to advise DOL on policy issues. We have reviewed a copy of the WCOB's July, 1997 report which is critical of the Division's enforcement efforts. We believe the Division's response has been less than adequate given the significance of the WCOB's role. The Boards' report warranted more than the brief and superficial response provided by the Division Director.

As a result, even though the upward trend in workers' compensation rates appears to have been blunted overall, rates in the construction industry and other high-risk occupations have increased, and Florida continues to have one of the highest rates in the nation. Certainly there has been no significant reduction in rates, which at least some had anticipated and hoped would be the result of the reforms. Furthermore, according to the NCCI some of the initial relief in upward pressure stemmed from a reduction in benefits rather than an increase of dollars into the system.
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4See in particular section 440.107, Florida Statutes.


III. KEY STATUTORY PROVISIONS

Section 440.107, Florida Statutes, gives the Division substantial authority to enforce compliance with Chapter 440. Section 440.107(1), Florida Statutes, states that failure by an employer to have appropriate workers' compensation insurance shall be deemed an immediate serious danger to public health, safety or welfare and gives the Division the authority to issue an immediate stop-work order requiring the cessation of all business operations at the place of employment or job site.

Section 440.107(2), Florida Statutes, gives the Division authority to file a complaint in the circuit court in and for Leon County to prevent any employer not in compliance, from employing individuals and from conducting business until the employer secures said insurance and pays a civil penalty to the Division.

Section 440.107(3), Florida Statutes, additionally gives the Division authority to assess a penalty in addition to any other enforcement action. While the decision to impose a penalty is discretionary, once a penalty is imposed, it must be either twice the amount of the evaded premium or one thousand dollars ($1,000.00) whichever is greater. The law states that the penalty must be paid within thirty days after it is served on the employer and that the payment of the penalty is also a precondition to the lifting of any previously served stop-work order.

Section 440.107(4), Florida Statutes, states that the Division may recover any unpaid penalties by bringing an action in the circuit court and allows the Division to seek costs and attorney fees, if it prevails.

Section 440.107(6), Florida Statutes, further gives the Division the authority to request assistance from local law enforcement to enforce stop-work orders or injunctions.

Section 440.103, Florida Statutes, requires employers to show proof of workers' compensation insurance as a condition to receiving a building permit. This section also requires that a certificate of coverage must show, on its face, whether such policy is a minimum premium policy.

According to section 440.105 (3)(a), Florida Statutes, it is a misdemeanor of the first degree for any employer to knowingly fail to update applications for coverage as required by section 440.381(1), Florida Statutes, and Department of Insurance rules, or to post notice of coverage pursuant to section 440.40, Florida Statutes.

Pursuant to section 440.105(4)(a)(1), Florida Statutes, it is a felony of the third degree for an employer to knowingly:
1. Present or cause to be presented any false, fraudulent, or misleading oral or written statement to any person as evidence of compliance with section 440.38, Florida Statutes.
...
3. Fail to secure payment of compensation if required to do so by Chapter 440.
...
5. Make any false, fraudulent, or misleading oral or written statement, or to knowingly omit or conceal material information, required by section 440.185 or section 440.381, for the purpose of obtaining workers' compensation coverage or for the purpose of avoiding, delaying, or diminishing the amount of payment of any workers' compensation premiums.
6. Misrepresent or conceal payroll, classification of workers, or information regarding an employer's loss history which would be material to the computation and application of an experience rating modification factor for the purpose of avoiding or diminishing the amount of payment of any workers' compensation premiums.
7. Present or cause to be presented any false, fraudulent, or misleading oral or written statement to any person as evidence of compliance with section 440.38, Florida Statutes.

Section 440.381, Florida Statutes, requires:

(1)Applications by an employer to a carrier for coverage required by section 440.38 be made on a form prescribed by the Department of Insurance. The Department of Insurance shall adopt rules for applications for coverage required by section 440.38...the rules must include a provision that a carrier or self-insurance fund may require that an employer update an application monthly to reflect any change in the required application information.
. . .
(3) The Department of Insurance and the Department of Labor and Employment Security shall establish by rule minimum requirements for audits of payroll and classifications in order to ensure that the appropriate premium is charged for workers' compensation coverage. ... Payroll verification audit rules must include, but need not be limited to, the use of state and federal reports of employee income, payroll and other accounting records, certificates of insurance maintained by subcontractors and duties of employees.

