Investigating Violations of the Workers' Compensation Act

byStephen T. Gheen

Assistant Attorney General1

I. OVERVIEW

Since 1996, the Fraud Investigations Section of the North Carolina Industrial Commission investigates all alleged criminal and civil violations of the Workers' Compensation Act. The year 1999 witnessed increasing efforts by the Industrial Commission in the successful criminal prosecution of Act violations and civil penalty enforcement proceedings for violations of the Act.

The principal, but certainly not exclusive, violations investigated by the Industrial Commission are:

Employee fraud in claims;Employer fraud and violations;Health care provider violations;Employers who fail to provide insurance or self-insurance for their

employees as required by the Workers' Compensation Act; and Employers who deduct the cost of workers' compensation insurance

or benefits from an employee's wages.

The total number of new cases opened by the Fraud Investigations Section in 1999 was 373. Of this number:

164 cases were classified as "fraud" investigations; and 209 cases were classified as uninsured employer violations.

The vast majority of the 164 "fraud" cases are employee criminal fraud investigations. These cases

1 The author may be reached directly at (919) 733-7317, fax number: (919) 715-0282, email: gheen@ind.commerce.state.nc.us.

Caveat: As an Assistant Attorney General, the author is agency counsel to the Industrial Commission, without line authority over Industrial Commission personnel or Commission policy. Typically, the author is requested to give opinions on a range of subjects before the Commission. As counsel to the Industrial Commission, the author is prohibited from expressing personal opinions in keeping with a counsel's ethical obligations to the client. The views, opinions and suggestions contained herein are those of the author and not necessarily those of the Industrial Commission.

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generally fall into two categories:

(1) Employees claiming temporary total disability benefits while allegedly earning wages at other employment, and

(2) Employees claiming physical injuries while allegedly performing physical tasks entirely inconsistent with the reported injuries.

A smaller, but growing number of the 164 "fraud" cases involve alleged employer conduct. Almost all of these cases involve employers who design fraudulent schemes to underreport the number of their employees thereby avoiding payment of workers' compensation insurance premiums. A few cases were reported alleging employers illegally deduct workers' compensation insurance premiums from an employee's salary.

The 209 "uninsured" employer cases generally present the failure of an employer to maintain workers' compensation insurance or self-insurance as required by the Act. While the alleged violation is the same in every case, the context in which the violation allegedly occurs is disparate. Many worker's compensation practitioners assume that the majority of uninsured cases involve inter or intra state trucking operations. Certainly, a number of these operations have been reported. However, reports of uninsured employers include a wide range of business enterprises, including restaurants, convenience stores, service industries and a sizeable number of reported cases involve contractors and subcontractors in the building and trade industry. Simply stated, no business class is immune from reported cases.

Some workers' compensation practitioners also assume that the vast majority of uninsured cases involve "small" business owners. Certainly, most reported uninsured cases involve less than ten employees; however, cases reported in 1999 included a significant number of employers that exceeded twenty employees during various periods of the violation.

During the 1999 calendar year, 133 of the 373 new cases were closed. With respect to criminal "fraud" cases, twelve cases were successfully prosecuted, all by plea arrangements, at the trial court level. This number includes cases that were opened in any year since 1997 but actually disposed of in 1999. Of the total number disposed of, five cases were felony dispositions and seven cases were misdemeanor dispositions. As of December 31,1999, ninety-five criminal cases were still under active investigation.

The 373 new case reports in 1999 demonstrate significant annual increases in the number of new reports. In 1996,87 complaints were received, 303 complaints in 1997 and 315 complaints in 1998. The percentage increase in new cases from 1998 to 1999 is approximately 22%. Of the 705 total cases opened prior to 1999, ten criminal fraud cases were finally resolved in the criminal courts prior to 1999. Of these ten cases, four cases resulted in criminal convictions of claimant fraud and two cases resulted in admissions of guilt with prayer for judgments entered. Therefore, more criminal cases were successfully concluded in 1999 than in all previous years combined.

For uninsured employer cases the number of employers assessed penalties and the amount of civil penalties collected in 1999 increased. For the fiscal year July 1,1998 to June 31,1999, civil

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penalties amounting to $33,168.00 were collected. From July 1, 1999 to February 29, 2000, $51,504.90 has been imposed and collected from uninsured employers. These amounts do not include sums that injured workers received as benefits or insurance premiums that were collected by insurance companies when employers were brought into compliance with the Act. If the amount collected in the current fiscal year is annualized, total civil penalties of $75,988.00 will be collected, obviously more than doubling the previous fiscal year.

The inevitable conclusion, however, is that some 240 cases opened in 1999 were not closed during the same calendar year. Considering all years, 568 cases, criminal and civil, remain pending. Simply stated, the Fraud Investigations Section opens more cases than can be investigated and closed in the same year. A more ominous indicator is the number of new cases reported during the first quarter of calendar year 2000. For the first quarter, over 80 new cases have been reported. Based on patterns from previous years, the first quarter results suggest that over 400 new cases may be opened this year.

Despite its limited resources, the Industrial Commission had several significant successes in 1999. First, as previously noted, the number of criminal convictions, while still small, is increasing. And, the first conviction was obtained based on "medical only" evidence. In State of North Carolina v. Peggy Story (Superior Court, Burke County), Ms. Story entered a plea based on videotaped evidence that she untruthfully claimed physical limitations in order to receive benefits.

Second, the amount of civil penalties actually collected on a fiscal year basis more than doubled.

Third the Industrial Commission has instructed its agency counsel to participate as a party in civil penalty proceedings before the Industrial Commission and the appellate courts. This is resulting in more uniform enforcement efforts.

Fourth, the Industrial Commission's commitment to addressing violations of the Workers' Compensation Act is evidenced by its expanding the scope of cases being investigated. Two uninsured civil penalty cases were brought in 1999 against insurance agents pursuant to N.C. Gen. 97-94(d). Both cases involve employers who allege contacting their insurance agent and requesting the agent to procure workers' compensation insurance. Inevitably, a worker is injured and a claim filed and no workers' compensation is in effect. The agent in one case is denying that he was instructed to procure insurance and in the second case the agent has admitted the failure to obtain proper coverage.

Fifth, the Fraud Investigations Section is actively investigating employee reports of alleged fraudulent wage charts. The reports are generally uniform; the employee reports that the employer does not include overtime earnings or wages that were paid in cash. This type of case demonstrates the broad scope of the Industrial Commission's duty to investigate violations of the Act. When speaking of "fraud investigations," the common association is to employee fraud claims. While N.C. Gen. Stat. § 97-88.2 certainly includes this type of case, the Industrial Commission is under an affirmative duty to investigate all "violations" of the Act.

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Sixth, the Industrial Commission has entered as a party, in its own name, three bankruptcy cases in the Eastern and Middle Divisions of the US Bankruptcy Court. All cases arise from one individual debtor who owned all stock in two allied corporations. Neither the individual debtor nor the corporations carried workers' compensation insurance. A seriously injured worker filed a claim. The debtor, as well as the allied corporations, filed bankruptcy. The Industrial Commission has entered the cases to contest the dischargeabihty of civil penalties that could be levied and dischargeability of the benefits owed to the injured employee.

Seventh, the Industrial Commission has filed civil enforcement proceedings in the Wake County court system in nine cases in which civil penalties imposed have not been paid. Active collection efforts are ongoing, and one case has been settled to this date.

Eighth, the North Carolina Court of Appeals has upheld the broad authority of the Industrial Commission to levy civil penalties in uninsured cases pursuant to N.C. Gen. § 97-94(d). This statute permits the imposition of civil penalties in uninsured cases for those who had the "ability and authority" to bring the employer into compliance with the Workers' Compensation Act. In Riverav. Trapp, ____N.C. App.____,_____S.E.2d____(1999) a subcontractor failed to procure workers'compensation insurance. A contract between the subcontractor and contractor required the subcontractor to have workers' compensation insurance. The subcontractor represented that he had workers' compensation insurance. However, some evidence existed that the contractor, also uninsured, knew that the subcontractor did not have insurance prior to a work related injury to the subcontractor's employee. The Full Commission ordered a civil penalty as to both the subcontractor, for four days at the rate of fifty dollars ($50.00) per diem, and the contractor, for ten thousand dollars ($10,000.00) based on subsection (d) of the statute. The Full Commission's rational was simply that the contractor had both the "ability and authority" to bring the subcontractor into compliance but did not do so. The contractor, Trapp, appealed. The Court of Appeals held that Trapp was subject to the civil penalty imposed by the Industrial Commission. The Rivera decision is important in effectively dealing with the mounting problem of uninsured employers in North Carolina.

