Employer Fraud Against Employers

On Friday I posted a comment about misclassification of workers, which drew more attention than I anticipated. Obviously I hit a nerve with those of us in the industry charged with ensuring that the system works.

When it's not intentional, misclassification of employees is unfortunate, and can be a costly shock to the business owner.

When it is intentional, misclassification is just basic fraud and no one likes cheats and thieves.

Taking money from a business under the auspices of securing the business' workers' compensation obligation, and then using that money for other purposes is likewise reprehensible.

In this morning's WorkCompCentral News is a story about a temporary staffing firm that is being sued by its franchisees for allegedly being a cheat and a thief by misappropriating millions of dollars paid by the franchisees to cover their workers' compensation obligations.

These stories seem never ending and temporary staffing firms seem particularly susceptible to workers' compensation fraud allegations, which would make sense because a staffing firm's biggest cost of doing business is the cost of the employees supplied, and this includes the cost of workers' compensation.

In this case, franchisees allege that the staffing firm used money franchisees paid for workers’ compensation coverage to give bonuses to its owners, to pay off a $33 million settlement from a 2011 lawsuit by State Compensation Insurance Fund for underreporting payroll, and to backfill some $700,000 that a former executive is accused of embezzling.

The story starts when Santa Barbara-based Koosharem LLC, the parent company of Select Staffing, bought Westaff, Inc. of Walnut Creek in 2009 for $10.3 million.

According to the lawsuit, prior to the deal, Westaff would contract with clients needing temporary workers and collect payment, and the franchisees would provide employees. Each month, Westaff would determine its gross profit by deducting from revenues the costs for workers’ compensation insurance, unemployment insurance, drug testing, safety equipment, background investigations and other direct labor costs. It would also hold money in reserve to cover future workers’ compensation costs, and would share a percentage of the margin with plaintiffs according to terms in the franchise agreements.

Post sale transaction, the plaintiffs allege, Koosharem did not set aside the money that had been paid to Westaff to cover costs of future workers’ compensation claims and instead used that money to pay a bonus to its owners.

The franchisee plaintiffs further allege that Koosharem started charging them for nearly all of its workers’ compensation costs rather than that just attributable to the temporary labor.

Koosharem had a high deductible policy, with a deductible of $500,000 per claim. In order to pay for claims not covered by the policy Koosharem required the plaintiffs to make monthly payments based on the billings of the temporary employees they placed. The payments funded a cash reserve for both incurred costs and incurred but not reported claims.

But, according to the suit, collecting money to fund a reserve pool violates the terms of the franchise agreements because franchisees were only to pay the actual cost for workers’ compensation insurance.

The plaintiffs further allege that Koosharem is forcing them to help fund collateral required by its excess workers’ compensation insurance carrier, which was $25 million in July 2013, according to the complaint. The franchisees say they had to cover $8 million of the required collateral amount which Koosharem collected by increasing their workers’ compensation payments by up to 100%.

If that wasn't enough, plaintiffs say that Koosharem was involved in an underreporting lawsuit with State Compensation Insurance Fund that was settled, after an adverse judgment, for $33 million, and also used franchisee workers' compensation money to make up about $700,000 of workers’ compensation money that a former executive is accused of stealing (that executive, Fred Pachon, former vice president of risk management for Koosharem, is scheduled to appear in the Santa Barbara Superior Court on June 11 for a preliminary hearing, according to the District Attorney’s Office).

Plaintiff franchisees are from Connecticut, Florida, Georgia, Hawaii, Indiana, Louisiana, Michigan, Minnesota, Missouri, North Carolina, Ohio, Vermont, Virginia and Wisconsin.

Obviously this is just one side of the story so no one should take the plaintiff's complaints at face value - defendants in the matter did not provide comment to WorkCompCentral for the story.