(4) Each employer shall submit a copy of the quarterly earning report required by Chapter 443 at the end of each quarter to the carrier and submit self-audits supported by the quarterly earnings reports required by Chapter 443 and the rules of the Division of Unemployment Compensation.

(5) Employers shall make available all records necessary for the payroll verification audit and permit the auditor to make a physical inspection of the employer's operation.

Section 440.52(4), Florida Statutes, states that an imposition of a fine not to exceed $1,000 per audit may be imposed if the insurance carrier fails to act on said audits by correcting errors in employee classification or accepted applications for coverage where it knew employee classifications were incorrect. Such fines shall be levied by the Department of Insurance and deposited into the Insurance Commissioner's Regulatory Trust Fund.

IV. FINDINGS
A. COMPLIANCE

We have learned that businesses engage in a variety of interesting and creative methods to carry out fraudulent schemes.
1. How Businesses Evade Compliance
Companies evade workers' compensation insurance in one (or more) of several ways:
1. Failing to buy any insurance;
2. Purchasing inadequate insurance by
a. Under-reporting payroll
b. Misclassifying employees
c. Misrepresenting experience modification
3. Fraudulently claiming exempt status.

The simplest way for an employer to cheat the system is to not purchase any insurance at all and hope to avoid detection by DOL. As we will demonstrate later, the penalty for being caught without insurance is almost always far less than the cost of insurance itself. According to figures provided by the Division's Compliance Bureau, during fiscal year 1995-1996, the Division contacted 22,758 employers of which 2,995 (13.1%) were operating without any workers' compensation insurance. The following year the Division contacted 26,185 employers and found that 3,565 (13.6%) were operating without any insurance.

Some businesses opt to buy insurance especially if proof is required for securing permits. However, the annual premiums are minimized by misrepresenting the true payroll, fraudulently misclassifying employees, or by fraudulently changing their experience modification rating. Payroll can be hidden by "under the table" payments or by making payments from separate bank accounts which are not reported to the auditor.

Premiums can be lowered by misclassifying employees into lower rate categories. We have heard about roofers, whose employers should be paying approximately $80 per $100 of payroll for the cost of insurance, classified as clerical employees with a minimal rate of 89 per $100, representing an enormous cost savings for unscrupulous employers.

Employers also seek to avoid a high experience modification rating by changing the business name, or not disclosing the true owner's identity on the insurance application, which conceals their true claims experience.

Finally, through the abuse of the exemption process, an employer can have some or all of their employees fraudulently claim corporate officer exemption or independent contractor status, which eliminates the need to obtain workers' compensation coverage.

These misrepresentations should be detected in the insurance company audits, however we have heard that businesses will avoid the audit process by refusing entry to their business and/or refusing to provide the necessary documentation to auditors. In cases where documents are provided, they may be fraudulent, insufficient, or incomplete. Unfortunately, insurance companies contribute to the problem by allowing businesses to continue operating with less than the statutorily required documents. If an insurance company cancels a business' policy for failing to comply with the audits, the employer simply finds coverage with another insurance company. Since insurance companies do not share information about their current or prior policy holders, a business is free to do this multiple times.

2. Impact of the Problem
The problem of non-compliance is not simply an issue of insurance company profits. Workers' compensation insurance is a heavily regulated industry in Florida and the diversion of premiums from the system is simply made up by higher rates. The burden falls not so much on the insurer, but on the legitimate business that is paying its fair share. Unscrupulous employers who either do not buy any insurance whatsoever or buy inadequate coverage by engaging in premium fraud secure a tremendous economic advantage over their competitors. This advantage manifests itself in one (or more) of three ways. First, if a business sells products, it will be able to undersell its competitors. Second, if it bids on contracts, it will be able to underbid its competitors. Finally, the business can afford to pay higher salaries and thereby lure away competitors' more experienced employees, albeit without offering compensation coverage. Eventually, legitimate businesses will face a difficult and depressing choice. They will either be driven out of business or join the ranks of the unscrupulous and stop paying all or part of the workers' compensation insurance in order to compete. As more and more businesses stop paying insurance, the rates eventually will be driven up even further for those remaining legitimate businesses, thereby increasing the pressure on them to also stop buying insurance so that they may survive. This then becomes a vicious cycle which eventually will undermine the entire workers' compensation system and threaten its collapse.

