Roofer Scott Hieb was enjoying his 37th birthday on June 30 until he opened his mailbox. He found a letter from the Contractors State License Board (CSLB) requiring him— forcing him, actually—to secure California workers' comp insurance or forfeit his C-39 roofer's license as prescribed by a new law that takes effect Jan. 1, 2007. The problem is that Hieb has no employees and needs no workers' comp.

Hieb, who set out on his own last January after years of working for others, says he was told by two different brokers that he'd be paying the State Fund minimum premium of $5,000 per year to cover all those multitudes of employees he doesn't have. And the cost of the insurance is not the only issue.

Further, State Fund is requiring him to lie. Hieb says that to obtain a policy, State Fund, the only market writing small roofers, is forcing him and other one-man roofers to sign a form stating that they have no employees but plan to hire some. This appears to be a mechanism whereby the carrier is covering its legal butt.

But obtaining insurance coverage under false pretenses is illegal, and requiring or encouraging someone to do so may be a violation of other state and/or federal laws.

"Eighty hours at $150/hour – that's $12,000 and that's a good job," Hieb says. He says he can do the job himself, adding, "But my next big job isn't for another two weeks. I'd have to pay unemployment insurance to any employee I have until the next big job, and then there's Social Security and payroll."

Making Sausage

The injustice spurred Hieb to zealous action, jumping with both feet into the capital's legislative machine as he tried to reverse legislation signed into law earlier this year. And the machine rolled this small businessman and ground him up as if it were  making sausage.

He came up against State Compensation Insurance Fund, which seemed to be pulling strings at every regulatory and legislative twist and turn. And he has received no sympathy from the group that fronted for State Fund as the legislation's main sponsor, a State Fund roofers' safety group, administered by none other than Ward Connerly.

During practically every call he made, Hieb says, "They told me they'd have to call State Fund before they could comment. It was Pat Quintana, State Fund's government affairs officer, they were all calling," he says.

Hieb says that Emmerson's legislative staff tried to graft clarifying legislation to the law in August by putting the exemption back in, but it didn't go anywhere.

"The problem is that the language negated everything the bill had done," says Carolyn Ginno, capital director for Assemblyman Bill Emmerson. "Had we known about these one-man shops, we would have gotten their input sooner. The bill was in print for over a year."

Hieb says that being on a roof all day doesn't allow him to pay attention to the legislature. He also says that most of the sole proprietors do not belong to trade associations.

Ginno says the language was nixed by internal staff and that neither the sponsor nor SCIF had anything to do with it. She adds that the amendments were also the victim of end-of-session scrambling because any language dealing with workers' comp needs to be fully vetted.

But Hieb says he was told by Ginno that SCIF  nixed the amendment.

"If eight of those employees get hurt, SCIF says it still has to pay out because workers' compensation is social insurance," she says.

According to Ginno, Emmerson's office contacted SCIF during the July recess and brought it in on a technical basis simply to answer workers' comp insurance questions. Ginno admits she worked with Pat Quintana.

"We spoke with SCIF because we were told they covered these guys," Ginno says. "We hope that eventually premiums will come down. It'll just take a couple of years."

State Fund refused to return repeated phone calls for this story.

Proponents of the new law, implemented through AB 881, are mostly large roofers. (To read copy of the analysis (Assembly, Senate) of AB 881 go to the resources section the Workers' Comp Executive website. State Fund told the legislature that this is the "first step" toward stamping out rampant fraud practiced by some of the state's almost 3,000 C-39 roofing contractors. Some of those are said by State Fund and unions to claim a workers' comp exemption but actually have employees.

"If independent roofers can be targeted this easily, what's to stop State Fund from going after other kinds of small businesses with no employees?"
 —Scott Hieb,
small businessman

But the real—should we say honest?—one-man shops say it's more like the first step toward putting them out of business. Not only that, Hieb says, but it could turn into a slippery slope. "If independent roofers can be targeted this easily, what's to stop State Fund from going after other kinds of small businesses with no employees?"

Sponsors of AB 881 admit that they've scooped up legitimate sole proprietors in their net, yet seem unperturbed by these consequences. The bill also seems to ignore the many existing enforcement mechanisms that state agencies have to conduct audits of employers to catch outfits that don't secure workers' comp coverage.

