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.