The California Little Hoover Commission, is an independent state agency charged with recommending ways to improve the efficiency and effectiveness of state programs. The Commission’s recommendations are submitted to the Governor and the Legislature for their consideration and action. By statute, the Commission is a bipartisan board composed of five public members appointed by the governor, four public members appointed by the Legislature, two senators and two assemblymembers.
The Commission said in the 140 page report, that California businesses are losing ground to unscrupulous competitors who break the rules to gain an unfair advantage,in a report calling on the Governor and Legislature to more effectively fight the state’s underground economy. The Commission found the underground economy is growing and thriving in part because of insufficient resources for enforcement. The Commission learned that many cheaters break the rules because getting caught is unlikely. If they are caught, few are charged in court. When found guilty, the profits from cheating often outweigh the fines and penalties. More, there is an abysmal record of collecting restitution. The state loses an estimated $8.5 billion or more annually in tax revenue, yet efforts to combat the underground economy are disjointed and under-resourced, the Commission found. It reported that the state’s bureaucratic disorganization and neglect provide significant incentives to cheat, making the rewards of participating in the underground economy outweigh the risks.
The Commission found that existing laws can be so confusing and inconsistent that even business owners who try to comply sometimes later learn they have broken rules. Recommended improvements include defining independent contractor in statute, bolstering asset seizure laws, and generally refining laws to improve clarity and to ensure rewards don’t outweigh risks.
The Commission also recommends replicating the current workers’ compensation fraud grant funding model to other high-fraud areas, enabling local district attorneys to increase their role in tackling the underground economy. Many stakeholders told the Commission that the workers’ compensation grant model, financed by premiums paid by California employers for fraud investigations and prosecutions, is an effective funding model. Nearly $59 million has been allocated for the FY 2015-16 grant cycle. A worker’s compensation manager of a Fortune 100 company and member of the Fraud Assessment Commission, which determines how much grant funding will be available for the program, told Commission staff that good oversight is what makes the grant process effective. “The Fraud Assessment Commission pushes and pushes and pushes for counties to do better. We constantly tell them that they have to do better to get the money. And it works,” he said. “If similar programs are established, you should create a similar mechanism that requires proven performance for funding.”
Counties funded by the grant dedicate prosecutors to investigating workers’ compensation fraud. “I have no problem finding prosecutors for workers’ compensation cases, because of the grant,” the EDD Chief of Investigations told the Commission.Many district attorney offices have opened workers’ compensation fraud sections, in part because of the grant. Representatives from the Orange County District Attorney’s Office said the grant program allowed them to hire fraud specialists. “These cases can take years sometimes to get up to speed. The grant funding allows someone to build an expertise in fraud.”
Prosecutors investigating workers’ compensation fraud cases frequently uncover additional unlawful activity. San Bernardino Deputy District Attorney David Simon told Commission staff: “Workers’ compensation fraud is just one spoke in a wheel of a wide variety of illegal conduct that we refer to as unfair business practices. This is what the Business and Professions Code defines as practices that unfairly advantage one business that disadvantage another business in the free market. We find that businesses without workers’ compensation are often unlicensed to do contracting, engaging in cash-pay transactions and income tax evasion, not paying overtime or engaging in theft of labor. They’re all related and a legitimate business person cannot possibly compete against the bid of these companies.”
The Report concludes “Because of the effectiveness of the workers’ compensation grant program, stakeholders suggested that it could be expanded and replicated in other high-fraud areas, including dedicated funding for complex cases.”