Because workers’ compensation claims are generally covered by insurance, they tend to be quickly dismissed by most business owners and managers. In a word -- don’t. Reason: In some cases, a fraudulent claim can turn this seemingly minor nuisance into a major drain on your company’s finances.

Despite some recent improvements, this current system has enabled unscrupulous employees to fake injuries. Furthermore, since money paid under workers’ compensation acts is exempt from federal income tax, there is even greater incentive for fraud. That is one of the reasons why the cost of workers’ compensation insurance has significantly escalated for some companies in recent years.

So how can you protect your company from fraudulent claims? Here are a few general suggestions.

Start by taking an active interest in the claims that are made. Investigate all reports of injury thoroughly. Talk to coworkers who may have witnessed the incident. Don’t hesitate to ask questions.

If your investigations show a pattern of injuries in a particular place at particular times involving particular employees, look for ways to improve working conditions.

Scrutinize all medical bills. The most common method of fraud in this area is double billing. Be sure that all bills have dates of treatment and specific descriptions of services rendered.

Ask the insurance company to investigate the employee’s past medical history and any prior claims. For instance, an employee’s driving record often will reveal past accidents that may have permanently injured the employee.

Similarly, you might have the insurance company or a private investigator look into whether the employee works anywhere else. Does he or she moonlight as a security guard or store clerk while claiming to be too injured to work? Some employees have even been caught collecting unemployment benefits and workers’ compensation at the same time.

There are many ingenious schemes for cheating at the workers’ compensation game. Undoubtedly, you can’t stop them all. But if you take the cheating seriously -- if you think of the money as coming out of your own pocket -- you can reduce the problem and send a message to would-be cheaters.

If your investigation detects fraud, seek legal assistance immediately to determine whether a legal cause of action exists. Also, your attorney may coordinate efforts with the insurance company to avoid unwarranted increases in your company’s premiums.

Benefits of Personal Residence Trusts

At some point in your lives, you and your spouse (if you are married) may decide to transfer your home to your children or other family members. Once the home is legally out of your hands, it is removed from your taxable estates. But there’s a problem: You still need a place to live and you could be hit with a hefty gift tax on the home’s value.

One possible solution is to set up a “personal residence trust.” With this type of trust, the donors technically make a gift of the home now -- it’s called a “remainder” interest -- but you don’t actually transfer the home until years down the road. In the meantime, you continue to live in the home as before. Best of all, there’s no estate tax due on the transfer and the gift tax is a mere fraction of what would normally be assessed.

Background: Normally, if someone transfers a remainder interest in property to a trust with a beneficiary, the remainder interest’s value is set at zero for gift-tax purposes. In other words, the donor is treated as having made a current taxable gift equal to the fair-market value of the property, even though the beneficiary is not receiving the property until sometime in the future.

Fortunately, a special tax law exception applies to personal residence trusts. It says that the value of the taxable gift is reduced by the retained interest in your home. So the donor is entitled to a gift-tax discount when the home is transferred to the trust.

Also, the beneficiary eventually receives the property without any additional tax cost. And no estate tax or gift tax applies to any future appreciation in the home. If the term of your retained interest is lengthened, the donor is able to establish a lower value for the remainder interest.

Caution: If the donor dies before the end of the term, the full value of the home will be included in his or her taxable estate. It doesn’t matter what your original intentions were. So the best strategy is to set a retained interest that will provide a valuable gift-tax discount, but is still reasonable, given life expectancy and personal circumstances.

During the time the trust is in existence, the donor continues to pay the mortgage interest, property taxes, insurance, etc. Since the donor is still the legal owner of the trust, he or she can generally claim the same deductions that would be allowed for an outright owner.

Note: Although a personal residence trust cannot be used to hold other assets, the donor can provide the trust with enough cash to pay the necessary expenses for a period of six months.

Lie Detector Testing: The Truth Be Told

Can you force an employee to take a lie detector test? Although the law is not exactly crystal clear in this area, you can only impose such a requirement if certain conditions exist. For example, under the Employee Polygraph Protection Act (EPPA), the testing must be related to an ongoing investigation of theft, embezzlement, misappropriation of funds, or industrial espionage or sabotage.

In other words, you must have a reasonable suspicion that the employee is involved in an illegal activity. You cannot randomly use testing without provocation.

New case: A mining company suspected that a group of employees were involved in theft and drug dealing activities. It promptly notified these employees that they would be fired. But the company relented when -- based on the suggestion of the union representative -- it agreed to reinstate those employees who passed a lie detector test.

Some of the employees decided to refuse the lie detector offer. Then they sued the company, alleging that it was violating the EPPA by using the tests for reinstatement.

