Just a reminder: Work comp fraud is a crime with scary consequences!
When thinking about subcontractors, we usually focus on a general contractor’s need to build a firewall between the GC operations and the subs: the latter must own a separate business in a separate trade, work for entities other than the GC, and be in control of any work performed for the GC. If the subs meet these strict requirements, the payroll portion of the sub billings will not be added to the GC’s comp premium.
In the spirit of Halloween, we examine the case of Marcello Pompa, owner of M & M Cleaners out of Malden MA. In order reduce his workers comp premiums over a period of six years, he subcontracted $2.8 million in payroll to three subcontractors, thus avoiding about $74,000 in comp premiums. The lower comp insurance costs enabled M & M to be the low bidder on numerous municipal projects.
But there was a problem: the three subcontractors did not exist. M & M’s employees were doing all the work.
Crime, Punishment & Ghosts
Misclassification in Massachusetts is a felony with sentences of up to five years. Earlier this month, Pompas pled guilty to defrauding his workers comp carrier and was sentenced to one year in the Middlesex House of Correction, with 6 months to serve. He is also required to make restitution to the insurer. Finally, he is barred from bidding on municipal projects for two years (thereby making restitution more difficult).
The Attorney General’s summary omits one interesting detail: why did the fraud continue for six years and just how was it discovered? It’s not easy to set up three shell – in honor of the holiday, let’s call them “ghost” – companies, with appropriate documentation: an auditor would look for subcontractor agreements along with certificates of insurance, listing a specific carrier for the workers compensation. In any event, the scheme was exposed.
For a time it was a trick, but ultimately, no treat!
Senior Workers Compensation Consultant
- A Transformation at Harvard: Not-So-Independent Contractors Become Employees
- The Fraud Files: Trick and Treat