Contact
Subscribe


If It Sounds Too Good To Be True, It ALWAYS Is

Mar 4, 2009
By .
Law

Sounds too good to be true, part I: You run a small, low-margin business in California.  You're in a dangerous line of work, such as window cleaning or security contracting.  A consultant tells you that with a little reorganization of your business, you can avoid paying premiums for California's state-mandated workers compensation insurance, saving thousands of dollars a year.

Sounds too good to be true, part II: "Good news, Enrique, you're being promoted.  You're no longer a security guard.  You're the Senior Vice President Of Being Shot At By Liquor Store Robbers In Watts."

It is too good to be true: Enrique, the Senior Vice President Of Being Shot At By Liquor Store Robbers In Watts, is shot by a liquor store robber in Watts.  Enrique's estate sues you for a massive judgment of medical and funeral expenses and lost wages, plus civil penalties.  The District Attorney would also like to have a word with you, about criminal penalties for failing to carry workers compensation insurance.

According to a complaint filed last week by the California Attorney General, that scenario is what the Contractors Asset Protection Association, or "ConAPA," has been selling to California businesses since 2002, only they leave out the third part.   The scheme was alleged to involve advising the owners of small businesses to use a commonsense exemption in the California Labor Code, section 3351(c), which provides that officers, directors, and sole shareholders of small, closely held corporations can exempt themselves from workers compensation requirements.  Under California law, if the President and Vice President of Sanford and Son, Inc., which has two employees, want to go without workers compensation insurance, that's their business.

But as allegedly used by ConAPA, what lawyers call a statutory exemption was turned into what the public calls a loophole.  Clients were advised to incorporate, to give officer titles and some small number of shares (which could not be sold, did not remove the employees' "at-will" status, and were required to be returned at a set buy-back price on termination) to employees, and voila: no workers compensation premiums.

"Freddie I'm so proud of you.  Today I'm giving you five shares of stock in the company, and making you Vice President In Charge Of Cleaning Windows From A Scaffold At Great Heights.  Now if you'll just sign this form I received from my consultant stating that you wish to opt out of workers compensation coverage, which by the way is mandatory if you wish to remain employed here, Mr. Vice President."

For some reason, probably a technical issue, ConAPA's website is down this afternoon.  But you can read Google's cached versions of what ConAPA promised here and here.  For that matter, you can read a "to whom it may concern" letter from an attorney, which ConAPA used to promote its service as fully compliant with the law, here.  Oddly, that letter has been removed from ConAPA's site as well.  I had to find it at the site for another of ConAPA founder Gene Magre's business ventures, Historic Ranch, which seems to be a horse farm and real estate development.  And you can find the California AG's suit against ConAPA here.

(Personal to Robert Cerny of Barger & Wolen: does your client's use  and hosting of this letter at the site for another of his corporations create issues of commingling and sham incorporation, should the California Attorney General seek to involve Historic Ranch?  Might want to have a word with Mr. Magre about that, particularly given that ConAPA appears to have held itself out as a consultancy specializing in avoidance of legal liability through incorporation.)

While I don't read Mr. Cerny's letter as broadly as ConAPA apparently did, I do note that he wasn't the only attorney providing assistance to ConAPA and its clients.  According to the cached version of ConAPA's page, the company had a network of attorneys ready to assist in what the California Attorney General calls a scam.  Now there's nothing wrong with incorporation, and if that's the only service these lawyers provided, that's fine and dandy.  It's foolish to go into business without incorporating.  But if ConAPA's network of attorneys knew or reasonably suspected that the company was counseling its clients to fashion sham corporations or to award sham officerships to low-level employees solely to avoid California's workers compensation law, well…

that would be interesting.

As is the network of other individuals ConAPA boasts assisted it in promoting its services, such as former San Diego mayor and occasional Rush Limbaugh guest-host Roger Hedgecock, and the San Diego Union Tribune, people who ought at the very least to be concerned about what it is that they were advertising.

Because if what's alleged is true, the worst scandal is that ConAPA, with the help of its enablers, has been getting away with promoting a scam to leave people employed in the most dangerous trades without workers compensation for almost seven years.  It did so under the noses of prosecutors, government, and plaintiffs' attorneys (who really ought to be on the lookout for this stuff), despite the fact that the company was advertising its illegal practices on the radio and in the newspapers.

