Workers' comp premiums fall victim to recession.

State casts a cold eye on growing number of tax dodges

Tough economic times have driven Los Angeles' unemployment rate to around 8 percent, creating a boom for temporary employment agencies and independent contractors -- but also increasing the number of businesses not paying their workers' compensation insurance premiums.

Although it is illegal for employers to ignore the premiums, the outlays add a significant financial burden to payrolls. Adding in the employer's matching contribution to an employee's social security deduction and the premium paid for unemployment insurance, the actual cost for a $10-per-hour employee could be as high as $20 an hour.

Some employers in high-risk businesses, such as construction and hazardous waste removal, have tried dodging high workers' comp premiums by setting up independent contractor agreements with workers. Some of the arrangements are legal, others are not.

"For a developer to have an independent contractor agreement with an employee, the employee must have a contractor's license," said Anna King, claims manager for the Sherman Oaks-based Pacific Compensation Insurance Co.

Otherwise, the conventional premium payments must be made.

Workers' comp rates are set by the California State Insurance Commission. There are 450 categories of insurance with premiums ranging from 94 cents per $100 of salary for office and clerical workers to $50 per $100 of salary for workers who move houses.

State Compensation Insurance Fund spokesman George Vignolo said companies increasingly have established independent contractor relationships with some employees in recent years. And he said he's also seeing more companies using devious methods to cut employment costs.

"Some employers pay industrial insurance premiums on three or four employees in a low-risk category. But at the same time, they pay no premium on dozens of employees who may work in substantially higher-risk categories," Vignolo said.

Besides circumventing workers' comp, some business owners keep operating after the workers' compensation provider cancels their policy for non-compliance with safety standards, he noted. In some cases, the business changes its name, doesn't eliminate the hazards and finds a new carrier, Vignolo said.

"The program still works on the honor system but we are starting to ask for more up-front documentation to let us know how many people really work for the firms, particularly those in the Los Angeles Basin," Vignolo said.

The San Francisco-based California Insurance Rating Bureau has created a check list to make sure that employers legally are entering into independent contractor agreements with providers. The criteria include:

* Does the independent contractor have the right to control the process? If so, he may qualify for exemption from payroll taxes and insurance.

* Can the business using the independent contractor terminate services at will? If so, then it probably won't be considered a valid independent contractor relationship.

* Is the independent contractor engaged in a separate business from the company that is using his services?

* Does the independent contractor work without a supervisor?

* Does the independent contractor have a specific skill? Unskilled workers usually are supervised while a skilled independent contractor is not.

* Does the independent contractor supply his or her own tools?

* Does the independent contractor who provides the services have the right to hire helpers?

* What is the length of time of the contract? Short-term contracts or piecework contracts generally show that an independent contractor relationship doesn't exist.

* What is the method of payment? If it is by the job, it is more likely to be considered a valid independent contractor relationship than if it is by the piece.

* Are the services provided by the independent contractor part of the regular business of the client?

Dave Bellusci, the California Insurance Rating Bureau's senior vice president and chief actuary, said going without insurance is more dangerous now than ever.

Claims have risen along with unemployment because, as in past economic downturns, workers file them after they are laid off. And paying on the claims is more expensive than ever. The maximum weekly benefit rose from $224 in 1989 to $336 in 1990, Bellusci said.

"Industry studies show that when benefits rise, so will the number of claims filed," Bellusci said.