Taxpayers are also victimized by these cheating businesses. Injured workers are ultimately treated somewhere and if there is no insurance coverage that usually means a trip to a publicly supported medical facility. If the worker can't pay, taxpayers will foot the bill.

The lack of compliance appears to us to be much more significant in construction and other high risk employment. We believe non-compliance is caused by high rates coupled with a lack of sufficient enforcement efforts, particularly by the Department of Labor.

3. Scope of the Problem
Our investigation has found that a large number of employers make no attempt to buy any insurance at all. DOL's own figures show that more than 13% of the employers they contact are without insurance. We believe this figure, while high, understates the magnitude of the problem for three reasons.

First, this figure includes all employers regardless of job category. It lumps together greeting card shop employees and clerical workers with carpenters and roofers. We have heard evidence that the non-compliance is much greater in the high-risk injury categories.

Second, the rate of non-compliance does not capture the number of businesses committing premium fraud since DOL either does not or cannot check for those violations. Even if DOL is aware that a business is only paying a fraction of what it should be paying by under-reporting or misclassifying its payroll, DOL counts that business as being in compliance with Chapter 440. Businesses believed to be committing this type of fraud are simply referred to DOI with no further enforcement action by DOL.

Finally, businesses that falsely represent their employees as "independent contractors" are also counted as being in compliance by DOL. If all of these businesses were properly counted as being non-compliant, DOL's reported non-compliance rate would no doubt sky-rocket. Not only does DOL's definition of compliance defy logic, we believe it presents a false picture of compliance in Florida, and flies in the face of legislative intent.

While we do not have exact figures on the percentage of employers underpaying premiums, in the limited time available to us we have returned four indictments charging nine individuals and one corporation with over thirty felony counts including Racketeering, Workers' Compensation Insurance Fraud, and Grand Theft. These cases concerned premium fraud by under-reporting payroll, misclassifying employees, and changing business names to achieve a lower modification rate. These charges concern the theft of over $3.7 million in insurance premiums. In addition, the Office of Statewide Prosecution has filed charges in two additional cases charging 4 more individuals with another $3.5 million in thefts. The fact that just a handful of cases in a short period of time has exposed theft of over $7 million from the system underscores the seriousness of the problem.

B. COMPLIANCE ENFORCEMENT
There are three key players that have a hand in the enforcement of Chapter 440. The Department of Insurance, Division of Insurance Fraud; The Department of Labor, Division of Workers' Compensation, Compliance Bureau; and private insurers.

The primary enforcement role of DOL, through its Compliance Bureau, is to inspect businesses and determine whether they are in compliance with Chapter 440. Section 440.107, Florida Statutes, grants a variety of powers to the Division in support of this function.

The DOI through the Division of Insurance Fraud, has authority to investigate employers engaged in premium fraud. Cases where premium fraud is found are referred to the Office of Statewide Prosecution or the local state attorney.

Private carriers enforce compliance through periodic audits conducted by the insurer. Refusal to allow audits, or audits which show fraudulent conduct, result in investigations by the insurance company's Special Investigation Unit (SIU). The SIU will then turn over its findings to DOI for investigation and possible criminal prosecution.

1. Department of Labor
A review of DOL's enforcement policies, practices and statistics leaves us with the distinct impression of an agency more concerned with the political ramifications of enforcement rather than achieving compliance through enforcement action. They respond to the backlash from violators who "get caught" out of compliance, while ignoring the concerns of honest business people. By word and action, DOL has demonstrated that its primary motivation is to avoid becoming "a burden" on businesses in Florida, or discouraging businesses from operating in the State. By definition, the businesses DOL is concerned about are the unscrupulous businesses that have deliberately refused to cover their employees with workers' compensation insurance, thereby stripping millions upon millions of dollars from the system and gaining an unfair economic advantage over the honest business that is paying into the system. We heard from one business owner who prefers that DOL not conduct any enforcement "sweeps" in his area. He believes that rather than discouraging violators, it actually encourages more businesses to stop complying with the statute, as enforcement is so lax and the penalties meted out so weak. While fostering a friendly business environment and encouraging economic growth are laudable goals, the sign on the door says, "Workers' Compensation Compliance Bureau" and compliance, not coddling, is what the public expects.

