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Shell Corporations and Workers’ Compensation Fraud in Construction Part 2

Whether it’s enticingly low premiums, a competitive payroll, or outdoing your rival in the bid process, many construction companies foolishly cut corners to get ahead of the competition. Of course, if you deliberately violate workers’ compensation laws and get caught, you will be issued excessive fines, work will be stopped, and you may face criminal penalties. If work has ceased on your project, consult a stop-work order attorney in Florida.

In the first part of this article, construction attorneys at Cotney Construction Law discussed construction firms that deliberately misrepresent their workforce to enjoy lower insurance premiums. In this section, we will focus on how shell corporation scams are harming the reputation of the industry. Whether it’s fooling insurance companies, claiming that certain workers are working in safe positions when they aren’t, or making illegal small cash payments to laborers at the jobsite, many of these tactics are often performed through a fraudulent shell corporation.  

The Disguised Nature of Shell Corporation Scams

Shell corporation scams are established to essentially hide payroll information on the employees working on a project. Here are some signs of a fraudulent shell company:

  • Many of these types of schemes have a fake owner of the shell company that is allegedly providing the workforce with their workers’ insurance coverage. This is done so that the fraudulent entity that deployed the strategy can simply walk away from the incident untraced during an investigation. In other cases, a construction firm will pay one person a weekly fee to have their name listed as the owner.
  • Generally, a fraudulent shell corporation has no accurate contact information or a physical address for their business. In other words, the business address is either a short-term rented property or even a PO Box. Again, this is done to abandon the business when detected for fraudulent behavior.    
  • Typically, the shell corporation has a very general name to not stand out. Usually, this entity presents itself to an insurance company as an extremely small business that only needs the bare minimum amount of coverage necessary to establish the business and keep the premium low with the insurance company.  

How Labor Brokers Get Involved

After the construction firm establishes the shell company and obtains the lowest possible premium, the firm then hires a labor broker business that is complicit with the scheme. The labor broker can hire the laborers needed per the specialty contractor’s request. The labor broker can then utilize the outline of the workers’ compensation policy for the shell company to employ a workforce while adding uninsured laborers when needed and so and so forth.

The Role of Specialized Subcontractors

In some cases, the specialty subcontractor is complicit with the scheme. For example, if the subcontractor is managing payroll, they are directly involved. Regardless of whether or not the subcontractor was aware of the shell company, the end result is that the labor broker uses this proof of insurance to hire the workers even though most are never listed on the insurance certificate. Unfortunately, most of these types of schemes are not uncovered until after a serious injury occurs at a jobsite and a worker files a claim only to discover they were never covered.

As there can always be legal pitfalls involved with a construction project, it’s important that contractors, subcontractors, suppliers, and other professionals work with an experienced attorney for all of their projects to ensure compliance with all laws, including those dealing with workers’ compensation.

If you are dealing with a stop-work order 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.