California Attorney General Cracking Down on Workman’s Compensation Avoidance Scams

James Cool

Contributor

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California’s Attorney General, Jerry Brown, has been cracking down on employers and others who illegally avoid carrying workman’s compensation insurance to save money. The Los Angeles Times reports that Brown has been targeting a scheme that encourages small businesses to endow workers with bare titles and worthless stock holdings in order to classify them as “corporate officers.” Under this scheme, the company can avoid buying costly worker’s compensation insurance for the workers, saving a mint. This practice is common among employers engaging in what Brown classifies as an “underground economy” wherein companies try to get ahead by not paying workers' compensation premiums or payroll taxes that fund state disability and unemployment insurance programs. In a time when worker’s compensation claims have been on the rise in California and state coffers aren’t as full as they used to be, this kind of scheme is especially underhanded. In addition, Brown points out that it intentionally misinterprets state law.

That is the allegation that Brown has made in the state’s suit against Contractors Asset Protection Assn. Inc. (ConAPA) of Rancho Santa Fe and its founder-president, Eugene J. Magre. The suit seeks a permanent injunction to force an end to the scheme, as well as $300,000 in civil penalties. Brown argues that California state law does not exempt company officers who are also the sole shareholders of a corporation from being covered by legally mandated workers' compensation insurance. He explains: “you can't simply call a security guard a vice president and avoid complying with the law through a sophisticated and fraudulent scheme.” But this is not what ConAPA has told its clients – instead, Brown alleges that ConAPA has told its clients quite the opposite – that they can easily avoid tens of thousands of dollars in workmen’s compensation premiums. In exchange, employees are getting the short end of the stick – in exchange for worthless titles and shares of stock – they are left without protection. Meanwhile, employers engaging in the scheme pocket the saved expense. ConAPA seems to have taken advantage of the desperate situation that some companies started facing in 2003, when workers compensation premiums skyrocketed, leaving ConAPA with clients looking for an easy way out. Most of the clients ConAPA suggested the scheme to employed workers in injury-prone industries, including housekeepers, security guards, roofers, maintenance personnel and cooks. It’s no surprise that Attorney General Brown has targeted ConAPA given that its advice may have led a number of employers to leave their workers without protection.

But this is not the first time that Brown has taken on this kind of scheme. In 2007, Brown sued PacifiStaff, a company out of Anaheim that claimed to be “the antidote to workers’ compensation.” After the suit, the company agreed to stop marketing its program, one that was eerily similar to ConAPA’s.

If you have signed paperwork with your employer that has given you a title and empty shares of stock rather than protection under a workers’ compensation program, you may end up having to fight for coverage in court down the line. Employers aren’t completely off the hook just because they have participated in the scheme; some end up in court. California’s specialized courts dealing with workers’ compensation are not often sympathetic to employers who have engaged in such selfish cutting-of-corners and acceptance of advice like ConAPA’s. Nevertheless, it may be much more difficult for an injured employee to get coverage for an on-the-job injury if the employee has participated in the scheme. If you have experienced an on-the-job injury and are having difficulty getting coverage for any reason, but especially if your employer engaged in this kind of scheme, you may want to consider getting assistance from an expert.