Paying Worker’s Comp “Under-the-Table”

It is not uncommon for employers to pay workers “under-the-table.” Paying under-the-table typically means that the employer pays the worker in cash.  In doing so there is no record of the payment.  Thus, the employer avoids paying taxes and fees related to that worker including unemployment compensation insurance premiums.  Also referred to as paying the worker “off the books,” paying a worker under-the-table is a way of pretending that a worker is not really an employee.  Not only does the employer avoid paying payroll taxes and related fees for that worker, the worker does not pay taxes or receive benefits associated with being an employee.  Not paying unemployment compensation insurance premiums and other taxes and fees may indeed save the employer money in the short run.  However, doing so may ultimately cost the employer significantly more in the long run. Ways to Pay Under-the-Table While paying under-the-table often means paying a worker in cash, it can also mean misclassifying a worker as an independent contractor when he or she is really an employee.  Employers are not required to pay unemployment compensation insurance premiums, payroll taxes, benefits, or withhold taxes on behalf of independent contractors.  While misclassifying a worker can be a form of paying under the table, it certainly does not carry the element of deceit that paying an employee in cash does.  There are typically no records of payments to cash employees while independent contractors are often paid via check or electronic transfer, and in some cases both the Internal Revenue Service and the independent contractor receives an IRS Form 1099 evidencing the payments. Consequences of Failing to Pay Worker’s Compensation Insurance Premiums Worker’s compensation is an insurance system through which employees injured in the workplace receive benefits.  The benefits include the payment of medical expenses, lost wages, disability benefits, and death benefits.  Most states require employers with a minimum number of employees to carry worker’s compensation insurance.  For example, most South Carolina employers who have at least 4 employees must carry worker’s compensation insurance.  The cost of an employer’s insurance premiums is based on a number of factors including the total number of employees.  The fewer “employees” an employer declares, the lower the employer’s premiums.  Thus, if a worker is not an employee because he or she is an independent contractor or is a “phantom” worker because he or she is being paid in cash, the employer will pay a lower premium. While an employer may initially be able to get away with paying a worker under-the-table and avoiding paying workers compensation insurance premiums, this scheme may turn into a financial nightmare for the employer if the worker suffers an injury in the workplace.  For example, if at a construction site a worker falls and severely injures his or her back, when the worker seeks treatment questions of workers compensation insurance will inevitably arise.  As the employer struggles to respond to such questions the fact that the employer failed to secure worker’s compensation for the worker will be apparent. A South Carolina attorney points out that failing to have worker’s compensation insurance for an injured worker is a violation of state worker’s compensation terms and may be considered worker’s compensation fraud.  This leaves the employer vulnerable to severe financial repercussions.  If South Carolina determines that an injured worker is indeed an undeclared employee, the employer may be charged with fraud and subject to steep fines and possible criminal penalties.  Ultimately, in most cases it would have been less expensive to simply treat the worker as an employer and pay the associated insurance premiums. Additional Consequences for Paying Under-the-Table In addition to the financial issues related to worker’s compensation, paying an employee under-the-table may lead to additional negative financial repercussions.  When an employer does not report wages paid to a worker, the employer does not remit payroll taxes and other payroll related fees to the government.  This is a type of tax evasion.  If caught, the penalties can include revocation of a business license, fines, and even imprisonment. Do you think that in general the only instances in which employers pay off the books is where the employer is operating an illegal business, or where the employee may be in the country illegally?

Tagged as: employer law, employment law, Worker's Comp Under-the-Table, workers comp, workers compensation