This philosophy of leniency is sought to be justified by alluding to the Governor's Executive Order 95-256. That order, issued in 1995, was designed to reduce government regulation of small business in Florida. By its express terms, the report "does not authorize or imply compromise of the protection provided by law for public safety, human health, the environment or any other protection afforded by the Legislature to the citizens and State of Florida". The order therefore does not apply to workers' compensation compliance, and DOL admits this. Nonetheless, the Division has adopted what it considers to be "the spirit of the order". The Division director also believes that most violators are simply ignorant of the requirements of the workers' compensation law. We have not heard any credible testimony to support this belief, but even if true, it certainly cannot justify leniency applied to repeat offenders who, after the initial enforcement efforts, should have been sufficiently educated. This philosophy of leniency appears to be pervasive within management of the agency and has apparently caused the Division to virtually ignore the entire statutory enforcement scheme laid out in section 440.107, Florida Statutes.

In fiscal year 1996-97, 3,565 businesses were found to be in violation of Chapter 440. That is, they did not have any workers' compensation insurance. Of that number, 703 were not penalized at all, primarily because of a Division policy of not imposing fines if a violator rushes to buy insurance before a penalty order can be written and served. Section 440.107(3), Florida Statutes, gives the Division discretion in whether or not to impose a fine, but if a fine is imposed, it must be $1,000 or twice the annual evaded premium, whichever is greater. Despite this dictate, we have found that when a penalty is issued, it is invariably $1,000 for first time offenders, no matter how large the payroll, how egregious the violation, or the amount of premium dollars stolen. Of the 2,862 penalties issued in 1996-1997, only 12 were for more than $1,000, of which 11 were repeat offenders, and the other was a business that continued to operate without coverage after being given 10 days to come into compliance. We know of no authority for the Division's decision to routinely impose $1,000 fines. In fact, DOL's own Office of General Counsel has advised the Division that section 440.107, Florida Statutes, does not give the Compliance Bureau authority to impose the lesser fine, as has been the practice.

DOL cites to their lack of ability to determine the appropriate amount of the
penalty. Prior to the 1993 revision, the Division of Workers' Compensation Compliance Bureau had authority to enter and inspect businesses and their records to monitor compliance with Chapter 440. That authority was eliminated as of January 1, 1994. This lack of authority does in fact hamper the Division's ability to determine whether the proof of insurance displayed by the employer actually covers non-exempt employees. Furthermore, it is difficult, though not impossible, to determine the amount of the statutorily mandated penalty without access to payroll records. The Workers' Compensation Oversight Board recommended in it's July, 1997, report that the Legislature amend section 440.107, Florida Statutes, and return these inspection powers, as well as add subpoena powers to the Division. The Compliance Bureau agreed with that recommendation and asked the Division to include that request in its 1998 legislative proposals. As of January 21, 1998, the Department intends to ask the Legislature for clarification of their subpoena power.

At the time the penalty is imposed, the violator is told by the Division that he or she has 10 days to come into compliance or further action will be taken. Section 440.105(4), Florida Statutes, makes it a felony of the third degree to operate without workers' compensation insurance. We know of no statutory authority for the Division to grant a 10 day "window" or "grace period" to come into compliance.

Section 440.107(3)(b), Florida Statutes, requires the fine be paid within thirty days. However, the Division has instituted a policy which allows violators who cannot pay the penalty within thirty days to agree to an installment plan and pay over several months. According to counsel for DOL, partial payment within the thirty day period complies with this provision, however, we find no statutory authority for any installment plans.

Section 440.107 (1) , Florida Statutes, states that a failure to secure workers' compensation insurance is deemed an immediate serious danger to public health, safety or welfare, justifying an immediate stop-work order. The Division has limited the use of stop-work orders to second offenders or violators who refuse to come into compliance after their 10 day "grace period" is over. Consequently, the Division has served only 21 stop-work orders in 1995-1996 (7/10 of 1% of the violators) and 94 in 1996-1997 (2.6% of the violators). Even when the Division's own policy calls for a stop-work order, it doesn't always happen. For example, one business in Tampa was cited for lack of insurance in July of 1994 and fined $1,000. In July of 1996, it was again found to be without insurance and fined twice the evaded annual premium penalty. However, contrary to DOL's own policy, a stop-work order was not sought. The business was again cited for operating without insurance in February, May and August of 1997. Despite five violations (four within 14 months), a stop-work order was never applied for or issued. Furthermore, as late as September, 1997, none of the fines had been collected.

