By Adrian Middleton, Sword & Shield, PLLC · Updated Friday, October 9, 2026
The 'deemed' rule
Section 440.107(2) defines securing compensation as obtaining coverage that meets the requirements of Chapter 440 and the Insurance Code, then adds: if at any time an employer materially understates or conceals payroll, materially misrepresents or conceals employee duties to avoid proper classification, or materially misrepresents or conceals information pertinent to the experience rating modification factor, the employer shall be deemed to have failed to secure payment of workers' compensation and is subject to the sanctions in the section. The policy stays in force for the injured worker's benefit; for penalty purposes it is as if it never existed.
What underreporting looks like
- A policy written on $80,000 of estimated payroll for a company whose bank records show $600,000 of labor payments.
- Crews paid in cash from job draws, with no payroll journal.
- Checks written to workers and cashed at a check-cashing store, so the payroll never appears on a 941 or an RT-6. Large-scale versions of this are the payroll check-cashing schemes the Division of Investigative and Forensic Services prosecutes as organized fraud, and the ones Adrian worked as an investigator.
- Labor run through a 'subcontractor' entity controlled by the employer.
- Payroll split across multiple entities so each stays under the carrier's estimate, with the entities sharing trucks, tools and a yard.
The consequences are heavier
| Ordinary failure to secure | Deemed failure under s. 440.107(2) |
|---|---|
| 12-month lookback | 24-month lookback (s. 440.107(7)(d)1) |
| Civil penalty, 2 × premium | Same formula over twice the period |
| Criminal referral possible | Criminal referral likely: s. 440.105(4)(b)6 (misrepresenting payroll or classification to reduce premium) and (4)(b)5 (false statements to avoid premium) |
| Carrier is not involved | Carrier audits, re-rates and bills the back premium; may cancel |
How the Department proves it
The investigator compares the carrier's policy payroll to everything else: bank deposits and disbursements, 1099s, permits pulled, square footage built, the number of workers seen on site, and what those workers say about how long they have been there and what they are paid. The gap between the policy and the evidence is the case. Producing records in that situation produces the proof; declining to produce them produces imputation and an inference. Neither is a good option without a strategy, which is why the records decision in a section 440.107(2) case is made by counsel, with the criminal exposure in view.
The carrier's audit is separate
Independently of the Department, the carrier conducts its own premium audit, re-rates the policy on the actual payroll and class codes, and bills the difference, often with the right to cancel. The carrier's audit findings are routinely shared with the Division. An employer that is about to be audited by its carrier and has a payroll problem should talk to counsel before the auditor arrives, not after.
Insured, but worried about what an audit would show? That conversation is privileged. Have it now.
(850) 766-6825Free consultationQuestions
I reported what my agent told me to report. Is that a defense?+
It is relevant to whether the understatement was knowing, which matters for the criminal side, and to whether it was material. It does not change the penalty formula if the payroll was in fact understated. Preserve every communication with the agent.
What is 'material'?+
The statute does not define it. In practice the Department treats any understatement large enough to change the premium meaningfully as material, and does not accept rounding or estimation as an excuse for a gap of tens of thousands of dollars.
Can the carrier's audit be used against me in the stop-work order case?+
Yes. The carrier's payroll audit is a business record the Department can obtain, and section 440.105(1)(a) requires carriers to report suspected fraud to the Department.