SACRAMENTO — California Atty. Gen. Jerry Brown cracked down Wednesday on an alleged scheme that advises small companies on how to avoid buying costly workers' compensation insurance by turning employees into stock-owning corporate officers.
In a lawsuit filed in San Diego County Superior Court, the state sought a permanent injunction and civil penalties of at least $300,000 from Contractors Asset Protection Assn. Inc. of Rancho Santa Fe and its founder-president, Eugene J. Magre.
Brown's action is part of an ongoing enforcement drive by the attorney general that targets the so-called underground economy. Employers in the underground economy, which often runs on cash without proper record keeping, attempt to gain an edge on competitors by not paying workers' compensation premiums or payroll taxes that fund state disability and unemployment insurance programs, said Scott Gerber, a spokesman for Brown.
In the latest suit, Brown contends that the San Diego company, known as ConAPA, misinterprets a state law that exempts company officers who are also the sole shareholders of a corporation from being covered by legally mandated workers' compensation insurance, paid by employers.
The insurance pays for medical care and disability benefits for victims of on-the-job injuries.
"This company falsely promised its clients that if they gave their employees empty titles and worthless shares of stock, they could avoid tens of thousands of dollars in workers' compensation premiums," Brown said.
"But you can't simply call a security guard a vice president and avoid complying with the law through a sophisticated and fraudulent scheme."
Neither Magre nor a representative of ConAPA returned telephone calls seeking comment on the lawsuit.
ConAPA currently has 40 active clients and in recent years helped more than 200 firms avoid buying workers' compensation insurance for all employees, the suit said.
Most of the clients employed workers in injury-prone industries, including housekeepers, security guards, roofers, maintenance personnel and cooks.
According to state corporation records, ConAPA started business in January 2003, a time when skyrocketing workers' compensation premiums were crippling companies. Small employers, particularly in high-risk occupations such as construction, were desperately seeking ways to cut comp costs. Since then, rates have fallen by about 50% because of a 2004 overhaul of state laws.
On its Internet page, ConAPA contends that its employee-ownership plan can save small companies as much as $30,000 a year in workers' compensation and other costs through incorporation. At the same time, it stresses that the "employer/owner retains control of the company while officers are made minority shareholders" who can be fired at any time and their shares repurchased.
In November 2007, the attorney general sued Anaheim company PacifiStaff, which offered an employee-owner plan similar to ConAPA's, marketed as "the antidote to workers' compensation." The company has since agreed to stop marketing its program.
California's specialized courts that handle workers' compensation disputes have also tried to rein in efforts to deny benefits to job-related-accident victims who unwittingly signed papers making them corporate officers and stockholders in small companies.
In one such case, the insurance company for Pic-A-Bagel, a now-defunct San Diego restaurant, refused to pay an injury claim filed by a bakery employee given the elevated title of "senior vice president of dough making."
The Workers' Compensation Appeals Board ruled that the baker should be covered and noted that "the applicant was never asked if he wanted to become an officer of Pic-A-Bagel and did not believe he had any ownership interest in the corporation."
An appeal by Pic-A-Bagel's insurer was denied by the 4th District Court of Appeal.