DISCLAIMER: This post describes one client’s penalty resolution experience. It does not contain legal advice. I am not your attorney, and past performance does not guarantee a similar results.
Francisco was a freelancer who was referred to us by his accountant. He had been served with a penalty notice from the New York State Workers Compensation Board because he did not respond to an insurance inquiry notice. He meant to respond, but when he received the notice, he had just gotten home from a hectic day at work. His young daughter was hungry, and his wife needed to run an errand. The notice went in the mail pile. He forgot about it, not knowing the chain of events his failure to respond would put in motion.
Francisco was shocked and scared. He had read he could be prosecuted for fraud, in addition to being responsible for a penalty he could not afford. His business had only generated about $80,000 in sales last year, and the pandemic had not helped its recovery. His wife worked, too, but her earnings were barely more than the $20,000.00 penalty the Board assessed.
They were living modestly and were as frugal as possible. If the penalty stood, they might have nowhere to live and be unable to care for their little girl.
How the Penalty Was Determined
The WCB’s computer system automatically sent a penalty notice within a few days after his response to the insurance inquiry was due. His failure to respond was deemed an admission of non-compliance. The Board assumed he had no workers compensation, disability, or Paid Family Leave insurance for his employees. Since the insurance is mandatory in New York and he was presumed not to have it, he was automatically penalized $2,000.00 for each 10-day period from the date he incorporated the business.
Fortunately, the Board’s primary goal is to get employers in compliance. It does not want to bankrupt businesses or cause families homelessness.
Define the Conflict
We zeroed in on the real issue. The WCB and Francisco simply disagreed about his need for workers compensation, disability, and Paid Family Leave insurance. He had no employees, but the Board didn’t know this because he failed to respond to the insurance inquiry that also requests information about the business’ workforce.
Identify the Interests
The penalty already told us the WCB’s position. It believed Francisco was non-compliant. His position was that he had no employees to provide insurance. If both parties held tightly to their positions, we would not resolve the conflict. We looked for the beliefs, wants, and needs that were supporting the positions.
The Board wanted to ensure compliance, confirm coverage, and avoid uninsured injuries to employees working in NYS. Francisco also wanted to be compliant and avoid uninsured injuries. He didn’t even know to think about insurance coverage.
Play with the Possibilities
Once we had a better idea of the reasoning behind each party’s positions, we could explore ways to meet everyone’s needs in a settlement agreement.
If the Board could have had the conflict resolve in any way possible, Francisco would have gotten the required coverage and paid the penalties. Likewise, Francisco’s ideal resolution was to have ample opportunity to comply and pay a small or no penalty.
We were off to a good start. The WCB and Francisco had compatible interests. They both wanted to ensure that Francisco’s employees were safe and that he was in compliance with the law. Also, they wanted to avoid the time, money, and energy costs of court action. We focused on the commonalities and built a resolution from there.
Create the Future
- Consultation. We provided Francisco with a free 30-minute telephone conversation to review his workforce structure and the correspondence he had with the Board before contacting us. Knowing the Board would need to see NYS-45 payroll tax returns, W-2 forms, and a list of all payments made to vendors or independent contractors, we had him send these and other documents to us for review.
- Appeal. We filed an Application for Review of Penalties with the WCB and answered the examining attorney’s follow-up questions. Within two weeks, we received an Offer of Reduction in the penalties. Francisco’s penalties would be resolved for $2,500.00, as long as he secured WC, DB, and PFL coverage.
- Training. We showed Francisco how to self-auditing his worker classifications before the State does it for him. It gave him a better understanding of the legal distinctions between an employee and independent contractor. Later, we discovered the large “Outside Services” deduction on his income tax returns had triggered the Board’s inquiry. In an effort to reduce Francisco’s tax liability, his accountant had deducted a relatively large amount for independent contractors. Instead of saving Francisco money, the accountant caused a penalty far larger than any amount he saved in taxes.
We still didn’t agree that Francisco’s contractors could be deemed employees, but we decided it was less expensive for him to purchase the insurance and move on. If someone gets hurt on one of his job sites now, he has insurance to cover the expenses and he won’t face additional penalties.
The insurance cost Francisco approximately $2,000.00. An uninsured claim could cost more than $50,000.00, depending on the type and severity of injury.
Stay on PARR
Plan, act, revise, and repeat. That is what Francisco does now.
- He is learning to keep better records of every payment to an independent contractor.
- He is careful not to subcontract work to individuals who have not formed businesses and who don’t have their own WC, DB, and PFL insurance policies, as well as general liability (or business) insurance.
- He is continuously improving his entrepreneurial skills and looking forward to growing from a freelancer to an entrepreneur–gradually, without missing his daughter’s big moments.
Need to resolve a NYS WCB penalty?
FAQs About Penalty Negotiations
How to Respond to a NYS WCB Penalty Notice: A Guide for Employers