New York City’s construction industry in 2011 alone cost the city and state approximately $500 million because employers misclassified the type of work their employees did for the purpose of paying workers’ compensation premiums.

That was the essence of a report by a New York Supreme Court grand jury that examined applications for, and audits of, workers’ compensation policies.

The fraud estimated was on a June 2013 report of the Fiscal Policy Institute and other estimates included in the grand jury report.

The report was released this afternoon by New York County prosecutor Cyrus Vance, who used it to call for major reforms of the state’s workers’ comp system. Vance says he timed release of the report to the 103rd anniversary of the Triangle Shirtwaist Factory Fire.

He says New York’s workers comp law is “closely associated” with the fire, which occurred March 25, 1911. He also says the event “was the largest workplace tragedy of the time,” killing 146 people when a fire broke out in a crowded Greenwich Village garment factory.

Among the changes Vance says the grand jury suggested: a requirement of “vigorous” audits by all insurance carriers, ensuring that employers pay the correct premium; and issuance of a workers’ comp insurance card for the employee to present when seeking medical services or prescription drugs in connection with a job-related injury or illness.

“The widespread premium fraud detailed by this Grand Jury Report is deeply troubling,” Vance says. He also says his office’s Tax Fraud and Money Laundering Unit will continue to pursue those who cheat the system, “but that the best protection for New York’s workers is a system that is itself protected from fraud and abuse.”

The report examined the vulnerability of New York’s workers’ compensation insurance system to fraud and misuse. It found that the largest component of the loss was unpaid workers’ compensation premiums, with personal income tax, withholding, unemployment insurance, and various other business taxes accounting for the remainder.

Vance says the system is vulnerable because it requires employer self-reporting, and is therefore “easily abused by unscrupulous employers who misclassify employees.” He says the audit by the grand jury determined, “Employers can easily lie about what work a particular employee performs, for example, reporting a roofer as a clerical worker, and thus paying a significantly lower premium.”

More egregious is fraud where an employer misclassifies a worker, who is required to be insured under the system, as an independent contractor rather than an employee, Vance says. 

He states that since 2013, his Money Laundering and Tax Crimes Unit recovered approximately $4.8 million from criminal defendants who pleaded guilty to defrauding New York State by violating the Workers’ Compensation Law. “Overall, premium fraud generates an unfair business environment in which honest business owners cannot compete with rogue employers and are either forced out of the market or dissuaded from entering it in the first place,” Vance says.

Others assisting in preparing the report were New York City Mayor’s Office of Data Analytics; New York State Insurance Fund; New York State Department of Labor; and the New York City and State Departments of Taxation and Finance.