While a year of many "successes," the poignant reality remains that reported violations of the Act exceed resources to investigate and process new case reports. The increasing number of cases pending disposition is largely attributable to the lack of staffing resources. The Section consists of only two investigators and one secretary. The Fraud Investigations Staff, their telephone numbers and email addresses are:

J. Alves, Jr.Fraud Investigator

(919) 715-7651Fax Number: (919) 715-0282

Email! fllvesjfg)ind.commerce.state.ncus

Ray YoungFraud Investigator Fax

Number: (919) 715-0282

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Email: voungiffiind.commerce.gtate.iic.iis

Imogene BrooksSecretary

(919) 715-7652Fax Number: (919) 715-0282

Email: brooksi@ind.commerce.state.nc.us

As of August 6,1999, the Attorney General Michael F. Easley assigned this author as agency counsel for the Industrial Commission. This author's duties include assisting the Fraud Investigations Section in enforcement actions.

During the latter half of 1999, the Industrial Commission altered allocation of staffing resources to maximize the number of cases that can be processed. Prior to 1999 the two Section investigators were responsible for investigating all criminal "fraud" and civil penalty cases, the latter consisting primarily of uninsured employer cases. The number of cases simply exceeded any reasonable expectations given just two investigators. Now, both investigators primarily focus their efforts on criminal "fraud" investigations and prosecutions. The Fraud Investigation Section's secretary, on a part time basis, and this author, on a part time basis, are primarily responsible for processing uninsured employer cases and employer deduction cases. The change in resource allocation has not had sufficient time for evaluation of its impact.

In addition to the problems inherent in attempting to process the number of reported cases with niinimal staff resources, a number of other barriers affect the efficient investigation of violations of the Workers' Compensation Act. First, criminal prosecution of employees who receive wage benefits while earning wages at other employment has proved particularly troublesome. The errant employee usually has made no affirmative false statement of such earnings required by N.C. Gen. Stat. § 97-88.2. In other cases, employees earning unreported wages receive those wages in cash, which proves difficult and time consuming to document. The Full Commission has adopted administrative rules that will make prosecution of employees for criminal fraud more efficient. Employees will be required to report earnings so that a carrier or employer may determine what credits to wage benefits are required. An employee's failure to report earnings on such an earnings report coupled with proof that the employee received wages during the time period covered by the report should be sufficient proof of a criminal violation. The report required of the employee will be further reinforced by similar language on benefit checks that will evidence a false statement made in order to obtain or deny a benefit sufficient to warrant criminal conviction.

Workers' compensation criminal actions generally develop slower than other types of criminal prosecutions. There are several reasons for more lengthy development periods that are outside of the Industrial Commission's control. First, neither the Industrial Commission nor the Attorney General directly prosecutes these cases. N.C. Gen. Stat. § 97-88.2 requires the Industrial Commission to refer all suspected criminal violations to the appropriate local prosecuting authority. The criminal prosecution of fraud cases is a relatively new development for local prosecuting authorities. Suffering from their already overburdened criminal dockets, the Industrial Commission's fraud cases do not and cannot be expected to receive highest priority. Second, many

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prosecutors are unfamiliar with the Workers' Compensation Act and have not been indoctrinated to the problems in the workers' compensation system, which support the need for criminal prosecutions. Third, being unfamiliar with the plethora of problems associated with the workers' compensation system, some prosecutors tend to believe that they are being asked to prosecute "civil" cases.

In an effort to enhance prosecutions, the Office of the Attorney General is referring a significant number of cases to the local prosecutors, invoking the concurrence of that Office in the Industrial Commission's requests for prosecution. Additionally, this author has initiated meetings with prosecutors in the various judicial districts in North Carolina to better inform these officials of the need for timely processing of criminal referrals.

There is much that the Industrial Commission and public officials have done and will do to more effectively enforce the Workers Compensation Act. Yet, workers' compensation practitioners also need to participate in improving the delivery of investigative services. These steps are:

Work in your community to educate employers on the jurisdictional requirements of the Act. The best way to reduce the urgent problem of uninsured employers is to bring employers into compliance. Volunteer to speak to local insurance agent association, trade groups, Chambers of Commerce, just as a few examples. Alert your local bar at bar meetings, especially business law practitioners in your community, as to the uninsured employer issue and ask them to work with their clients.

Workers' compensation practitioners in local communities should approach their local District Attorneys to explain the importance of criminal actions in workers' compensation cases.

In reporting violations of the Act, do so in writing. While the Fraud Investigations Section takes reports by telephone, and will continue to do so, written reports are preferred. Telephone reports consume additional time of the only secretary that the Fraud Investigations Section has. That secretary must then type the report prior to opening a file, a process that can take considerable time compared to processing a written report. Sending written reports by fax or by email is preferred with supporting documentation following by mail.

When filing a report, provide as much supporting documentation as exists. Providing copies of correspondence, discovery documents, and public records greatly reduce staff time obtaining the same material. It is extremely helpful in cases that may have witnesses other than the employee or employer to provide the full names, addresses and phone numbers for those witnesses.

When filing a Form 18, correctly identify the business entity and plead the business entity on the Form 18 just as in a regular civil action. Because an insurance

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company usually is present, practitioners generally do not name employers accurately. Where an insurance carrier pays the claim, the improper identification of an employer creates no harm. In uninsured cases, however, the practitioner, in most cases, will have to seek civil judgment to execute on any benefit award. If the employee is identified as ABC Company but the employer is actually ABC Water, Inc. the Opinion & Award and subsequent civil judgment may be worthless. Furthermore, improper identification can create delays in your client's case. The Industrial Commission's Statistics Division, which identities insurance carrier coverage for all Form 18 filings, spends considerable wasted time checking for coverage when proper identification of the employer would have permitted immediate identification. A small number of cases have been referred to the Fraud Investigations Section as uninsured employers in which considerable resources are expended to ultimately confirm that the employer has coverage.

While these steps may seem simplistic, they can be effective.

n. STATUTORY AUTHORITY

The North Carolina General Assembly enacted three enabling statutes that proscribe both crimmal offenses and civil violations of the Workers' Compensation Act. These statutes are N.C. Gen. Stat. §§ 97-88.2, -88.3 & -94. The obvious intent of the General Assembly is to provide a comprehensive array of both criminal and civil penalties for violations of the Act by all of the actors in workers' compensation cases.

The broad scope of the Industrial Commission's duties is:

(b) The Commission shall:

(1) Perform investigations regarding all cases ofsuspected fraud and all violations related toworkers' compensation claims, by or againstinsurers or self-funded employers, and referpossible criminal violations to the appropriateprosecutorial authorities;

(2) Conduct administrative violation proceedings; and

(3) Assess and collect civil penalties and restitution.

N.C. Gen. Stat. § 97-88.2 (emphasis added).

m. CRIMINAL OFFENSES AND PUNISHMENT

The next sections of this article outline the general criminal offenses enacted by the General

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Assembly followed by the specific treatment that the General Assembly has given to health care providers and employers. While criminal violations are segregated from the discussion of civil actions, the General Assembly has intertwined both criminal and civil actions providing a range of alternatives for punishment of violations of the Workers' Compensation Act.

A. GENERIC WORKERS' COMPENSATION FRAUD

The primary enabling criminal statute is N.C. Gen. Stat.§ 97-88.2, enacted by the North Carolina General Assembly as a part of the "Workers' Compensation Reform Act" of 1994. The statute provides:

(a) Any person who willfully makes a false statement or representation of a material fact for the purpose of obtaining or denying any benefit or payment, or assisting another to obtain or deny any benefit or payment under this Article, shall be guilty of a Class 1 misdemeanor if the amount at issue is less than one th< usand dollars ($1,000). Violation of this section is a Class H felony if the am .at at issue is one thousand dollars ($1,000) or more. The court may order restitution.

N.C. Gen. Stat. § 97-88.2 (emphasis added.)

