Fraud with Labor-Related Services (or “How to get Broad-Sided by a Surprise”)

Fraud with Labor-Related Services (or “How to get Broad-Sided by a Surprise”)

©2016 Research Solutions, Inc. (all rights reserved)

Over the years, there is not a single home owner who has not had the need to have improvements done to their property. The same applies to owners of commercial buildings and rental properties.

Repairs, renovations, improvements, additions – all of them are services provided by a plethora of businesses and individuals that represent themselves as “skilled laborers”, “skilled craftsmen” and so-on.

However, the amount of “misrepresentation and fraud” is staggering in a multi-billion dollar industry that includes, but is not limited to construction and concrete, repairs and maintenance, to flooring, roofing and the like.

The following is just “one” EXAMPLE of one of the thousands upon thousands of problems that plague consumer homeowners and commercial building owners:

  1. Let us say the consumer or customer has a need – say a new roof.
  2. The consumer looks in their phone book or on-line for a roofer in their area.
  3. We will call the company “ZZZ, Inc.” (not to be associated with any “real” company that may or may not exist by the same name – this is just an example and nothing more).
  4. The consumer, in good faith, signed the quote that ZZZ, Inc. came up with, and ZZZ, Inc. starts the job the following week – maybe.
  5. I will not even address the delays, additional costs and so-on, because I could spend numerous pages on how many of the companies that provide such services can and will scam their clients once they are under contract. That is fact.
  6. During the job, one of ZZZ, Inc.’s “alleged” employees falls off the roof and fractures a leg, a couple of ribs has spin damage.
  7. You are definitely alarmed, but ZZZ, Inc.’s foreman (or President of the company for all that matters) tells you the employee will be ok and not to worry about anything. Then again, who would seriously question if the person really “was” an employee in the first place.
  8. Be honest, most never question that.
  9. The job is completed over the next couple of days and a replacement for the injured worker is on-site doing what he is supposed to do.
  10. The job is done, you make your final payment and all is good. Right?


It may be a month or two, but all at once, one or more of the following events takes place:

You receive a notice from your Department of Labor and Industry (each state has its own name for their workers compensation department) asking you your policy number that you have for your employees. Employees? You hired a company (so you think)!.

You receive medical bills that reflect several thousand dollars (yes, that is “cheap” by todays’ standards) asking you to remit, IN FULL;

You receive a letter from an attorney/legal firm making demand for payment for medical bills, lost wages and what looks like a 50% permanent disability claim, which the attorney wants to talk to you about;

A “lien” is placed against your residence for a major amount of money, let’s start with $25,000.00USD; or perhaps a Pre-Judgement Remedy (which many states have) places something worse than a lien for, say, $100,000.00USD based upon initial cursory evidence that a judge may find compelling enough to “grant” a Pre-judgement Remedy;

You contact ZZZ, Inc. and ask what the devil is going on. You are told there is nothing they can do because they did not have workmen’s compensation.

In many cases, where “good faith” was the circumstance when you hired ZZZ, Inc. to do your roof, your insurance company will fight the claim; however that is not always the case at all. The lien and/or Pre-judgement Remedy can effect credit, future mortgages and it is a bear to not only get it removed, but have the three credit bureaus remove it from their records as well (usually 30-90 days).

You find out that ZZZ, Inc. “is” liable for not carrying workmen’s compensation, but ZZZ, Inc. is a “shell corporation” with no assets making it almost judgement proof. In simple terms a waste of a time to sue.

Worse yet, the alleged employee, was, in fact, really a casual labor person (someone who literally could have been picked up off the street to work one or two days as “contract labor”).

States are cracking down on this business practice by service companies more than ever, since many companies like the idea of utilizing “contract labor” since they skirt the payroll taxes, and most important, the workmen’s compensation requirements.

In the roofing industry, the workmen’s compensation insurance rate can be as high as $0.81 on the dollar, or more. When you see roofing job quotes that are cheap, it is almost a guarantee they do NOT have workmen’s compensation on their workers.

That leaves YOU, the consumer or business owner, totally exposed.

Seriously exposed.

The nightmare continues to unfold. Most likely litigation “will be required”, and in many of the cases, companies like ZZZ, Inc. will just disappear and re-appear under a new name somewhere else. Even if you may prevail, it will still result in you spending thousands, if not tens of thousands of dollars to defend against.

This is just “one” example of thousands upon thousands of contract/contractor service frauds we face daily in every type of industry/service that can be provided.

What can we do “proactively” to use best reasonable efforts to prevent being scammed this way, or get dragged into such a mess? A better question that should follow this “first” question is how do you “mitigate” this mess “WHEN” it happens?

  1. When dealing with ANY service company, it is your right, which you SHOULD exercise, for them to provide proof of a valid and current workmen’s compensation policy. Period. No exceptions. No excuses. They provide it, or you point them to the door.
  2. Your contract that you make with the service or job provider should clearly state they are using company employees to do the job. If there is ANY mention that they use “sub-contractors” you will need to acquire current and active workmen’s compensation policies from each and every one of them. NO EXCEPTIONS. Again, it cannot be provided, point them to the door.
  3. The service or job provider should be able to provide you with a current and active liability policy which will indemnify you from any claims or losses resulting from an accident or injury that takes place on your property, in your building, etc. Typically, these policies take into account a $1,000,000.00USD cap per occurrence.
  4. Perform a little snooping (e.g. DUE DELIGENCE). Contact the Secretary of State (SOS) of your state and find out about the potential business and if they are on record. With most SOS websites, you can find out the information on-line.
  5. When they (the potential company you are planning to contact with) incorporated, if they are in good standing, etc. However, some businesses may not be listed since they are not a corporation or LLC – perhaps they are a sole proprietorship or partnership.

Again, the most important thing your MUST do is make sure they are registered with department of labor of your state, and they have an active and in-force workman’s compensation policy.

Sole proprietorships, partners in a partnership and officers/directors of corporations (as well as other organizational officers and principals) may get an “exemption” from workmen’s compensation from their state, but if THEY get injured, they have the potential of coming back on you. If it is a one-person operation, you must have proof they have some type of coverage that protects YOU against potential liabilities as a result from an injury and/or loss from the company person you contracted. This should cover medical and property damage.

Most companies you come across will “tell you” they have the coverage. It may be in their advertising, but in the end, you need “written” PROOF that they do indeed have the proper coverage AND that it is “current”. Do not forget to look at the expiration date of the policy(s) as well. It will usually cost you nothing contacting the department of labor (or department that is responsible for workman’s compensation) in your state and find out the facts right from the “horse’s mouth”.

If there is even a sliver of a doubt, I personally would recommend going elsewhere, BUT the company you are eyeing to do your proposed work/service can post a BOND that will protect you against almost any loss or damage (specifically medical and property damage). There are bonds specifically for jobs and services of all types AND if they cannot get one, there is a problem… point them to the door.

In summary, it is unfortunate that we have to go further than just checking references of a person/company we want to contract services/work to be performed, but let there be no illusion that there are numerous liabilities that you can ultimately be responsible for, and they are not cheap.

Dr. Mark D. Lurie, CTA, CFE, CHRE, CFE























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