According to the DOL policy manual, when a stop-work order is sought it must be approved at the Bureau Chief level in Tallahassee. According to the Division, it takes an average of 5-7 days for the stop-work order to be issued, yet we found one example where it took 27 days for the order to be approved and 10 more days to be served. On another occasion, it took 15 days to serve a stop-work order on a business operating without insurance. That order was rescinded the next day because the violator had purchased $44,000 worth of insurance in the interim. That case resulted in the imposition of a $20,000 fine.

While a stop work order cannot be authorized below the Bureau Chief level, anyone including field investigators can immediately rescind the order. In some cases this has resulted in orders being rescinded prior to all fines and penalties being paid.

A non-compliant employer discovered by the Compliance Bureau can come into compliance by purchasing any workers' compensation insurance policy no matter how insufficient. Even if DOL investigators know for certain that the policy purchased is for fewer employees than an employer has on payroll, DOL will consider the employer to be technically in compliance with Chapter 440, and no further enforcement action will be taken. The rationale is that since the insurer will be obligated to compensate any injured worker regardless of payroll figures reported by the employer, then the employer has in essence provided for his employees, although admittedly by fraud. While DOL recognizes that this is blatant fraud, their position is that their only obligation is to report this fraud to DOI for further investigation. We strongly disagree with DOL's interpretation. We do not believe the Legislature ever intended that an employer who engages in premium fraud should ever be considered by any state agency to be in compliance with Chapter 440 in any way, shape or form.

Despite the evidence we have seen of fraudulent activities, between June, 1996 and July, 1997, DOL only referred 33 employers to DOI for investigation. DOL contends this number is inaccurate, as "informal" referrals are made which are not reduced to writing. We have no way of knowing how many "informal" referrals are made, as they are not written, logged, or tracked by DOL. Given the level of fraud we have discovered, we would have expected the number of referrals to be much higher.

2. Insurance Carriers
When it comes to fraud, insurance carriers can sometimes be their own worst enemies. This may be symptomatic of regulated industries that can generally rely on rate increases to cover their losses. We have heard that insurance companies typically count on employers' honesty on applications hoping to catch any omissions or discrepancies during the year-end audit. By that time however, the insurer may be out significant sums of money. Moreover, audits can be stymied by the employer refusing access to auditors or by omitting crucial records such as state and federal tax records mandated by law. If an insurer cancels the policy, this only allows the employer to move on to a new insurer where the process begins again. An employer can do this because insurance companies routinely do not share information with each other regarding customers who may be engaging in fraudulent practices.

Since carriers do not compete on price, because workers' compensation rates are regulated, an insurer that is overly rigid or demanding concerning applications and audits is sure to lose business both legitimate and illegitimate, to less restrictive companies. Unless specifically mandated to by law and enforced by DOI, insurance companies will be reluctant to aggressively root out premium fraud at the front end.

As we stated earlier, employers can lower their experience modifier, and in turn their premiums by instituting special safety and drug-free programs at work. Too often though, these programs exist only on paper. While this is a fraud perpetrated on the insurance companies, we have learned that insurance companies do a poor job of auditing these programs in the field to see if they exist. Insurance companies will often rely strictly on employers' representations. While the percentage decrease in rates may be small, it can quickly add up to thousands of dollars in each business.

Insurance companies are also authorized to sell and do sell what are called minimum premium policies. These policies are very inexpensive but are only for businesses that report no employees on payroll at the time of purchase. These policies are supposed to be clearly labeled as a minimum premium policy pursuant to section 440.103, Florida Statutes. We have heard that this provision is often ignored. These policies look like any other policy and unscrupulous businesses will often use these policies to convince DOL inspectors that the business is in compliance.

