On January 8, 2016, two criminal cases were filed against individual company owners for workers' compensation insurance fraud and payroll tax evasion in Los Angeles and Sacramento.
These are not related cases but show the the Department of Insurance’s effort to pursue more workers’ compensation premium fraud and tax evasion cases for misclassifying employees as independent contractors or paying employees cash under the table. The State views this as its efforts to combat the underground economy.
In the Sacramento case, William Huffman (owner of Capitol City Contractors) was charged with nine felony counts of workers' compensation insurance fraud and tax evasion. The Sacramento County District Attorney's Office is prosecuting this case and contends that losses total $187,707. The State contends that Mr. Huffman allegedly underreported $755,899 in payroll to avoid paying workers' compensation premiums for dozens of employees.
How did this case arise? An insurer notified the Department of Insurance of suspected fraud. A forensic audit of the company's bank records was conducted and it is contended that detectives discovered evidence that Mr. Huffman was paying employees under the table and classifying some payroll checks as expenses for supplies and materials.
Attorney Commentary: We have helped numerous companies during the audit stages of workers’ compensation or EDD audits given the potential for criminal charges. During these audits, there are things that can be done to prevent the cases from being perceived as criminal intent to defraud cases. Compliance and immediate business changes can also help avoiding criminal charges. False documentation, false statements and other facts can cause problems. Companies often handle these audits on their own without detached counsel to advise them on how to proceed when there are sensitive issues and potential past non-compliance.
Second Case In the second case, Los Angeles nightclub owner Jonathan DeVeaux self-surrendered in Los Angeles Superior Court and was booked on multiple counts of insurance and tax fraud. The alleged total loss is more than $1.1 million. It is alleged that Mr. DeVeaux is part-owner and operator of Los Angeles Entertainment Inc. DBA Savoy Entertainment Center, a nightclub in Inglewood.
It is alleged that the nightclub business underreported the number of employees working for him to reduce his reportable payroll, so he could illegally reduce his workers' compensation premium. As a result, State Compensation Insurance Fund allegedly was not paid more than $143,000 in premium between 2009 and 2014.
It is also alleged that during the same period, Mr. DeVeaux allegedly paid many employees in cash, which meant he did not pay the California Employment Development Department payroll taxes which are alleged to be worth over $500,000. Finally, Mr. DeVeaux was also charged with sales tax evasion for allegedly underreporting his sales to the California Board of Equalization between 2006 and 2014. It is claimed that an audit of the nightclub's sales records revealed the business actually underreported sales by $5.4 million. It is claimed that the business collected sales tax from nightclub patrons (more than $500,000) but that the business did not remit it to the state.
This was a joint investigation with detectives from the Department of Insurance worked in tandem with investigators from the Employment Development Department and the Board of Equalization. Usually these cases are triggered after an audit by the workers' compensation insurer on the company's payroll. EDD has begun conducting its own audits as well. If you receive a request for an audit, that is the time to see professional help - at that time and before you respond to the audit or have the auditors at your business.
Posted by Tracy Green, Esq.