Workers Compensation Insurance Companies Cannot Deny Benefits to Injured Workers for Employer Fraud in Florida.

A recurring problem in Florida workers compensation cases is that some employers will misstate payroll, the number of employees or the type of work their employees are performing to lower their workers compensation premiums.  Some employers will pay their employees claiming they are subcontractors or independent contractors. Employer’s will sometimes issue IRS 1099 forms to the employee rather than withholding taxes, social security and paying workers compensation premiums.

The problem is common in the construction industry where employers pay high premiums.  For instance, National Council on Compensation (NCCI) class code # 5703,  Carpentry Operations on Commercial Structures, is charged a premium of $22.01 per one hundred dollars of payroll paid to the employee.  If a 5703 employee is paid $500.00 a week the employer must pay $110.05 as the workers compensation insurance premium.  Add to that the 7.5 percent contribution, or $37.50 per week, which the employer pays to social security and it’s easy to see the temptation.

In Bend v. Shamrock Services and Zenith Insurance Company, 36 FLW D440 ( Fla. 1st DCA, February 28, 2011) the First District Court of Appeal (1st DCA) held that the judge of compensation claims (JCC) does not have the authority to void the insurance contract between the employer and the insurance company to defeat coverage to an injured worker. Click here to read the decision:, retrieved 3/21/11.

In the beginning, Shamrock obtained workers compensation insurance coverage from the Zenith Insurance Company for a lawn care business.   Thereafter, Shamrock began providing painting services in the construction industry.  Shamrock had each of the painters sign independent contractor agreements requiring that each independent contractor obtain a valid workers compensation exemption from coverage.  Bend was being paid by the employer with an IRS 1099 form.   Bend testified that he never performed lawn care work for Shamrock and considered himself an independent contractor.  When it was determined that Bend had not obtained a valid exemption from coverage as an independent contractor, by operation of law, he became the statutory employee of Shamrock and an insured employee under the Zenith’s workers compensation insurance policy.

In a strongly worded decision the  JCC lambasted the employer for engaging in fraud when obtaining and maintaining the workers compensation coverage. The JCC held that the workers compensation insurance contract was void from the beginning based on employer fraud and as a result the employee was denied workers compensation insurance benefits. Click here to read the decision: (retrieved 3/21/11)  (It should be noted that the employer did not appear at the hearing before the JCC or the 1st DCA and was not represented by counsel)

In a lengthy decision the First District Court of Appeal overturned the JCC.  First, the court noted that the JCC is a judge with limited powers as conferred by statute. The JCC has no authority to declare a contract void. The 1st DCA  explained that workers compensation is a self-executing system which is designed to provide benefits to the injured worker. This in turn protects the public from having the costs of workplace injuries placed on the shoulders of the taxpayer.  Insurance companies have sweeping authority during the application process to require the employer to provide all information necessary to allow the carrier to accurately underwrite  the employer’s policy.  After issuance of the policy the carrier has an arsenal of remedies to audit and charge back premiums to employers who have not properly reported their employees,  payrolls and type of work being performed.  For instance,  the employer can be forced to pay a civil penalty in the amount of 10 times the amount of premiums the employer avoided by not properly reporting employees, payroll or type of work performed.

The 1st DCA took great pains to point out how the insurance carrier failed to exercise diligence in issuing and monitoring the policy including that Zenith never required the employer to update his application, submit quarterly earnings reports or to conduct biennial audits of it’s insured.  Audits include the employer presenting independent contractor agreements, accounting records and cash disbursement journals of the employer.

The end result of Bend v. Shamrock is that the legislature will not allow insurance companies to issue policies and collect premiums without exercising due diligence during the issuance and administration of the policy.  In cases where the employer may have engaged in undetected fraud the carrier must still pay benefits to the injured worker.  The carrier’s remedy is against the employer. The employee cannot be made to bear the brunt of the employer’s misconduct through denial of workers compensation benefits.

It should be noted that the 1st DCA is the only appellate court in Florida that hears workers compensation appeals.  The 1st DCA’s mandates are usually the final word on an issue except for very limited circumstances allowing for appeal to the Florida Supreme Court.