3. Department of Insurance
Section 440.381(3), Florida Statutes, requires insurance carrier auditors to examine at a minimum state and federal reports of employee income, payroll and other accounting records, certificates of insurance maintained by subcontractors and duties of employees. Additionally, section 440.381(4), Florida Statutes, requires employers to submit to the carrier a copy of the quarterly earning report filed with the Division of Unemployment Compensation pursuant to Chapter 443. While we have not been able to exhaustively review the thousands of insurance company audits performed annually, the evidence we have heard is that the requirements of sections 440.381(3) and (4) do not appear to be strictly adhered to. For example, we have found that employers will often report much higher payroll figures to the Department of Labor, Division of Unemployment Compensation than to their insurance carrier. As was previously mentioned, insurance companies may be reluctant to be too demanding in its audits for fear of losing legitimate business. Though the audit procedures are mandatory it is unclear what authority DOI has to enforce these procedures. Perhaps due to this ambiguity, we know of no cases where a carrier has been penalized for failure to follow the audit rules laid out in sections 440.381(3) and (4), Florida Statutes.

We find that there are a variety of workers' compensation insurance application forms being used by the industry and approved by DOI. Some are better than others in capturing information useful in the prevention and detection of premium fraud. Insurance carriers and fraud investigators would both benefit from a more detailed application. Information such as social security numbers, former business names and predecessor companies, former and current owners, contractor licensing numbers, tax identification numbers and all names under which the corporation operates ("d/b/a") are examples of information not required on all forms. Despite the importance of the initial application in avoiding fraud in the first instance, it appears that forms are generally promulgated by the carriers and subsequently approved by DOI. This approval process however does not appear to involve anyone from the Division of Insurance Fraud.

C. INDEPENDENT CONTRACTOR EXEMPTION

An independent contractor is not classified as an employee requiring workers' compensation coverage if the contractor meets all of the requirements of section 440.02 (13) (d), Florida Statutes. Although it may appear that the initial purpose of this exemption was to help the sole business person from incurring the high costs of workers' compensation insurance, it has instead become a loophole for dishonest workers and employers. According to DOL, several hundred thousand independent contractor certificates have been issued, and thousands of new applications are received monthly. Because of the way the statute is written, these applications receive nothing more than cursory review. In fact, we have heard testimony about one individual's dog and another's seven year old son receiving certificates of exemption as independent contractors. All that is required to receive an exemption is that an individual answer nine questions on a form, have it notarized, and send it to DOL in Tallahassee. Once received, the statute provides for no further investigation or background check to attest to the accuracy of the document. If it did, DOL would not have nearly the resources necessary to handle such a volume of applications.

Once issued, there is no provision in the statute for the certificate to be revoked, no matter what abuses may occur. If an investigator were to go to a construction site and find an "employee" working under the auspices of an independent contractor exemption, there is no authority to fine the worker, nor can his or her license be suspended or revoked. Once issued, the certificate lasts for the life of the worker. Section 440.10(f), Florida Statutes, does allow the Division to fine an employer for each employee it classifies as an independent contractor but who is found by the Division not to meet the independent contractor criteria. However, the very next section, 440.10(g), states that an individual is conclusively presumed to be an independent contractor if the employee presents the employer with an affidavit stating that he or she meets the criteria of independent contractor and obtains a valid certificate of exemption issued by the Division, making section 440.10(f) virtually irrelevant. An individual's status as an independent contractor is, at the very least, fluid. A worker can act as an independent contractor on one job site one day, and work for a business as an employee the next day. The certificate is essentially meaningless; it's what a worker is doing on a job site on a given day that determines his or her exemption. Unfortunately, when performing field investigations DOL investigators must accept the certificate at face value.

We have found that the abuse of the exemptions is taking its toll on the workers' compensation system. Employers can hire independent contractors at lower rates than an employee requiring insurance, causing more and more workers to obtain exemptions in order to get hired.

Another issue to consider is the effect of this exemption on the general public. Consumers, especially homeowners, are well advised to ensure that workers on their property are properly insured so as to avoid claims and costly litigation. When faced with a valid exemption certificate, most homeowners are likely to believe they are adequately protected since the worker seems to be acting within the law. It appears, however, that nothing prevents the "independent contractor" from pursuing claims against the homeowner's insurance or the homeowner personally for injuries suffered while working on the property. This situation is precisely what the workers' compensation law was created to avoid, yet hundreds of thousands of workers appear to be outside the law and the number grows daily.

