Crime and Punishment: Jailing Employers Who Do Not Pay Into Workers’ Comp

Photo by: James Clayton

It is the public policy of this state to provide for workers who can no longer work due to permanent partial or total disability.  The question of how this State effectuates that policy has recently come into question and there have been increasing calls for employers who fail to pay their workers’ compensation insurance to go to jail.  In North Carolina, workers’ compensation is governed by N.C. Gen. Stat. § 97.  The Statute provides that all businesses employing three or more persons must provide workers’ compensation insurance.  Section 97 is very broad and covers sole proprietorships, partnerships, LLCs, estates, or trusts who regularly employ three persons.  All employees are covered by the statute whether they are full-time, part-time, regular seasonal, or family members.  If the business is incorporated, including all forms of corporations and those which have non-profit status, everyone is included in the headcount including corporate officers.  Businesses with radiation are required by law to carry coverage when they have one employee.  Agricultural operations must carry coverage when there are ten or more regular, non-seasonal employees.  The business can either purchase the insurance or seek qualification as a self- insured business pursuant to N.C.G.S. § 97‑134.

However, this system fails workers when companies do not pay for this insurance.  Over the last several years, the problem has grown in scale.  In North Carolina, the incidents of employers failing to provide workers’ compensation insurance are large.  A recent investigative report conducted by the News & Observer noted that insurance carriers writing policies in North Carolina reported that they covered 140,472 businesses with another 117 large companies certified as self-insured.  The N.C. Department of Commerce stated that as many as 170,000 companies with four or more employees operate in the state.  Dun & Bradstreet, a business tracking organization, counted about 172,000 businesses headquartered in North Carolina with at least three employees, and this did not account for the branches of businesses in the state that are headquartered elsewhere.  As the News & Observer reports, the problem of businesses failing to pay for workers’ compensation insurance has grown so large as a result of the almost non-existent oversight from the Industrial Commission.

But while approximately 30,000 qualifying businesses forego their statutory obligation, businesses may not fully appreciate the severity of their non-compliance.  For example, Tom Williams, the owner of a small bookstore, pays his workers’ compensation insurance but was not aware that failing to do so could constitute a Class H felony.  “It’s been a real burden,” the sole proprietor owner says, “I pay thousands of dollars per year for this coverage, and we’re a retail business who has never had a claim.”  The books that Mr. Williams carries certainly do not pose a risk the same way hauling gravel does, but he appreciates the possibility that a worker could be hurt lifting, cleaning shelves, or even taking out the garbage.  Mr. Williams has never considered not paying into the system.

However, not paying into the system is certainly a tempting option for those business owners who either cannot afford the coverage, want to gain a competitive advantage, or simply pocket the extra revenue for themselves.  “Where we are, it’s a pretty close group of stores,” comments Mr. Williams about the shopping center where his store is located.  “I certainly haven’t looked at their records or anything, but we all know we have to pay into it,” he adds.

When the bottom-line is at stake, some businesses have always been willing to cut corners.  Whether a contractor is seeking to gain a competitive advantage or an owner simply wants to pocket the extra profits, the incentive of saving thousands of dollars a year is quite powerful.  And if that business owner were to look at the Industrial Commission’s website for guidance about his gamble, he might not be dissuaded from placing that bet.

In a Q & A section on the Industrial Commission’s website, last updated in May of 2008, the following question is posed:

Q: What are the penalties for not carrying workers’ compensation insurance coverage?

A: Pursuant to N.C. Gen. Stat. §97-94(b), employers not in compliance with the Act may be subject to penalties between $50.00 to $100.00 for each day of non-compliance until proper coverage is obtained.

There is no mention of the more severe punishment, which can amount to a Class H felony.  Yet subsection (c) of the statute clearly states that any employer required to secure the payment of compensation under the Act who willfully fails to secure such compensation shall be guilty of a Class H felony.

The idea of jailing an employer who does not purchase insurance also raises fundamental questions about whether or not threatening jail is what the State should be doing.  Buck Lattimore, Chairman of the Industrial Commission from 2000 through 2007, is on record for noting how the Commission used threats of jail or contempt as a tool at a lesser rate after he stepped down as chairman.  He is quoted as saying, “I thought we should use every tool we had to get payment…[b]ut, some [commissioners] thought we were overstepping our bounds.”

Mr. Lattimore is basing his stance on the deterrence theory.  In admittedly flowery words, the 19th century philosopher Jeremy Bentham, who is often quoted by criminal law professors, stated the theory behind deterrence as follows:

When a man perceives or supposes pain to be the consequence of an act, he is acted upon in such a manner as tends, with a certain force, to withdraw him…from the commission of the act.  If the apparent magnitude, or rather value of that pain be greater than the apparent magnitude or value of the pleasure or good he expects to be the consequence of the act, he will absolutely be prevented from performing it.  The mischief which would have ensued from the act, if performed, will also by that means be prevented.

While there is certainly an element of truth to Bentham’s opinion, the inherent problem is that for some the value of the pain will simply not outweigh the temptation or perhaps the necessity of skirting the system.

For the injured workers, such a punitive system offers little relief.  Even worse, while it is often joked that the value of a judgment is nothing, that becomes an even more probable scenario when that employer is in jail and can earn no money to pay the judgment.  Certainly the threat of jail and fines keeps some employers paying into the system, but justice for the employee is not done by punishing those who do not.

While North Carolina has sometimes been described as a more progressive state, South Carolina offers perhaps a better system for ensuring those workers who now face a lifetime of chronic pain and the emotional toll of being unable to work.  South Carolina has created the Workers’ Compensation Uninsured Employers’ Fund, which was created to ensure payment of workers’ compensation benefits to injured employees whose employers have failed to acquire necessary coverage for employees.

The South Carolina system’s main flaw, or burden, is that the businesses that do pay essentially pay for the businesses that do not.  To establish and maintain the South Carolina Workers’ Compensation Uninsured Employers’ Fund, taxes on insurance carriers and self-insured persons are levied in an “amount sufficient” to establish and annually maintain the fund at a level of not less than two hundred thousand dollars.

As North Carolina looks to increase enforcement concerning insurance, the stories of uninsured injured men and women and the South Carolina Legislature provide an important reminder that where deterrence fails, the State should still strive to protect those who once contributed, but now cannot.


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About Harry Lorello, Former Senior Staff Writer (7 Articles)
Harry graduated from Campbell Law in 2013. He attended Guilford College, graduating in 2008 with a Bachelor of Arts in History and Education. During both 1L and 2L summers, Harry interned for the North Carolina Department of Justice Property Control Section, where he worked on issues ranging from property to employment law. During his 2L year, Harry worked as a clerk for the Lanier Law Group, which focuses on workers' compensation.
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