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State Fund Scores Major Verdict in PEO “Piggybacking” Case

SCIF logoA San Francisco jury has sided with State Compensation Insurance Fund (SCIF) in a dispute with two staffing agencies — Onvoi Business Solutions and Select Staffing. State Fund accused them of running a scheme to defraud the carrier and avoid paying more than $30 million in workers’ comp premiums. According to sources close to the case, the final award could range upward of $300 million, depending on how final damages and penalties are calculated.

The court gave State Fund the option of collecting common law compensatory damages as well as punitive damages or statutory damages, along with penalties provided under Insurance Code section 756. Section 756 says an employer is liable for 10 times the amount of premium it avoided paying due to its fraudulent actions, and in this case the jury pegged that premium amount at $30.1 million. As of press time, State Fund was still deciding how it would proceed on that front but expects to file the judgment by early next week.

State Fund originally filed the lawsuit against Onvoi in 2007 alleging more than $8 million in unpaid premiums stemming from policies written in 2002 and 2003. But the case ballooned when SCIF realized during discovery of the case that Select Staffing and other professional employer organizations (PEOs) were “piggybacking” off Onvoi’s policy to get a lower rate.

Select Staffing X-ModPiggybacking or “docking” occurs in a multitiered PEO arrangement where a PEO with a higher X-Mod will obtain coverage through another PEO with a lower X-Mod, which lowers its rate significantly. State Fund’s complaint notes that Onvoi had an X-Mod of 69% and 93% in 2002 and 2003 while Select’s was 260% and 256%, respectively.

Piggybacking or “docking” occurs in a multitiered PEO arrangement where a PEO with a higher X-Mod will obtain coverage through another PEO with a lower X-Mod, which lowers its rate significantly.

State Fund’s 2003 rate filing had changed its policy on PEOs to specifically bar piggybacking. That policy also changed the way it underwrote PEOs by underwriting its administrative staff separate from its clients, which were to be underwritten individually. State Fund notes that an endorsement to Onvoi’s policy also required it to disclose any PEO or temporary-help agency clients, but says Onvoi and Select conspired to hide this information from State Fund. The jury found that Onvoi was acting as Select’s agent to obtain coverage.

State Fund also alleged that in addition to portraying Select’s clients as Onvoi’s to access its lower X-Mod, the companies hid the true amount of the payroll. For example, its complaint noted that Onvoi represented that ESL Power Systems was one of its clients but learned through discovery that it was actually Select’s client. In addition, SCIF says the payroll totals that Onvoi provided it were far too low based on the number of hours Select actually billed ESL.

If State Fund is to collect on the final award, it appears that Select will be the only likely source of revenues. Onvoi still has an active business license registered with the Secretary of State, but for all intents and purposes appears to be out of business. Published reports and sources close to the case note that Onvoi transferred most of its operations and personnel to Mainstay Business Solutions in 2004 after it lost its coverage with State Fund.

Mainstay, for its part, is the self-insured staffing company taken over this spring by the state after the Employment Development Department (EDD) seized its bank accounts. EDD alleged that it owed more than $16.4 million in unpaid unemployment taxes, penalties and interest. At the time of the takeover, Mainstay officials said they were transferring their accounts to Select. (For past coverage, see Mainstay Bank Accounts… and Mainstay Seized…)

Santa Barbara-based Select says its family of staffing companies is now the eighth-largest in the nation. An attorney representing Select did not return a call requesting comment by deadline.

(Filed by Brad Cain in San Francisco)


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