Workers Comp: Tale of the Phantom Subcontractors

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Misclassification in Massachusetts is a felony with sentences of up to five years. Earlier this month, a man 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.
ghosted figures representing phantom companies to defraud work comp

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!

Jon Coppelman
Senior Workers Compensation Consultant

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Renaissance Alliance is the premier alliance for independent property casualty agencies. Founded by agents for agents in 1999, we are a pioneer in agency groupings, offering far more than expanded markets and profit share. Distinct from agency aggregators, we provide state of the art technology solutions, a full-time staff of more than 90 industry experts and a proprietary agency growth acceleration process that delivers superlative results.

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