V. CONCLUSION

The problem of employer non-compliance with the workers' compensation law is serious. By defining thousands of employers engaged in blatant and obvious premium fraud to be in compliance with Chapter 440, DOL has inflated the compliance rate to seemingly acceptable levels. With this "head in the sand" approach, it is no wonder that DOL is oblivious to the warning signs of the impending crisis in workers' compensation that is so painfully obvious to every legitimate employer desperately trying to make an honest living in the State of Florida. By giving break after break to those businesses without any workers' compensation coverage, the Department of Labor is, figuratively speaking, breaking the backs of law abiding business people. The law must be properly interpreted and enforced.

Improvements in the workers' compensation system will require the joint effort of the primary players involved, namely, DOL, DOI, and private insurers. We have identified several places where problems are occurring and at the end of this report we offer some suggestions for improvement for all three entities. However it is important to note that it appears to us that the primary problem is a lack of enforcement action by DOL. The recommendations directed to DOI and private insurance companies will have little meaning or effect if DOL does not aggressively enforce the current workers' compensation laws.

The Florida Legislature took strong action in 1994 to address the problem of non-compliance with the workers' compensation laws. DOL was given almost every tool necessary to fulfill the mandate of the law to bring employers into compliance with the law. Unfortunately it is impossible to fairly judge the statutory scheme because it has been misapplied or virtually ignored by DOL. DOL responds that it does not view its role as punishing businesses or collecting money. Instead, DOL is concerned that strictly following the law would be unduly harsh on small business operators and would create a negative business environment in Florida. The Department fears that strict enforcement would lead to a public outcry and be politically unpopular. However, it appears to us that this is a matter that should (and has) been decided by our elected representatives, not appointed bureaucrats.

DOL is of the opinion that the problem of non-compliance stems primarily from ignorance of the law by the violators, a premise with which we strongly disagree. We do not want to minimize the importance of educating employers about the workers' compensation laws or of DOL's efforts in this regard. We do feel that far too much reliance has been placed on education as opposed to enforcement. Whenever payments of large sums of money can be illegally avoided with virtually no punishment, common sense (further substantiated by evidence we have seen) indicates that many will "give in" to temptation. While many statutory safeguards are in place to deter such criminal activity, the lack of enforcement of these penalties create unlimited avenues for dishonest employers to travel. We have no quarrel with DOL's goal of fostering strong business growth, and in fact we believe that controlling fraud, through strict penalties and fines, can only help secure the lawful development of the business industry in Florida.

VI. RECOMMENDATIONS

1. To the Legislature
We recommend that the Legislature direct DOL to determine that employers cannot be in compliance with Chapter 440, Florida Statutes, by purchasing inadequate insurance coverage.

We recommend that the Division be granted authority to enter and inspect business premises and job sites and to examine all necessary business records to ensure compliance with Chapter 440 and to determine the appropriate amount of fine to be imposed.

We recommend that failure to allow access to Division investigators for the purpose of such inspection be made a first degree misdemeanor.

We recommend that statutory authority be given to DOL to suspend, rescind or revoke independent contractor exemptions that have been used in a fraudulent manner.

We recommend that section 440.52(4), Florida Statutes, be amended to give DOI the authority to fine insurance companies which fail to follow audit rules, either directly or through failure of third party auditors.

We recommend insurance companies be immune from liability for exchanging information in their possession regarding present and past insureds which they in good faith believe to be true and accurate.

Our review indicates that there is substantial abuse as it relates to exemptions. We recommend that there be no independent contractor exemptions in construction or other high-risk industries.

If the compliance problem cannot be resolved by the Department of Labor, we recommend the Legislature consider privatization of some of DOL's functions, including, compliance investigations, collection of fines, and analysis of compliance data.


2. To the Department of Labor

We strongly recommend that DOL follow the mandate of section 440.107, Florida Statutes.

We recommend that DOL stop considering employers to be in compliance with the law when they purchase clearly insufficient policies for their employees.

We recommend that where DOL determines that a fine is appropriate, that it shall impose the statutorily mandated penalty of twice the evaded annual premium or $1,000.00, whichever is greater.

We recommend that DOL stop the practice of granting employers 10 days to come into compliance with Chapter 440.

