California Sues To Block Alleged Fraudulent Workers' Compensation Scheme By Employers And Companies

On February 25, 2009, the State of California Attorney General’s Office filed a civil lawsuit to stop a company known as the Contractors Asset Protection Association, Inc. (ConAPA) and its its founder-president, Eugene Magre, from engaging in an alleged “sophisticated and fraudulent scheme” to cheat the state workers' compensation system.

The lawsuit alleges that ConAPA sought to exploit a legal exception to the workers' compensation law (Labor Code Section 3351(c), where directors of a corporation who are also the sole shareholders can exempt themselves from workers’ compensation coverage.

The lawsuit alleges that ConAPA targeted high risk industries as clients and falsely promised them that if they (1) incorporated (if not already done), (2) provide their employees with a corporate title, and (3) give the employees nominal stock – the company would no longer be obliged to provide those employees with workers' compensation insurance.

The lawsuit alleges that ConAPA failed to advise its clients what type of employees are eligible or appropriate to become officers or shareholders. Attorney General Brown issued a press release claiming that ConAPA clients named housekeepers, cooks, security guards, maintenance men, roofers, and construction laborers as “vice-presidents” and issued worthless shares of non-negotiable stock. Attorney General Brown also stated that despite the titles, many workers were not assigned any managerial or administrative duties and performed the same rank-and-file duties for the same pay that they performed prior to their “promotion.”

Brown contends that ConAPA has approximately 40 active clients, and has had as many as 200 clients in the past that employed their business model. The lawsuit alleges that this was a scheme to utilize false and misleading statements and engage in the unauthorized practice of law “to facilitate a common scheme to profit by promoting the unlawful evasion of workers compensation obligations.”

This lawsuit seeks a permanent injunction barring ConAPA and Eugene Magre from engaging in unfair and deceptive business practices in violation of Sections 17200 and 17500 of the California Code. The lawsuit also seeks restitution and civil penalties of no less than $300,000. For a copy of the complaint:
http://ag.ca.gov/cms_attachments/press/pdfs/n1685_conapa_complaint.pdf

Commentary: It is more common to hear about employee workers’ compensation fraud but employers can also be charged with workers’ compensation fraud. We have represented employers accused of workers’ compensation fraud.

High workers’ compensation premiums have been an issue in California for years – especially during times of economic turmoil where employees may use the workers’ compensation system to supplement unemployment benefits and a means of obtaining medical treatment.

We have represented employers who fabricated payroll records or altered employee titles to obtain classifications which carry a lower premium rate. Sometimes employers (especially those in the construction business and other high risk industries) were desperate to reduce their premiums. Businesses need to be careful in making any false representations or hiring companies that make promises that seem to good to be true.

Although these ConAPA clients may be characterized as “victims” in this civil lawsuit, there is civil and criminal exposure for these companies. The State has a mandatory workers’ compensation system and is aggressive about enforcing it. In addition, since employees are frequently prosecuted for fraud, when there is an opportunity to charge an employer – they often do so. If your company is considering making changes to your workers’ compensation classification system or taking action that affects which employees are covered by workers’ compensation, seek independent legal advice.

Any questions or comments should be directed to: tgreen@greenassoc.com or aschneider@greenassoc.com Tracy Green is a principal at Green & Associates and Ann Schneider is a senior associate at Green & Associates. They focus their practice on the representation of licensed professionals and businesses in civil, business, administrative and criminal proceedings.