If a business has employees, it must take out a workers’ compensation insurance policy. In New York State, if the employees are also officers of the company, two officers may elect to be excluded from the policy.

Workers’ compensation policy can be obtained directly from the New York State Insurance Fund, or with the help of an insurance agent, through private insurers. Workers’ compensation insurance covers wage replacement and medical benefits for employees who might be injured on the job in exchange for the employee giving up their right to sue the employer. The cost of this insurance depends on the classification code of a particular occupation, for example, the cost of insurance for an office worker is much less than that of a construction worker. The more dangerous the occupation, the more expensive the insurance, as workplace accidents can potentially be more serious. Depending on the type of business and covered occupations, workers’ compensation insurance can be very expensive. For this reason, many companies try to circumvent the system and this can lead to their closure.

The main types of fraud committed by companies to keep down the cost of workers’ compensation are the following:

1. Payroll sub-declaration. An employer reports that workers are being paid less than they are actually paid to lower their premiums.

2. Inflation experience. An employer claims that workers are more experienced than they really are to make them appear less risky and therefore less expensive to cover.

3. Escape. An employer does not obtain workers’ compensation for its employees when required by law. He often misleads workers into thinking they are covered when they are not.

4. Misclassification of employees in a lower classification code.

5. Pay workers unofficially or as independent contractors

The penalties for not having workers’ compensation insurance are extensive.

Failure to secure coverage for five or fewer employees within a 12-month period is a misdemeanor punishable by a fine of not less than $1,000 and not more than $5,000. More than five employees within a 12-month period is a class E felony punishable by a fine of not less than $5,000 and not more than $50,000 and in addition to any other penalties provided by law. In addition, the penalties increase by $1,000 per day for each additional day without coverage.

Annually, most workers’ compensation policyholders undergo a payroll audit, where auditors review not only the number of employees, but also their job functions. Additionally, subcontractors are listed and reviewed to ensure they have their own policy; if not, a company can be assessed an additional 15-20% of the amount you paid to that subcontractor.

Currently, the New York State Insurance Fund references payroll tax returns and compares business identification numbers to see if they have coverage. If not, a preliminary sanction letter is sent to the company. If this letter is not heeded, the penalties increase gradually.

This is another topic that should be discussed with an experienced accountant before starting or expanding your business. Failure to comply can carry severe penalties that can bankrupt a business.