The statute is deceptively simple in design, however, some issues exist that will require resolution. First, subsection (a) speaks to fraud by "any person." By its plain meaning, the General Assembly intended that anyone involved in the workers' compensation system committing fraud has violated a criminal act. The sweeping scope of the statute is reinforced in subsection (e) that specifically names not only the traditional persons involved in criminal cases; claimants and employers, but also insurance company officials, officials of third-party administrators, insurance agents, attorneys, health care providers, and vocation rehabilitation providers. N.C. Gen. Stat. § 97-88.2(e). In short, "anyone" means anyone acting within the context of the workers' compensation system.

Subsection (a) of the statute clearly envisions two separate criminal offenses. First, the statute exposes direct actors to criminal prosecution. Second, those who "assist" the direct actor are also subject to criminal prosecution and sanction. The elements for the prosecution of a principal actor are:

1. a person, in the context of a workers' compensation claim;2. willfully;3. makes a false statement or representation of;4. a material fact for the;5. purpose of obtaining or denying;6. any benefit or any payment.

The elements for the prosecution of a person who "assists" the direct actor are:

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1. a person, in the context of a workers' compensation claim;2. assists, before or during the commission of the crime, a person who3. willfully;4. makes a false statement or representation of;5. a material fact for the;6. purpose of obtaining or denying;7. any benefit or any payment.

These elements are generally well defined in the context of criminal law. "Willfully" denotes the wrongful doing of an act without legal justification or excuse or the commission of an act purposely and deliberately in violation of law with something more than just intent. State v. Stephenson, 218 N.C. 258, 10 S.E.2d 819 (1940). A "false statement or representation" is one that the defendant knows is false. State v. J. L. Dowed, 201 N.C. 714 (1931). A "material fact" is one that would naturally influence obtaining or denying any benefit or payment under the Act.

Not well defined in the context of criminal law is the term "assist." The appellate courts may prefer to define the term in more classical concepts of either an "aider or abetter" or "accessory before the fact." An "accessory before the fact" is one who, before the crime is committed, counsels, procures, commands or knowingly aids the other person to commit the crime. If the assistance occurs during the crime, the defendant is an "aider and abetter." The former concept is aimed at the person that is not actually or constructively present when the principal crime is committed.

Special note should be given to the fact that the General Assembly did not specifically include "omissions" within the context of the criminal offense. The question, yet unknown, is whether or not the failure to include "omissions" within the statutory definition has significant impact on prosecutions. In reading all of the hypothetical questions below consider the consequences for each fact pattern.

The offense level is a Class H felony if the "amount at issue" is $1,000.00 or more and a Class 1 misdemeanor if the "amount at issue" is less than the threshold amount for a felony. The term "amount at issue" is not defined and ultimately will require judicial determination of its meaning. Several hypothetical situations demonstrate potential unresolved questions associated with interpretation of that term.

Hypothetical 1. Employee Lets Fakem, with an average weekly wage of $800.00, files a workers' claim on January 2,2000, alleging an injury by accident on January 1, 2000. The specific injury is a broken foot. The injured worker went to the emergency room to have the foot set, at a total cost of $800.00. In filing the claim the employee states that expected return to work is "unknown." Of course, a permanent partial disability rating is not rendered at this stage of the employee's treatment. On January 5, 2000, Fakem's mother, a saint of a woman, calls the workers' compensation insurance carrier and tells them that her son was not really hurt at work but broke his foot at a family reunion. Just for good measure, she mails the insurance carrier a picture of her son sitting on the edge of the family picnic table holding his foot in obvious pain from an obviously broken foot. The insurance

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company immediately denies the claim having not paid a farthing.

What is the "amount in issue?" Is it nothing, which Fakem got? Is it the amount of the actual bills and benefits that Fakem would have been entitled on the date the fraud was discovered? Is it the amount that Fakem could have gotten? If the "amount in issue" is the former two, Fakem is guilty of a Class 1 misdemeanor. If the "amount in issue" is the latter formula, Fakem may be guilty of a Class H felony.

In the latter case, would an expert physician's opinion be needed at criminal trial that a person with a broken foot in the same job as Fakem would be out of work for four weeks or would have received a permanent partial disability rating in an amount that could cross the $1,000.00 threshold? Could Fakem offer a defense that he intended to go back to work even with the broken foot or offer his own expert physician's opinion that there would have been no permanent partial disability?

Hypothetical 2. Dr. Injury Mill treats Sweet Sue, an injured employee, for a legitimate work related injury. However, patients at Dr Injury Mill's office have been scarce lately. He treats Sweet Sue for three weeks for a total workers' compensation payment of $600.00. Yet, Injury Mill bills the workers' compensation insurance carrier for $1,200.00. The insurance company calls Sweet Sue and learns that not all of the treatments billed for were actually provided.

What is the amount in issue? Is it the difference between the legitimate bill and the fraudulent amount claimed or the entire bill?

Hypothetical 3. Add to the fact pattern that before beginning treatment Dr. Injury Mill had told the insurance company that he would have to treat Sweet Sue for twelve weeks for $4,000.00. Injury Mill billed $200.00 as an "interim bill" suggesting that more treatment will be given for another $3,800.00. The deception is discovered before the final bill is presented to the insurance carrier.

Should Dr. Injury Mill be charged with a felony or misdemeanor?

Hypothetical 4. Minimum Wage is an employer. He pays his employee, Blue Collar, minimum wage each week on the "record." Yet, Minimum Wage also pays Blue Collar $100.00 in cash under the table most weeks because Blue Collar works a lot of overtime which is not paid at the statutory rate, but at minimum wage. Blue Collar likes the deal because he does not have to pay taxes.

Blue Collar is injured, files a Form 18 showing the total amount of wages both on and off the "record." Low Ball, an insurance adjuster who never met a deserving injured worker, has the employer provide wage information. Employer does not submit the off record wages.

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As the case develops, Low Ball hires attorney Magnolia Steel to defend the claim. Ms. Steel interviews two of Blue Collar's co-workers to offer testimony on non-wage issues but accidentally learns that Minimum Wage routinely paid one of these witnesses in cash for overtime work. Steel reports this fact to Low Ball, and both decide not to call at hearing the one witness receiving cash wages. At hearing, Blue Collar testifies as to the "off record" wages. The employer does not testify. Neither Low Ball nor Magnolia Steel informs plaintiffs counsel or the Commission of the one witness who claims to receive cash wages for overtime work.

• Who, other than Minimum Wage, has criminally violated the statute?Query: Has the statute profoundly altered traditional concepts ofattorney-client relationships?

Hypothetical 5. Alter the preceding fact pattern by adding that Minimum Wage does testify and denies that Blue Collar was paid anything "off record."

• Who, other than Minimum Wage, has criminally violated the statute?Query: If neither Low Ball nor Magnolia Steel has violated the statute,why? Has the failure of the General Assembly to specifically include"omissions" within the context of the statute effect your answer? HasMs. Steel breached her ethical obligations to a tribunal?

As of this writing, North Carolina appellate courts have not addressed these or other issues that the statute presents. All criminal cases referred for prosecutions are pending or have been resolved at the trial level. The vast majority of cases that have been resolved were by negotiated plea agreements. No current cases pending disposition could reach the appellate courts in the immediate future.

B. HEALTH CARE PROVIDER OFFENSES

Health care providers are subject to the criminal sanctions of N. C. Gen. Stat. § 97-88.2. However, the General Assembly enacted an additional criminal offense in a special context. N.C. Gen. Stat. § 97-88.3(c) provides that:

A health care provider who knowingly charges or otherwise holds an employee financially responsible for the cost of any services provided for a compensable injury under this Article is guilty of a Class 1 misdemeanor.

No known cases have been brought under this statute. A number of health care providers, however, have informed the Industrial Commission that they have substantial medical bills they believe arise from work related injuries that remain unpaid. These health care providers are actively seeking the guidance of the Industrial Commission in establishing the proper procedures to determine the timing and circumstances under which employees may be directly held accountable for unpaid medical bills. Three examples highlight the developing problem:

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Hypothetical 1. Hard Hat, who is not married, is injured at work. While building a new high rise building, a coworker drops a hammer from two stories above that fractures Hard Hat's skull. Hard Hat is immediately taken to the hospital and extensive emergency surgery is performed to save Hard Hat's life. He is hospitalized for thirty (30) days. In the course of his treatment, the hospital performs blood work, which shows that Hard Hat had a blood alcohol concentration of .02 at the time of the accident. The total cost of medical treatment at the hospital is sixty thousand dollars ($60,000.00). Hard Hat tells the hospital he was injured at work and provides the name of his employer. Employer is insured and reports the injury to its workers' compensation carrier. The carrier immediately discovers Hard Hat's alcohol usage from the medical reports and denies the claim. Hard Hat has no medical insurance.