Result: The Eleventh Circuit Court ruled in favor of the company. The Court said that the law allows employees accused of theft to be tested by polygraph. With respect to the drug dealing activities, the request was permitted because it was suggested by the union representative.

If a lie detector test is allowed, employers must still provide notice of the process and an explanation of the circumstances. Keep written copies of these statements in case you are ever challenged in court.

Watch the Content in Employee Manuals

If you own or manage a company, it would not be too surprising to someday be named as a party to a lawsuit involving the business. That’s a risk that you must take. But you still might be taken aback if the suit is initiated by someone you trust -- for example, one of your long-time employees.

Unfortunately, this type of lawsuit has become more prevalent as both employees and ex-employees increasingly take their gripes to the courts. For instance, you must be especially careful about what you say in your company’s employee manual and how you say it.

Caveat: This is not to discourage your company from using an employee manual. On the contrary. It is important to document company policies from both a practical and legal viewpoint. For example, if your employees work at computers, implementing a strict policy for Internet usage and e-mail is critical in today’s electronic world. But this must be done with the requisite care.

To give you a prime example, there’s no reason to explain the “whys and wherefores” of a particular policy in the manual. These unnecessary embellishments could land you in court.

New case: While a couple was both employed by a university, the wife became pregnant. According to the university’s employee manual, the pregnancy entitled her to a paid maternity leave of six weeks. However, the policy did not include any provisions for the husband to take time off in connection with the birth.

Nonetheless, the employee manual did include a “purpose” section, which the couple cited. This section stated the following: “Purpose: To permit parents who have care-giving responsibilities to have time off to spend with a child.”

In reliance on this purpose statement, the husband claimed he was entitled to a leave following the birth of his child, since he was a primary care-giver. Subsequently, the husband initiated a legal action against the university. The lawsuit alleged that the policy discriminated against biological fathers.

Result: The Eighth Circuit Court of Appeals did not agree with the husband. The Court opined that it was permissible to offer different benefits to women who were experiencing childbirth. But the Court did note that it was “troubled” by the language in the manual that admittedly ran counter to the “purpose” stated therein.

In this particular case, the employer managed to prevail in court. But the entire matter could have easily been avoided by matching the preface in the manual to the actual content or by eliminating it altogether.

Moral of the story: Be careful about published statements in your manual, especially if they are superfluous. Consult with an attorney as to the exact wording.

Resolving Local Boundary Disputes

Hopefully, you get along well with all of your neighbors. Unfortunately, however, that’s not always the case. For instance, you may have a dispute with one of your neighbors over exactly where your property ends and where your neighbor’s begins. What started off in mere unpleasantry or idle chatter can escalate to a full-blown lawsuit.

Of course, you can save lots of time and money -- not to mention the aggravation -- if you take some proactive steps.

Case in point: One common approach that may be used to resolve disputes is to hire a licensed land surveyor. This professional will survey the property and place markers indicating the appropriate boundary lines. You can likely find a list of reputable surveyors working in your geographic area by contacting a professional association. Alternatively, we may be able to provide referrals.

The exact cost of his or her service is generally determined by several factors, including:

• The size of the lot;
• The date the lot was last surveyed;
• The area in which you reside; and
• Other related factors.

Legal Briefs

The Privilege Is Yours -- The “attorney-client privilege” generally protects communications that take place between a client and an attorney. When the privilege exists, an attorney may not disclose any communication -- whether oral or written -- without the client’s consent. Key point: Both the client and the attorney can claim the privilege, but only the client has the right to waive it.

Employer Duties -- A hospital stock clerk had trouble doing his job because he hurt his back. He asked for an accommodation, but never suggested any particular solution. Management ignored the request, so the employee sued under the Americans with Disabilities Act (ADA). But the hospital claimed this did not violate the ADA. Result: The Third Circuit Court of Appeals said it is the employer’s duty to suggest a reasonable accommodation.

Frivolity in Tax -- The IRS recently identified 26 “frivolous” tax return items claimed by taxpayers. For instance, it warned about basing claims on Native American treaties or arguments that only residents of Washington, D.C., must pay federal taxes. Other common schemes include deducting household costs through a home business; claiming that payment of taxes is voluntary; and assigning income to an abusive trust.

No Retaliation -- A new case shows that employers cannot punish whistleblowers for coming forth. Facts: A psychiatrist signed a series of one-year contracts with a clinic. After he complained about patient-care issues, the director decided not to retain his services. A jury awarded the psychiatrist nearly $900,000 in back pay and future lost earnings. Now the Third Circuit Court of Appeals has agreed because the action was retaliatory.