Workers compensation insurance premiums are highly subject to premium fraud by the employer. This is because they are based, in part, upon data that employers can attempt to manipulate. The most common fraud allegations are:

• Understating payroll. Examples of understating payroll include paying employees in cash or otherwise “off the books;” failing to report as payroll bonuses, housing allowances, and other wage substitutes; construing employees as independent contractors and thus not reporting payments to them as “payroll,” and simply reporting less payroll than is actually paid. Since premium is a direct function of the amount of payroll, any method of understatement reduces the employer’s workers compensation cost.
• Misallocating or misreporting payroll among classifications. Employers might misallocate their allocation of employee payroll among classifications listed on their workers compensation policy (such as reporting cashiers as “clerical office” employees) and/or might report payroll under a classification not assigned by the insurer or the rating agency or bureau (such as the WCIRB or NCCI). Since each classification carries a different dollar rate, reporting payroll in a lower-rated classification reduces the employer’s workers compensation cost.