The workers' compensation case takes almost two years before a Deputy Commissioner hears the claim. Prior to the hearing, the hospital repeatedly bills Hard Hat for the cost of medical treatment. Hard Hat actually manages to pay Hospital one hundred dollars a month ($100.00) towards the balance.

The Deputy Commissioner issues an Opinion & Award finding the claim compensable, but carrier appeals. Prior to the Full Commission's decision the hospital continues to bill Hard Hat, but Hard Hat now refuses to pay the hospital because of the Deputy Commissioner's opinion. The hospital sues Hard Hat in a civil action, secures a judgment and begins execution on the judgment.

The Full Commission affirms the Deputy Commissioner's Opinion & Award. Employer appeals to the Court of Appeals. The hospital continues its execution efforts and discovers that Hard Hat has a beach house with almost no mortgage. The house is sold at judicial sale and hospital nets forty thousand dollars ($40,000.00) after costs of execution and the judicial sale commission. The Court of Appeals affirms the Full Commission's decision and carrier does not appeal. Carrier pays hospital the full bill, and hospital refunds the net sum it received from execution on Hard Hat to him.

The obvious question is when, under the criminal statute, did Hard Hat's claim become compensable. What is your answer? Why?

Hypothetical 2. Assume all of the facts in the hypothetical above, except Hard Hat's employer is uninsured.

Does your answer change? Why?

Hypothetical 3. Assume all of the facts in the previous hypothetical. Hard Hat elects not to pursue his workers' compensation claim but initiates a civil action under common law principals as permitted under N.C. Gen. Stat. § 97-94(b).

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• Does your answer change? Why? Is this a potential malpractice trap for the unsuspecting practitioner?

C. UNINSURED EMPLOYERS

In addition to criminal exposure under N.C. Gen. Stat. § 97-88.2, the General Assembly provides criminal sanctions for employers and other "persons" who do not comply with the Workers' Compensation Act by failing to insure or self-insure as required by N.C. Gen. Stat. § 97-93. The statute provides:

(c) Any employer required to secure the payment of compensation under thisArticle who willfully fails to secure such compensation shall be guilty of aClass H felony. Any employer required to secure the payment ofcompensation under this Article who neglects to secure the payment ofcompensation shall be guilty of a Class 1 misdemeanor.

(d) Any person who, with the ability and authority to bring an employer incompliance with G.S. § 97-93, willfully fails to bring the employer incompliance, shall be guilty of a Class H felony. Any person who, with theability and authority to bring an employer in compliance with G.S. § 97-93,neglects to bring the employer in compliance, shall be guilty of a Class 1misdemeanor.

N.C. Gen. Stat. § 97- 94(c) & (d).

The elements of a criminal violation appear very straightforward. The elements of a subsection (c) violation are:

(1) an employer;(2) subject to the Workers' Compensation Act;(3) willfully fails;(4) to procure compensation under the Act.

The only difference between a felony and misdemeanor is that a misdemeanor is present when an employer "neglects" to obtain compensation coverage. "Neglect" has been defined in various unrelated statutory settings; e.g. N.C. Gen. Stat. § 7A-517(21) (juvenile code), N.C. Gen. Stat. § 108(A)-101 (social services), and N.C. Gen. Stat. § 131D-20 (adult care). Perhaps the closest statutory usage of the term appears in the Rule 60(b) of the North Carolina Rules of Civil Procedure that appears to accord the term its standard meaning. The classical definition of the word is to give little attention or respect to, to leave undone or unattended to, especially through carelessness.

In practice, however, individual cases can present complex questions. The following examples illustrate some of the questions:

Hypothetical 1. Skate By starts a sole proprietorship. He is quickly successful and

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employs three full time workers but does not obtain workers' compensation insurance. An employee is injured. Skate By adamantly denies that he knew he needed workers' compensation insurance.

• Has Skate By committed a crime?

Hypothetical 2. Add to the fact pattern that Skate By purchased general liability insurance and other forms or business insurance from Bill Agent, and Skate By testifies that Agent never nformed him of the need for workers' compensation insurance even though Skate By told him that he had three employees.

• Has Skate By committed a criminal offense?

Hypothetical 3. Add to the fact pattern that Skate By fashions his business to have "independent contractors." The State, believing that these are not independent contractors but employees, charges Skate By. At trial Skate By offers an "independent contractor" defense.

• If Skate By's belief was honest, has Skate By committed a crime? If youranswer is yes, is it a felony or misdemeanor. Why? Is the defense a juryquestion? Is it still a jury question if the Industrial Commission hasissued an Opinion & Award based on the preponderance of the evidencefinding the defense is invalid and the Commission's Opinion & Awardbecomes final? Would this mean that a criminal action cannot be broughtin certain cases until the Commission's decision has become final, whichin some cases can be several years? Equally important, what are the risksof harm to Skate By's other "independent contractors" while the issue ofjurisdiction is being resolved.

The most unique aspect of the statute is subsection (d). The General Assembly has obviously deemed the importance of the failure of an employer to obtain coverage so fundamental that persons other than the employer may be held criminally responsible for failure to comply with the Act. The elements of the offense are:

(1) a person;(2) with ability and authority;(3) to bring an employer into compliance with N.C. Gen. Stat. § 97-

93;(4) willfully fails;(5) to bring the employer into compliance.

As with uninsured employers, the difference between a Class H felony and a misdemeanor violation is that the latter requires "neglect." And, as with the criminal statute regarding uninsured employers, individual fact patterns present complex questions.

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Hypothetical 4. Assume all of the facts in hypothetical fact patterns one (1) through three (3) above. Add to the fact pattern that Skate By went to Bill Agent, his insurance agent, and tells Agent all about his business and asks Agent to write all insurance coverage that his business needs. Agent honestly, but incorrectly, believes that five (5) employees are required before workers' compensation insurance is needed.

Does this earn Skate By a "get out of jail free" card? Is Agent criminally liable, or has Agent just committed malpractice?

Hypothetical 5. Add to the fact pattern that Skate By consulted his good friend and attorney Mr. Any Opinion. Any Opinion tells Skate By that a real question exists on the independent contractor status of those he hired and he may well lose the issue if it ever comes before the Industrial Commission. But, in advising clients to the "line" Any Opinion tells Skate By that he can continue with "independent contractors" and if there is ever an injury he will probably, but not necessarily, lose. Assume that Skate By then goes to his insurance agent, who tells Skate By that based on his training these are employees and that he should purchase insurance. Skate By relies on his legal counsel and declines purchasing coverage.

Is anyone criminally responsible here? Is Any Opinion criminally responsible or does he get to "pass go" with a gold star for having gone to the "line" again? In framing your response, has the General Assembly redefined the attorney client relationship in workers' compensation cases?

Some conclusions about subsection (d) appear obvious. First, a substantial number of "employers" are business entities in which the individual owners cannot be held personally liable to judgments. A corporation is just one example. The personal shield accorded such individuals has been eradicated by the General Assembly.

Second, as suggested by the hypothetical fact patterns above, the question remains as to the entire scope of persons the General Assembly intended to subject to criminal sanctions. As of the writing of this article, the Industrial Commission has referred cases for prosecution involving employers and other "persons," usually corporate officers, for prosecution. No insurance agents or attorneys have been referred for prosecution.

These examples highlight just a few of the questions that arise when prosecuting uninsured employers. As of this writing, no criminal cases have been decided by the appellate courts to answer these and a plethora of other fact situations under the criminal arm of the statute. The several cases that have been resolved have been by plea negotiations at the trial level. However, actual cases generally involving each of these fact patterns are currently before the Industrial Commission.