We recommend that DOL not allow employers to pay fines on installment.

We recommend that DOL make greater use of stop-work orders to enforce immediate compliance especially in construction and other high-risk occupations.

We recommend that the DOL create procedures to allow stop-work orders to be issued within one business day, at least in construction and other high risk occupations.

We recommend that DOL institute a policy to prevent a stop-work order from being rescinded by other than those authorized to approve such an order.

We recommend that where DOL issues a stop-work order, that it not be lifted until adequate workers' compensation coverage is obtained and fines are paid in full.

We recommend that upon issuance of a stop-work order, DOL notify all known affected parties, including owners, general contractors and sub-contractors, of the issuance of the order, so that consumers and businesses can make informed decisions.

We recommend that DOL institute a policy for mandatory follow-up of employers found out of compliance.

We recommend that DOL track enforcement emphasis to determine how much of their energies are devoted to construction and other high-risk occupations.

We recommend that DOL focus more of their compliance efforts on construction and other high-risk occupations.

We recommend that the Division formally report to DOI, in writing, all information in their possession showing an employer is engaged in premium fraud, so that appropriate criminal enforcement action can be taken.

3. To the Department Of Insurance

We recommend that DOI enforce compliance with section 440.103, Florida Statutes, requiring a minimum premium policy be clearly identified as such on its face.

We recommend that DOI formulate one standard application form to be used for all workers' compensation policies sold in the State.

We recommend that DOI require that new applications for insurance include social security numbers, former business names and predecessor companies, former and current owners, contractor licensing numbers, tax identification numbers and all names under which the corporation operates.

We recommend that DOI formally report to DOL, in writing, all information in their possession showing a business is engaged in premium fraud, so that appropriate civil enforcement action can be taken.

4. To the Insurance Carriers

We recommend that insurance carriers require that new applications for insurance include all owners' names and social security numbers, as well as the previous year's audit of the business.

We recommend insurance carriers treat "d/b/a" changes on insurance applications as new businesses requiring past history and owner's name and identification.

We recommend that insurance companies request information from a new applicant's prior insurance carrier including, but not limited to audits and payment history.

We recommend that improvement in the methods for verification of employer policies (relating to drug-free workplace and safety programs) be implemented prior to issuing a premium discount.


THIS REPORT IS RESPECTFULLY SUBMITTED to the Honorable N. Sanders Sauls, residing Judge of the Fourteenth Statewide Grand Jury, this ____ day of _____________, 1998.
___________________________________
EDWARD D'ARCY ADAMS, III
Foreperson
Fourteenth Statewide Grand Jury of Florida

I, MELANIE ANN HINES, Statewide Prosecutor and Legal Adviser, Fourteenth Statewide Grand Jury of Florida, hereby certify that I, as authorized and required by law, have advised the Grand Jury which returned this Report, this ______ day of ___________________, 1998.

________________________________
MELANIE ANN HINES
Statewide Prosecutor
Legal Adviser
Fourteenth Statewide Grand Jury of Florida


I, OSCAR GELPI, Chief Assistant Statewide Prosecutor and Assistant Legal Adviser, Fourteenth Statewide Grand Jury of Florida, hereby certify that I, as authorized and required by law, have advised the Grand Jury which returned this Report, this _____ day of ___________, 1998.

__________________________________
OSCAR GELPI
Chief Assistant Statewide Prosecutor
Assistant Legal Adviser
Fourteenth Statewide Grand Jury of Florida

I, SUZANNE L. ROSSOMONDO, Deputy Chief Assistant Statewide Prosecutor and Assistant Legal Adviser, Fourteenth Statewide Grand Jury of Florida, hereby certify that I, as authorized and required by law, have advised the Grand Jury which returned this Report, this _____ day of ________________, 1998.

__________________________________
SUZANNE L. ROSSOMONDO
Deputy Chief Assistant Statewide Prosecutor
Assistant Legal Adviser
Fourteenth Statewide Grand Jury of Florida



THE FOREGOING Report of the Fourteenth Statewide Grand Jury was returned before me this ______ day of ____________________, 1998, and is hereby sealed until further order of this Court, upon proper motion of the Statewide Prosecutor.

___________________________________
N. SANDERS SAULS
Presiding Judge
Fourteenth Statewide Grand Jury of Florida