Via Julius Young, who mentions a similar scheme involving a bagel maker who was promoted to Senior VP of Dough-Making.

Last 5 posts by Patrick

4 Comments
Tags

4 Comments

  1. S Davis  •  Mar 4, 2009 @5:14 pm

    I thought employee ownership was good thing, especially in smaller corporations. Doesn't that also mean that they share in the profits of the company as well? And if the company can afford to provide life, health and disability insurance that it may not have been able to if it were also paying high workers comp premiums, isn't the employee owner better off? A legitimate use of the statutory exemption or loophole, whatever you want to call it, is possible whether you have a company like Conapa involved or not.

  2. Patrick  •  Mar 4, 2009 @6:58 pm

    S, read the Complaint. While I don't necessarily believe the allegations to be true, that's not what's described at all. A non-controlling interest in a company that pays no dividends, doesn't guarantee employment to the "owner," and doesn't grow in value (remember the buyback), and sacrifices workers compensation is less than useless. It isn't ownership. A small stake in a small corporation is nothing. It's a scam.

    As for life, health, and disability insurance, if you believe that the typical policies that would be offered to employees of a window-washing company (if they were offered at all) are better than workers compensation for the sorts of on-the-job injuries that window washers suffer, you don't know much about insurance.

    In any event, the law in California, and every other state, requires workers compensation insurance. The scheme as described is a sham to get around that requirement, not a benefit to the new "owners," who can be fired and forced to sell back their "stock" at a small price at any time. Don't be naive.

  3. Brother  •  Jun 1, 2009 @9:25 pm

    I disagree, Patrick. Sure, if ConAPA convinced certain employers to create sham corporations with sham shareholders only to avoid WC and offered those "sham" shareholders nothing in return and the customer company had no coverage of any kind for those workers, that might be insurance fraud. However, if a company "promotes" certain higher level workers to "VP" and offers them full-time health and disability benefits instead of WC, while offering WC to non-shareholder employees, where the company complied with all the corporate, tax, and labor code rules, it is perfectly legal. If the law is imperfect, as ConAPA figured out, change the law. Don't go after legitimately operating business who have no interest or intent in defrauding anybody or anything. Fact is, in my example, the company still pays the same for coverage whether it is all WC or, say, 1/2 wc and 1/2 health/disability. The latter covers those persons 24/7 for any health issue, whereas WC only comps them for work-related injuries. If the "shareholders" choose private insurance over WC, that is their right. Also, your comments appear to ignore the reality of an S-Corporation. Sure, a C-Corp doing the ConAPA thing would be fishy. However, the reality of many S-Corps is that there is a principal owner who generally calls the shots and worker shareholders, who may be family members or valued workers, who "work the line." In fact, in many small contracting S-Corps, the principal owner works right along side the others. There is nothing wrong with this business model. You can have a family baking business, for instance, where Dad is the President, Secretary and Treasurer and the children are all "VPs of Dough Making" so long as they have complied with the minimal rules of forming an S-Corp. Happens all the time, all over the country. For a small business owner with an S-Corp to recognize and reward certain longer term or higher level workers with the option of becoming shareholders and getting more comprehensive 24/7 health benefits if the opt out of WC is perfectly legal. Again, crucify ConAPA. I agree they were crooks. However, many of the businesses ConAPA solicited used the model legally and appropriately. Again, if you don't like the "loophole" or weak link in the law, change the law. Do not sue the legally operating small business owner. Finally, you are mistaken when you say that the law in California "requires" WC insurance. The Labor Code allows small, closely held corporations to have shareholder owners who can choose not to participate in the compensation bargain. If you are going to say what the law requires, you have a responsibility to correctly state the law. Your latter comment is not legally correct.

  4. Brother  •  Jun 1, 2009 @9:44 pm

    Pardon me for forgetting: The other flaw in your analysis, Patrick, is that in the Pic N Save Bakery case, the person being touted as a "VP of Dough Making" was never told and never had the choice to opt out of WC. The case came down on those specific facts. The holding of that case clearly indicates that if the "VP of Dough Making" made an informed decision to assume that title and opt-out of WC, it would have been perfectly legal. On the one hand you have a business owner gaming the sytem and commiting fraud. On the other, you have business owners and certain informed workers in the same small business making a choice that the law currently allows. There is nothing whatsoever wrong or illegal with the latter.