D. EMPLOYER DEDUCTION CASES

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The General Assembly has also specifically addressed situations in which employers attempt to charge the cost of workers' compensation insurance or self-insurance to its employees. Except in the dealings between contractors and subcontractors, employers are prohibited from deducting the cost of workers' compensation insurance or self-insurance from wages. N.C. Gen. Stat. § 97-21 provides:

No agreement by an employee to pay any portion of premium paid by his employer to a carrier or to contribute to a benefit fund or department maintained by such employer for the purpose of providing compensation or medical services and supplies as required by this Article shall be valid, and any employer who makes a deduction for such purpose from the pay of any employee entitled to the benefits of this Article shall be guilty of a Class 3 misdemeanor and upon conviction thereof shall be punished only by a fine of not more than five hundred dollars ($500.00). No agreement by an employee to waive his right to compensation under this Chapter shall be valid.

The Industrial Commission receives a small but consistent report of employer deduction cases.

E. THREATENING PROSECUTION TO EFFECT CLAIMS

Any person who threatens an employee with criminal prosecution under N.C. Gen. Stat. § 97-88.2(a) to effectuate a settlement or abandonment of a claim commits a Class H felony. N.C. Gen. Stat. § 97-88.2(c) provides:

Any person who threatens an employee with criminal prosecution under the provisions of subsection (a) of this section for the purpose of coercing or attempting to coerce the employee into agreeing to compensation or agreeing to forgo compensation under this Article shall be guilty of a Class H felony.

The statute is straightforward and the penalty is severe. These facts may suggest the reason that no cases have been reported to the Industrial Commission.

F. RESTITUTION IN CRIMINAL ACTIONS

In the context of N.C. Gen. Stat. § 97-88.2 the General Assembly specifically provided that a trial court may order "restitution." "Restitution" in the context of North Carolina Criminal law is well defined. Chapter 15A, Article 81C of the North Carolina General Statutes provides comprehensive procedures determining the amount of restitution and its enforcement.

A detailed analysis of criminal restitution is beyond the scope of this article; however, the workers' compensation practitioner should develop an understanding of criminal restitution. In uninsured cases, injured workers' often discover that civil judgments are often uncollectable. Restitution in the context of criminal law may be the only relief practically available to the

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employee.

The position of the Attorney General's Office is that restitution can be ordered for any injured employees of the employer in any conviction under N.C. Gen. Stat. § 97-94 for failure to have workers' compensation insurance. N.C. Gen. Stat. § 15A-1340.34(c) provides that criminal restitution may be ordered "to the victim or the victim's estate for any injuries or damages arising directly and proximately out of the offense committed by the defendant." The logical argument is simply that the offense committed is the failure to have workers' compensation insurance and the failure resulted in the injured worker not receiving actual payment for benefits.

Restitution in the criminal context also has civil enforcement features. N.C. Gen. Stat. § 15A-1340.38 specifically provides that criminal trial court orders of restitution for more than two hundred and fifty dollars ($250.00) may be enforced in the same manner as civil judgment with several exceptions. First, the restitution may be docketed with the Clerk of Court as any other civil judgment immediately upon rendition of the order for restitution. The major difference between restitution judgments and normal civil judgments is enforcement. The civil restitution judgment may not generally be executed upon until the criminal trial court terminates or revokes the defendant's probation and makes specific findings of fact as to the amount of unpaid restitution. However, if the defendant attempts to transfer property subject to the restitution judgment, the stay against execution is removed.

G. SPECIAL CONSIDERATIONS IN CRIMINAL ACTIONS

There are no magical criteria to detect fraud. Some writers, for example, have suggested lists of factors found in fraud cases; i.e. many fraudulent employee injuries occur on Friday or Monday, etc. As many exceptions to any stated evaluation criteria exist as the criteria. Common sense is the best criteria. For example, trial practitioners routinely complain that employers deliberately provide inaccurate wage information to insurance carriers. Yet, very few of these cases are formally reported. Simply stated, if a reasonable person suspects fraud may exist, it probably does. Anyone involved in the workers' compensation system that suspect fraud should report it to the Fraud Investigations Section.

If fraud is suspected, documentation and preservation of that documentation is critical to developing a prosecutable case. In a number of employee criminal fraud cases, for example, insurance companies have made referrals contending that employees are receiving workers' compensation benefits while unlawfully working at unreported employment. The insurer generally produces checks with "no work" endorsement language, responses to interrogatories, deposition transcripts or other document in which the suspected employee denies employment during the relevant time period. The insurance carrier will produce photo static copies of their benefit payment checks for the suspected period. However, the insurance carrier has destroyed the original check, retaining only a facsimile of the cancelled check. If the employee denies that the signature on the check is the employee's, it is impossible to submit the facsimile for expert handwriting comparison and a question of fact is created for a criminal jury.

In representing an individual in a criminal fraud case, when you conclude that the client has

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criminal exposure, prepare to make full restitution as early in the case as possible. While the District Attorney is ultimately responsible for the disposition of the cases within the prosecutorial district, the Industrial Commission will make recommendations to the District Attorney.

Taking together all of the General Assembly's enactments for criminal offenses, the General Assembly's paramount objective can be defined as requiring all employers to comply with N.C. Gen. Stat. §97-1, et. seq. and require all of the actors involved in the workers' compensation system to closely heed the dictates of the Act. The General Assembly's intent is in keeping with the special relationship that the State of North Carolina has created with its workers.

IV. CIVIL PROCEEDINGS

In addition to substantial criminal penalties, the General Assembly traditionally provided limited civil penalties for actors violating specific provisions of the Workers' Compensation Act. In 1994, the Workers Compensation Reform Act greatly expanded the actors within the Industrial Commission's authority to inflict civil penalties. The enactments were generally designed to address specific perceived problems in the Workers' Compensation system.

A. UNINSURED EMPLOYERS

Employers are required by N.C. Gen. Stat. § 97-93 to provide workers' compensation insurance or self-insurance for their employees if they are subject to the Workers' Compensation Act. Employers who fail to provide workers' compensation insurance or self-insurance are subject to civil penalties in addition to the criminal sanction previously discussed. N. C. Gen. Stat. § 97-94 (emphasis added) provides:

(a) Every employer subject to the compensation provisions of this Article shall file with the Commission, in form prescribed by it, as often as the Commission determines to be necessary, evidence of its compliance with the provisions of G.S. § 97-93 and all other provisions relating thereto.

(b) Any employer required to secure the payment of compensation under this Article who refuses or neglects to secure such compensation shall be punished by a penalty of one dollar ($1.00) for each employee, but not less than fifty dollars ($50.00) nor more than one hundred dollars ($100.00) for each day of such refusal or neglect, and until the same ceases; and the employer shall be liable during continuance of such refusal or neglect to an employee either for compensation under this Article or at law at the election of the injured employee.

The penalty herein provided may be assessed by the Industrial Commission administratively, with the right to a hearing if requested within 30 days after notice of the assessment of the penalty and the right of review and appeal as in other cases. Enforcement of the penalty shall be made by the Office of the Attorney General. The clear proceeds of penalties

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provided for in this subsection shall be remitted to the Civil Penalty and Forfeiture Fund in accordance with G.S. § 115C-457.2.

(d) Any person who, with the ability and authority to bring anemployer in compliance with G.S. § 97-93, willfully fails to bring theemployer in compliance, shall be guilty of a Class H felony. Any person who,with the ability and authority to bring an employer in compliance with G.S.§ 97-93, neglects to bring the employer in compliance, shall be guilty of aClass 1 misdemeanor. Any person who violates this subsection may beassessed a civil penalty by the Commission in an amount up to onehundred percent (100%) of the amount of any compensation due theemployer's employees injured during the time the employer failed tocomply with G.S. § 97-93.

(e) Notwithstanding the provisions of G.S. § 97-101, the Commissionmay suspend collection or remit all or part of any civil penalty imposed underthis section on condition that the employer or person pays the compensationdue and complies with G.S. § 97-93.

The legal standard by which a civil penalty may be imposed against an "employer" is slightly different than the criminal standards. A "willful" violation of the act is not required. The Industrial Commission must simply find from the preponderance of the evidence that the employer "refuses" to comply with the Act or "neglects" to comply with the Act. The discussion of these elements in the criminal offense section of this article should be referenced.

The General Assembly has specifically treated "employers" and other "persons" separately for the purposes of civil proceedings. As to "employers," the General Assembly has maintained the traditional per diem fine. Carefully note that the "employer," no matter how small and up to one hundred (100) employees is subject to a minimum fine of fifty dollars per day ($50.00) and up to a maximum fine of one hundred dollars per day ($100.00). The minimum civil penalty for uninsured employers equates to eighteen thousand two hundred and fifty dollars ($18,250.00) per year and at the minimum daily rate the penalty is thirty-six thousand five hundred dollars ($36,500.00) per annum.

