Dan and Aimee King McElroy, former owners of a Taunton employment agency, decided payroll taxes and workers compensation premiums were a huge drag – so they opted not to pay all of them.

For about a decade, the McElroys doled out about $43 million worth of wages in cash, ducking out of $10 million in taxes and $7 million in insurance premiums.

That makes this the biggest fraud case of its type in Massachusetts history, according to the U.S. Department of Justice’s statement on McElroy’s sentencing.

Insurance investigators call it “premium fraud” – employers avoid payments by not correctly reporting the number of full-time employees, or misclassifying them; someone who works as a roofer, for example, would get reported as a receptionist because desk workers are less expensive to insure.

Adding Up

It’s been a noteworthy year for premium fraud: This month, Aimee McElroy was sentenced to pay $9 million in restitution and serve more than six years in prison, and Dan was yet more harshly sentenced in July.

A few months before that, Gov. Deval Patrick created a task force to more efficiently catch fraud perpetrators. The “Joint Task Force on the Underground Economy and Employee Misclassifi-cation” is supposed to coordinate between the agencies that have traditionally investigated different aspects of employee misclassification, such as tax fraud and insurance fraud.

Anthony DiPaolo, chief investigator for the Insurance Fraud Bureau of Massachusetts, has investigated such cases on behalf of shorted insurance companies. Premium fraud not only de-prives insurance companies of premiums, he said, it also skews the state’s workers comp rates – those costs get spread out to other insurers.

There are other, indirect ramifications that have caught the state’s interest, DiPaolo said: Employers who fudge their employee numbers get a leg up over the competition. In construction pro-jects, for example, a contractor who misclassifies his employees will be able to put in a lower bid than peers who played by the rules.

Getting Away With It

McElroy was in the employment agency business since the early 1990s, according to the U.S. Department of Justice. His agency provided hundreds of laborers to factories and food process-ing plants in Massachusetts, a third of whom worked along the New Bedford waterfront.

He and his wife operated under a series of different business names and paid most of their wages in cash, doctoring their records until investigators caught on in 2001.

Marc LaCasse is a partner with The McCormack Firm, a Boston law firm that deals specifically with premium fraud. LaCasse said this type of fraud was particularly common in the early 1990s, and helped drive up insurance rates and, in turn, pushed many companies to the state-run workers comp “plan of last resort” at that time.

The bad economy of the early ’90s created a bigger incentive for employers to commit this type of fraud, LaCasse says, prompting a slew of new regulations during the rest of the decade. But it’s likely that today’s hard times have prompted more employers to tinker with their employee documentation again, although it might be a while before anyone knows for sure.

“Sometimes it takes a while for the fraud to manifest,” LaCasse said. If there is an uptick, it won’t be visible until these employers have to file workers comp claims, and then only if insurance companies catch them flubbing the cover-up.

Martha Zackin with Mintz Levin law firm in Boston said employee misclassification lawsuits seem to be getting more common, but that’s likely because regulators and insurers are paying closer attention to payroll documentation – not that more employers are breaking the law.

Zackin represents employers, many of who are anxious to follow state classification law. She more often hears about employees themselves requesting to be classified as independent con-tractors because the up-front pay tends to be better, and they don’t have payroll taxes to chop down their paychecks.

While some employers might be able to escape paying premiums for workers comp, she said, they’ll also be less likely to file claims, leaving it more of a wash than a major drag on insurance companies.
Lost taxes, more than anything, prompted the state to launch its task force, Zackin said.

“I think that’s a primary incentive,’ she said.