Published On: 4.22.2012 Charlotte, NC

Ghost Policies Leave Injured Workers Unprotected

On behalf of Charles G. Monnett III & Associates


In today’s harsh economy many businesses are looking for new ways to cut costs and save profits. However, when a company looks to bend the law to save a few dollars it can lead to serious problems for employees. The News and Observer recently published an article which brought to light a new scheme used by employers to avoid paying large sums of money for workers’ compensation insurance and to avoid paying Social Security, Medicare and unemployment taxes along with avoiding tax withholdings from paychecks for employees

Workers’ compensation protects workers if they are injured on the job by paying for their medical bills and other costs. In North Carolina companies with three or more employees are required to purchase workers’ compensation insurance or certify with the state that they have enough assets to self-insure.This can cost an employer thousands of dollars to cover all employees. In the construction business, and many others, a new way to circumvent this requirement has become common place.

In the construction business it is common for a general contractor to hire a subcontractor to worker on large projects. These general contractors require proof of workers compensation insurance before anyone is allowed to work on site. This is to protect themselves from liability for any potiential injuries the subcontractor’s workers might sustain. In order to avoid this requirement and save money, the subcontractors are purchasing ghost policies which leave contruction employees vulnerable.

A ghost policy a less expensive workers’ compensation package that is designed for one-person operations. While these policies are legal, some companies are using them fraudulently by intentionally misclassifying their employees as independent contractors. A worker under state regulations should be considered an employee if the company provides tools and equipment and controls how and when the worker is to do the job. In this scenario, the subcontractor excludes himself from the policy, which is his right as a sole proprietor, and declares the other employees to be independent contractors. As a result the policy only covers a “ghost,” an unknown employee who might unexpectedly join the subcontractor to work during the year. The ghost policy looks the same as an actually policy that covers all employees on paper. Now the subcontractor can provide the “proof” of insurance that the geberal contractor requires without spending thousands of dollars for real coverage for all employees.

The pitfalls of ghost policies are apparent. They are insurance policies that cover nobody. Workers are left unprotected and, if they are hurt, are forced to engage in time-consuming battles to win rulings and collect money from businesses or insurance companies, who say they aren’t covered. These injured employees are left unable to work, unable to take care of their families and unable to pay for building medical expenses.

The real outrage in this situation is that nobody is doing anything to prevent this from happening to more and more employees. According to the News & Observer, as many as 32,000 of the state’s estimated 172,000 businesses have not purchased workers’ compensation insurance nor have they certified with the state that they have enough assets to self-insure. The state has the power to warn or punish companies with fines if they do not have inadequate workers’ compensation coverage or none at all, and offenders also can face jail for the felony of failing to carry workers’ compensation. However, it does not appear that anyone is being punished at this time for these transparent policies.

The News & Observer went further to report that officials at the Industrial Commission have seen the ghost policies for years, but they have not asked the legislature to address the practice. And when they see insurance agents sell ghost policies in improper circumstances, they rarely, if ever, report the problems to the Department of Insurance, which regulates agent conduct. When faced with such cases, the commission usually waives penalties if the business is able to settle with the injured worker.

The failure to address this problem by multiple state agencies has enabled business owners who break the law to flourish, while those following the law say they are increasingly shut out of work because of the high costs of doing business legally. So who really benefits from a policy that leaves workers unprotected, hurts other doing business legally and takes tax money away from our state? It seems the only group that benefits from these ghost policies are insurance companies. They receive payments from business owners for policies that will never have to pay out.