The "per employee" penalty of one dollar per day ($1.00) would, in practice, appear applicable only to employers with over one hundred employees. Obviously, most employers in North Carolina would be subject to the minimum or maximum per diem penalty rather than the per employee penalty.

Civil penalties collected from "employers" are not generally revenue to the Industrial Commission.These civil penalties are paid to the North Carolina Civil Penalty and Forfeiture Fund in accordance

with N.C. Gen. Stat. § 97-94. The Civil Penalty and Forfeiture Fund is estabhshed by N.C. Gen. Stat.§ 115C-457.2. The Civil Penalty and Forfeiture Fund transfers the proceeds of the Fund to the State

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School Technology Fund. The latter uses the proceeds for obvious purposes by allocating the funds to local school systems on the basis of average daily membership. The North Carolina Industrial Commission may retain only up to ten percent (10%) of the ar. int collected to offset the costs of collection.

A civil penalty for other "persons" is a recent addition n ue Workers' Compensation Act. Every practitioner should give special reading to subsection (d) oi the statute providing penalties for "other" persons. As noted in the discussion of criminal offenses, the classes of persons to which the statute applies appears to be very broad. It is suggested that the reader review ail of the hypothetical fact patterns detailed in the discussion of criminal actions above applying the civil penalty provisions to the questions posed.

In one case currently before the Commission, an insurance agent's attorney is contending that the N.C. Gen. Stat. § 97-94(d) is inapplicable to insurance agents because they are not "persons" within the meaning of the statute. The Attorney General's Office has taken the position that agent's are "persons" within the meaning of the statute and are subject to civil penalties under appropriate fact patterns. The Full Commission and ultimately the appellate courts will have to resolve the scope of the application of the statute.

The impact of including other "persons" within the civil penalty jurisdiction is profound. In cases involving all business entities that purport to shield individuals from liability; i.e. corporations, the statute simply imposes personal liability despite the "shield" that North Carolina normally affords individual stockholders, directors, and officers. The effect of subsection (d) should not be confused with the concept of "piercing the corporate veil" in workers' compensation benefit cases. Generally stated, an injured employee, in order to have liability imposed to individual owners of a corporation, must demonstrate that the business entity was the "alter ego" of the individual being pursued. In Postell v.B&D, Construction Co., 105 N.C. App. 1,11,411 S.E.2d 413,11, _ (1992) (citations omitted), the North Carolina Court of Appeals succinctly defined the rule:

North Carolina recognizes the "instrumentality rule" as the basis for disregarding the corporate entity or "piercing the corporate veil." That rule, in the context of this case, would hold that where one exercises actual control over a corporation operating the latter as a mere instrumentality or tool, then that controlling individual is liable for the torts of the corporation thus controlled. "In such instances, the separate identities ... may be disregarded."

To "pierce the corporate veil" the Commission utilized the three part test for determining whether a corporation was being used as an instrument.. . . [Liability may be imposed on an individual controlling a corporation as an "instrumentality" when he had:

(1) Control,. .. complete domination,... of policy and business practice in respect to the transaction attacked so that the corporate entity . . . had at the time no separate mind, will or

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existence of its own; and

(2) Such control must have been used ... to perpetrate the violation of a statutory or other positive legal duty ... in contravention of the plaintiffs legal rights; and

(3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

However, under the N.C. Gen. Stat. § 97-94(d) the "shield" simply does not exist. The only requirement is a finding that the "person" had both the "ability" and "authority" to bring the employer into compliance with N.C. Gen. Stat. § 97-93.

The Industrial Commission has several cases pending before it in which petitions for civil penalties have been brought against insurance agents. While the numbers of insurance agent cases are not great, distinct fact patterns are emerging. First, the typical fact pattern has an employer contacting his insurance agent upon forming a business and requesting the agent to procure all the various insurance coverage he will need. The employer usually contends that he informed the agent of the number of employees he is hiring. The agent ultimately provides commercial automobile coverage and general liability insurance, perhaps major medical insurance, but no workers' compensation insurance. Inevitably, a worker is injured and a claim filed with the Industrial Commission. The agent typically responds that the employer requested specific insurance coverage and did not request workers' compensation insurance. Second, in a number of cases, employers report instructing their insurance agents to procure workers' compensation insurance and the agent fails to do so.

The Full Commission2 has addressed N.C. Gen. Stat. § 97-94 on twenty-one occasions in reported decisions. Please refer to the Appendix for a list of those cases for the practitioner who wishes to develop a more intensive knowledge of Industrial Commission responses to specific fact patterns.

The penalty for other "persons" can be an amount up to one hundred percent (100%) of the benefits that injured workers' would have been entitled to during the period of non-insurance. The General Assembly obviously intended that responsible "persons" should be held directly accountable for the full impact of their failure to have the employer comply with the Act.

Penalties collected from responsible "persons," however, are not revenue of the Industrial Commission. Unlike the civil penalties for employers, which are paid to the Civil Penalty and Forfeiture Fund, penalties collected for responsible "persons" are paid to the General Fund of North Carolina pursuant to N.C. Gen. Stat. § 97-101. The Industrial Commission may not deduct any amount for the actual costs of its collection efforts.

2 Deputy Commissioner Opinions & Awards are not included in this Article. They are available to the public as of March 1,2000. Deputy Commissioner Opinions & Awards may be found at the Industrial Commission's Internet home page; the address is www.comp.state.nc.us.

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Considering both criminal and civil penalty statutes, the Industrial Commission may pursue both criminal and civil proceedings simultaneously. Consider the following hypothetical:

Hypothetical 1. Fly By Night starts a business. His attorney advises Fly By Night that he should incorporate because it shields him from personal liability. The business is incorporated. Hy By Night is president of the company. His attorney, being his best friend, agrees to be named as a director of the company. He hires three employees. In consulting with his insurance agent, the agent advises Fly By Night that he is required to have workers' compensation insurance. Fly By Night declines because the premium is more that he can afford. At the next directors meeting, both Fly By Night and attorney discuss workers' compensation insurance. Attorney concurs with the insurance agent, Fly By Night resists, and attorney states, "Well, North Carolina law requires you to have coverage, but it is your business and if you don't have it, it is no skin off my "corpus delicti." One of Fly By Night's employees is injured.

Who may be criminally charged? Who is subject to civil penalties?(There is an old expression about the

"kitchen sink!")

Despite the significant civil penalties that may be imposed, the General Assembly grants the Industrial Commission discretion to remit or reduce penalties. N.C. Gen. Stat. § 97-94(e) provides:

Notwithstanding the provisions of G.S. § 97-101, the Commission may suspend collection or remit all or part of any civil penalty imposed under this section on condition that the employer or person pays the compensation due and complies with G.S. § 97-93.

The Industrial Commission has exercised its grant of discretion in appropriate factual circumstances. In uninsured cases, it has substantially reduced penalties where employers and responsible persons have paid complete or nearly complete compensation benefits on a prompt basis. The best advice that an attorney can give an uninsured client in any compensable case is to pay employees legitimate benefits promptly.

As with a workers' compensation benefit Opinion & Award, enforcement of an Industrial Commission civil penalty assessment is by reducing the assessment to a regular civil judgment and executing on that judgment. N.C. Gen. Stat. § 97-100 provides:

The Industrial Commission shall have the power by civil action brought in its own name to enforce the collection of any fines or penalties provided by this Article....

1. Special Considerations in Uninsured Employer Cases

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Uninsured employers present particular problems for the Industrial Commission, injured workers and practitioners. The crucial problem in these cases is assuring that injured employees receive the benefits to which they are entitled.

The author's experience is that time is the enemy of the injured worker in uninsured cases. Given sufficient time, recalcitrant employers can dispose of assets, leave the State, or file bankruptcy. A number of uninsured cases involve "mom and pop" corporations that may be undercapitalized. For the injured worker, "piercing the corporate veil" to expose individuals to liability can be difficult. See generally Postell v.B&D. Construction Co., 105 N.C. App. 1,411 S.E.2d 413 (1992) and the related discussion above. Even if the "corporate veil" can be pierced, no assurance exists that assets will be available to satisfy any judgment.

