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Shell Corporations and Workers’ Compensation Fraud in Construction Part 1

Many construction firms overlook the legalities related to paying workers’ compensation coverage because they want to take advantage of the monetary benefits. For example, when a contractor neglects to pay their workforce’s workers’ compensation coverage, they can save money on their payroll, enjoy lower insurance premiums, and make competitive bids on projects. Of course, this comes with the extreme risk of breaking the law.

In this two-part article, workers’ compensation defense attorneys in Florida with Cotney Construction Law will discuss a common tactic that fraudulent construction companies deploy in order to successfully lower their premiums and dupe insurance companies — establishing a shell company. Although this is an extreme example of how a construction firm can willfully break the law, it’s vital that contractors consult an experienced workers’ compensation defense attorney in Florida to ensure their compliance with all workers’ compensation laws.   

What’s a Shell Corporation?

Shell corporations are one way that construction firms attempt to avoid paying workers’ compensation coverage. Investopedia.com defines a shell corporation as, “a corporation without active business operations or significant assets. These types of corporations are not all necessarily illegal, but they are sometimes used illegitimately, such as to disguise business ownership from law enforcement or the public.”

As it states above, not all shell corporations are inherently illegal. Many large corporations utilize shell companies as a tax saving strategy by moving select jobs offshore or outsourcing certain work responsibilities to foreign countries. Although there are some legitimate shell corporations, there are also many illegal ones operating in the construction industry.

Shell Schemes and Construction

Often located in states with a lot of construction activity, like Florida, shell schemes have become increasingly common in the last few decades. These types of fraudulent enterprises often involve several parties including specialized subcontractors and a labor broker business that assists with filling out the workforce with uninsured workers. Although going through a third party staffing agency is common in construction, as we will discuss in the second part of this article, the issue is that the labor broker business and the shell company itself are essentially avoiding paying the state-required coverage by deliberately underreporting or misrepresenting their workforce.

Depending on the circumstances of the case, the subcontractor may or may not face liability issues during a shell scheme. Regardless of the type of project you are working on, it’s important that contractors and subcontractors consult an experienced attorney in regard to workers’ compensation laws.     

If you would like to speak with one of our workers’ compensation defense lawyers in Florida, please contact us today.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.