Given these considerations, it is vital to the practitioner to identify at the earliest possible time an uninsured employer. Notify the Fraud Investigations Section any time you suspect an uninsured employer. Given the volume of uninsured cases that the Industrial Commission is attempting to process, early confirmation that a case file has been established in the Fraud Investigations Section helps obtain early intervention. It is preferred that you fax or send the notification by email with as much information as possible about the potential uninsured employer's proper identity and all known facts and witnesses necessary to establish jurisdiction of the Workers' Compensation Act.

Practitioners must correctly identify the business entity and plead the business entity on the Form 18 just as in a regular civil action. Because an insurance company usually is present, practitioners generally do not name employers accurately. Where an insurance carrier pays the claim, the improper identification of an employer creates no harm. In uninsured cases the practitioner, in most cases, will have to seek civil judgment to execute on any benefit award. If the employee is identified as ABC Company but the employer is actually ABC Water, Inc. the Opinion & Award and subsequent civil judgment may be worthless.

Furthermore, improper identification can create delays in your client's case. The Industrial Commission's Statistics Division, which identifies insurance carrier coverage for all Form 18 filings, spends considerable wasted time checking for coverage when proper identification of the employer would have permitted immediate identification. In fact, a small number of cases have been referred to the Fraud Investigations Section as uninsured employers in which considerable resources are expended to ultimately confirm that the employer had coverage.

In representing an injured worker in an uninsured case, petition the Industrial Commission to bypass mediation unless there is a real reason to go to mediation. Unless absolutely necessary, avoid continuing an uninsured case. In many cases, plaintiffs counsel will request continuances when uninsured cases come before a Deputy Commissioner. Continuances, other than for compelling reasons, threaten your client's chances of recovery. It is advisable in most cases to request expedited hearings on the issue of jurisdiction under the Act.

Most importantly, practitioners should file corresponding civil enforcement actions in all uninsured cases to ultimately enforce any potential workers' compensation Opinion & Award. Civil

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enforcement action should be filed immediately upon forming a reasonable belief that the employer is uninsured. Many practitioners appear: be unaware that a civil action can be filed before the Opinion & Award becomes final. The : ag of a civil action is considered so important to the protection of the injured employee that setung forth the statutory authority authorizing such civil actions is appropriate:

As to every employer subject to the provisions of this Article who shall fail or neglect to keep in effect a policy of insurance against compensation liability arising hereunder with some insurance carrier as provided ix G.S. § 97-93, or who shall fail to qualify as a self-insurer as provided in the Jticle, in addition to other penalties provided by this Article, such employer shall be liable in a civil action which may be instituted by the claimant for all such compensation as may be awarded by the Industrial Commission in a proceedine properly instituted before said Commission, and such action may be brougnt by the claimant in the county of his residence or in any county in which the defendant has any property in this State; and in said civil action, ancillary remedies provided by law in civil actions of attachment, receivership, and other appropriate ancillary remedies shall be available to plaintiff therein. Said action may be instituted before the award shall be made by the Industrial Commission in such case for the purpose <v preventing the defendant from disposing of or removing from the State of North Carolina for the purpose of defeating the payment of compensation any property which the defendant may own in this State. In said action, after being instituted, the court may, after proper amendment to the pleadings therein, permit the recovery of a judgment against the defendant for the amount of compensation duly awarded by the North Carolina Industrial Commission and subject any property seized in said action for payment of the judgment so awarded. The institution of said action shall in no way interfere with the jurisdiction of said Industrial Commission in hearing and determining the claim for compensation in full accord with the provisions of this Article. Nothing in this section shall be construed to limit or abridge the rights of an employee as provided in subsection (b) of G.S. § 97-94.

N.C. Gen. Stat. § 97-95 (empha added).

A number of cases before die Industrial Commission demonstrate that waiting on a final Opinion & Award before filing a civil enforcement action greatly diminishes the injured workers' ability to recover benefit awards. An argument can be made that any practitioner who fails to bring a civil enforcement action with appropriate motions to preserve assets as early as possible may commit malpractice.

Bankruptcy presents particular problems in uninsured cases and is always a consideration that the practitioner must anticipate. Two fundamental issues arise with any bankruptcy petition in an

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uninsured employer case. These issues are: is a workers' compensation benefit award subject to discharge in bankruptcy, and, are administrative fines and penalties imposed by the Industrial Commission subject to discharge?

The Industrial Commission has joined three bankruptcy cases arising from a single uninsured employer in the Federal Bankruptcy Courts, Eastern and Middle Districts of North Carolina to determine whether administrative fines and penalties will be dischargeable. Plaintiffs counsel is contesting dischargeability of the workers' compensation benefit award in the same cases. It should be noted that the Industrial Commission is not generally considered a "creditor" in bankruptcy for the purpose of filing on behalf of the injured worker, but only a creditor as to civil penalties that could be collected. Resolution of the bankruptcy issues is anticipated during the latter part of 2000.

These cases already suggest several lessons for practitioners. First, if a bankruptcy is filed in an uninsured case, the Industrial Commission can take NO further action in that case; either as to employee benefits or civil penalties, until such time as a relief from the automatic stay of the bankruptcy court is obtained. Second, an injured employee has a very short period of time from the first meeting of the creditors in the bankruptcy court in which to file an adversarial proceeding if one is required. In cases where an adversarial proceeding is necessary, failure to file it automatically subjects the workers' compensation benefit claim to discharge even though it might not have been dischargeable. If the workers' compensation practitioner is not experienced in bankruptcy, establishment of a working relationship with an experienced bankruptcy practitioner is critical.

These special considerations are just some of the problems that are encountered in uninsured employer cases. For the perspective of a Deputy Commissioner of the Industrial Commission, the reader is directed to an article by Douglas E. Berger, "Representation of Injured Workers Against Non-Insured Employers: Strategic Considerations."3

B. HEALTH CARE PROVIDERS

The General Assembly has specifically proscribed civil penalties for health care providers. N.C. Gen. Stat. § 97-88.3 provides a comprehensive system of civil penalties for health care providers in a wide range of contexts. They are:

(a) In addition to any liability under G.S. § 97-88.2, any health care provider who willfully or intentionally undertakes the following acts is subject to an administrative penalty, assessed by the Commission, not to exceed ten

3 The article may be found on the Industrial Commission's Internet home page: www.comp.state.nc.us. In reading Deputy Commissioner Berger's article, the reader should be aware that the Industrial Commission has suspended civil contempt proceedings to require payment of Opinion & Awards. Substantial legal issues have been raised as to whether or not civil contempt proceedings may be employed in this context. Pending resolution of the legal issues by the Full Commission civil contempt proceedings may not be utilized.

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thousand dollars ($10,000):

(1) Submitting charges for health carethat was not furnished;

(2) Fraudulently administering, providing, and attempting to collect for inappropriate or unnecessary treatment or services; or

(3) Violating the provisions of Article 28 of Chapter 90 of the General Statutes.

A penalty assessed by the Commission for a violation of subdivision (3) of this subsection is in addition to penalties assessed under G.S. § 90-407.

(b) In addition to any liability under G.S. § 97-88.2, any health care provider who willfully or intentionally undertakes the following acts is subject to an administrative penalty, assessed by the Commission, not to exceed one thousand dollars ($1,000):

(1) Failing or refusing to timely file required reports or records;

(2) Making unnecessary referrals; and

(3) Knowingly violating this Article or rules promulgated hereunder, including treatment guidelines, with intention to deceive or to gain improper advantage of a patient, employee, insurer, or the Commission.

(d) Any person, including, but not limited to, an employer, an insurer, and an employee of an insurer, who in good faith comes forward with information under this section, shall not be liable in a civil action.

(e) Information relating to possible violations under this section shall be reported to the Commission which shall refer the same to the appropriate licensing or regulatory board or authority for the health care provider involved.

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(f) A hospital that relies in good faith on a written order of a physician in performing health care services shall not be subject to an administrative penalty in violation of this section.

The General Assembly's treatment of health care providers is similar to that of uninsured employers. Health care providers are subject to both criminal and civil penalties. Additionally, monetary penalties are substantial.

As of this date, the Industrial Commission has not imposed a civil penalty against a health care provider. Only one case involving a health care provider is currently under investigation. When penalties are collected, they would be paid to the North Carolina General Fund.

RESTITUTION IN THE CONTEXT OF WORKERS' COMPENSATION CLAIMS?

In N.C. Gen. Stat. § 97-88.2, the General Assembly specifically authorized "restitution" in the context of criminal actions. Less clear is the legislative intent in N.C. Gen. Stat. § 97-88.2(b) authorizing the Industrial Commission to order "restitution."

The General Assembly did not specifically define the classes of violations to which "restitution" applies. Equally absent, the General Assembly did not provide comprehensive procedures for "restitution." These omissions are in stark contrast to the legislative enactments proscribing "restitution" in criminal actions.

Logic would suggest that "restitution" in the context of the Workers' Compensation Act would be applicable to (1) employee fraud, (2) health care provider violations, and (3) employers in "deduction" cases. For example, if an employee has received benefits based on fraudulent conduct restitution by Industrial Commission order would be appropriate to address the wrong. Restitution would not appear necessary in the context of employee claims, as the underlying Opinion & Award would provide the appropriate benefits under the fact situation.

Several Deputy Commissioners report entering orders requiring employees to make restitution to the employer/carrier when fraudulent conduct has resulted in overpayments to the employee. The amount of restitution, in some cases, cannot be offset against other benefits owed to the employee, if any. To date, the issue of the enforcement of restitution has not been raised.

The issue of whether or not, and under what circumstances, if any, the Industrial Commission invokes even larger issues. For example, if the Industrial Commission orders an offending employee to reimburse an employer for benefits paid as a result of the employee's fraudulent conduct, how would that order for restitution be enforced? N.C. Gen. Stat. § 97-95 only speaks in terms of employees being able to reduce Industrial Commission Opinions & Awards to civil judgment. The larger issue is whether or not the Industrial Commission can attempt to enforce its awards, including orders for restitution, under the civil contempt powers of Chapter 5 A of the North Carolina General Statutes. If the Commission can utilize civil contempt, the Commission could imprison the disobedient, subject to the strict standards of Chapter 5A of the North Carolina General Statutes, until restitution is paid.

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The Industrial Commission has not traditionally utilized civil contempt proceedings to enforce its orders. The importance of the issue cannot be underestimated. If the Industrial Commission can enforce its orders through civil contempt proceedings, the potential impact for Opinions & Awards in uninsured cases may be profound.

The Industrial Commission is currently considering the issues involved in determining whether or not it may exercise civil contempt powers in the context of its benefit awards. Until the Commission completes its research, Deputy Commissioners have been instructed not to undertake civil contempt proceeds to enforce payment of benefit orders.

VI. CONCLUSION

The North Carolina General Assembly has provided a broad range of criminal offenses and civil penalties to punish violations of the Workers' Compensation Act. The Industrial Commission's effort to actively deal with violations under the Act in a systematic and effective manner is still in its infancy. Yet, the Industrial Commission's 1999 data clearly documents that all types of reported violations of the Workers' Compensation Act are increasing at a significant rate, which appears to be ongoing. This fact is especially true for uninsured employer cases, the number of which is alarming and growing. These cases threaten the very integrity of the workers' compensation system.

The process of developing the best possible system for effectively addressing violations of the Act, given the limited resources available to the Industrial Commission, requires substantial experimentation with allocation of resources and procedure for processing claims. The active input of all of those involved in the workers' compensation system is vital in developing the best possible response to violations of the Act to better protect the workers' compensation system in which we have dedicated ourselves.

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NORTH CAROLINA INDUSTRIAL COMMISSION FULL COMMISSION DECISIONS CITING N.C. GEN. STAT. § 97-94

1. I. C. No. 637787. MILTON L. HARRISON, Employee, Plaintiff v. TOBACCO TRANSPORT, INC., Employer, NON-INSURED, and/or CNA INSURANCE COMPANIES, Carrier, Defendants.

2. LC. NO. 267664. ANNA D. LLOYD, Widow of and Administrator of the Estate of BERNARD LLOYD, Deceased Employee, Plaintiff v. HERMAN T. JONES d/b/a QUALITY A AUTO SALES, Employer, NON-INSURED, Defendant.

3. LC. NO. 341032 KATHY LnTLE, Employee, Plaintiff v. B Y ROCKY'S, Employer.

4. LC. NO. 351559 ARTHUR P. NELSON, Employee v. BG&S OF GREENSBORO, INC. d/b/a THOMAS J.

5. LC. NO. 389021. CARROLL EDMUND BOHANNON, Employee, Plaintiff v. MIKE LUNSFORD D/B/A LUNSFORD'S GARAGE, Employer, NON-INSURED, Defendants.

6. LC. NO. 426943. LAURIE WILLIAMS, Employee, Plaintiff v. FINISHES FIRST, Employer, NON-INSURED, Defendant.

7. LC. NO. 453334 MIRANDA CLAYTON, Employee, Plaintiff v. O'BRIANT DBA B Y JOE'S ONE HOUR MARTINTZING, Employer.

8. LC. NO. 492160. GLORIA J. WATTS, Employee, Plaintiff v. LONNJE LYNWOODNORRIS.Employer, MICHIGAN MUTUAL INSURANCE CO./AMERISURE, Carrier, Defendants.

9. LC. No. 078492 DONALD WILLIAMS, JR., Employee, Plaintiff v. A. B. HUNTER JR., Alleged Employer Individually, Employer, AND/OR CURRICORP, INC., Alleged Employer AND/OR BACKWOODS, INC.,

10. LC. NO. 114173. WILLIAM R. WELLBORN, Employee, Plaintiff v.TRI-STATE SERVICES, INC., Employer, NON-INSURED, and/or ROYHUFFMAN CONSTRUCTION COMPANY (Now Dismissed),

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Employer, LIBERTY MUTUAL INSURANCE COMPANY

11. LC. NO. 273415 KAREN POWELL, Employee v. SADLER CHECK CASHING OF CHARLOTTE.

12. LC. NO. 426943 LAURIE WILLIAMS, Employee, Plaintiff v. FINISHES FIRST, Employer, NON-INSURED.

13. LC. NO. 452790. LEON EDWARD KNOX, Employee, Plaintiff v. OSWALT ROOFING CO., Employer, NON-INSURED, Defendant.

14. LC. NO. 455258. LUKE W. GUILLORY, Employee, Plaintiff v. STAR ERECTORS, INC., ROYAL INSURANCE COMPANY, and MATRIX INSURANCE AGENCY INC., Employer, SELF-INSURED (CONSOLIDATED ADMINISTRATORS, INC., Servicing Agent).

15. LC. NO. 468262 516448. JAMES RABBITT, Employee, Plaintiff v. CORNERSTONE BUILDING (MICHAEL CLENDENING), Employer, SELF/CONSOLIDATED ADMINISTRATORS, Defendant.

16. LC. NO. 517839. JOHN ROBERT EDGE, Employee, Plaintiff v. MELVIN MOTOR COMPANY, JAMES MELVIN and JAMES D. MELVIN, m, Employers, NON-INSURED, Defendants.

17. LC. NO. 563639. TED THOMAS TUCKER, Employee, Plaintiff v. WORKABLE COMPANY, INC., D/B/A ABLE BODY LABOR, Employer, [IAEA BENEFIT TRUST/ROSS FULLER, TRUSTEE, Alleged Carrier.

18. LC. NO. 601631. GARLAND FLOYD, Employee, Plaintiff v. DONALD AND LINDA WARREN, D/B/A WARREN'S JOY DOG FOOD, Employer, NON-INSURED, Defendants.

19. LC. NO. 642881. CLAIRE A. BARBER, Employee, Plaintiff v. GOING WEST TRANSPORTATION, INC., Employer, NON-INSURED, Defendant.

20. LC. NO. 691937. MITCHELL TEW, Employee, Plaintiff v. E. B. DAVIS ELECTRIC COMPANY, Employer, SELF-INSURED (COMPTRUST AGC, BRENTWOOD SERVICES, Administrator), Defendant, and/or BRADFORD S. HANCOX, Administrator.

21. LC. NO. 702568. HERMAN RIVERA, Employee, Plaintiff v. GEORGE

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^ TRAPP, Employer, NON-INSURED, and/or DAVID BEAUCHEMIN,Employer, NON-INSURED, and/or JOHN SCHUCK, Employer, NON-INSURED, Defendant.

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