And State Fund, insurer of last resort, seems content to accept premiums and conduct payroll audits on policies on which no claims can or will be filed. Ginno says that State Fund informed her that even a minimum policy will not be sufficient to cover an employer who claims an exemption, then goes out and hires 10 employees.

Hieb says that even if it was technical in nature, it sure seemed like everyone he communicated with had to contact SCIF before moving forward on anything. When he started asking questions about the legislation, he says he got a message from Quintana when he was up on a roof.

"She said: 'What we were trying to accomplish with this bill,' " he says, suggesting that SCIF, if not a sponsor, was at least a willing ally.

Ginno says that Emmerson is still open to amending the law next year.

SCIF Is the Only Market for Small Roofers

SCIF is the only carrier that provides coverage for small roofers, but for large contractors, other carriers are sometimes in play, roofing contractors tell Workers' Comp Executive.

"CNA will provide workers' comp to roofing contractors, but they're very selective about who they let in," says Ron Johnston, executive director of the Union Roofing Contractors Association, and a supporter of AB 881.

He adds that CNA writes only large roofers with long histories and good loss ratios. He says half his membership of very large union roofers can get insurance outside SCIF.

But that forces sole proprietors like Hieb into SCIF with the prospect of high rates and poor service. And Hieb is required by the new law to pay for a mandatory payroll audit to be conducted by State Fund of his nonexistent payroll.

Hieb says he has not applied for a workers' comp policy, and that Emmerson's office told him that other roofers who applied for policies with SCIF were told they need to sign a form saying if they have no employees that they intend to get some.

"Even if it was legal, I wouldn't sign it," Hieb says. "I don't intend to hire employees."

Even more peculiar is SCIF's willingness to force a small business to obtain coverage for something it doesn't have. SCIF bears the brunt of the fraud committed by employers who underreport payroll and misclassify employees. But that has nothing to do with outfits that have no employees. If they fail to secure coverage and have employees, claims go to the Uninsured Employer Benefit Trust Fund, not State Fund.

The Department of Industrial Relations assesses an annual fee on employers every year to pay for those claims filed with the trust fund. This amount is split between insured and self-insured employers in proportion to their payroll. Insured employers have the rate assessed against their policies. According to the DIR, employers paid $44 million into the trust fund for fiscal year 2005-2006.

SCIF Behind the Deal

The outward sponsor of the bill is Roofing Contractors Association of California, which has approximately 200 midsize to large companies. It also administers a workers' compensation safety group through SCIF – RCAC Group Program 639 – where eligible members receive a discount of 6 percent or more off their base premium.

But what seems obvious around the legislature is frequently only subterfuge.

Connerly & Associates Inc. is the administrator of the group. Ward Connerly is the executive director. His son Marc Connerly, senior consultant for Connerly & Associates, says before RCAC brought this issue to the legislature, it took it to the Contractors State License Board in hopes that it might be able to do something about weeding out contractors who fraudulently claim exemptions.

"It drives up rates for all the legitimate roofers and puts them at a competitive disadvantage," Marc Connerly says.

He admits that there are one-man roofing operations out there, and that RCAC has been contacted by "four or five" of them. Regardless, he says, the legislation won't be a financial hindrance to sole proprietors.

"It just should be looked at as the cost of doing business...The number of legitimate one-man operations really pales in comparison to those who are flying below the radar."
—Marc Connerly,
Connerly & Associates

"It just should be looked at as the cost of doing business," Connerly says. "The minimum mandatory policy of $1,360 is only a little over $100 a month. It's not cost-prohibitive. The number of legitimate one-man operations really pales in comparison to those who are flying below the radar," he says.

"Okay, what if there were 100 [sole proprietors]. What about them?" Hieb says.

Marc Connerly admits the office of bill author Assemblyman Emmerson started "buckling a little bit" in August, looking for amendments to "appease" the roofers who were making noises about the legislation. But State Fund's Pat Quintana was always there to bolster the roofers' group position, and not always with facts.

Connerly & Associates has been running RCAC since the mid-90s, he says, adding that his father, Ward Connerly, is the lead in administering the safety group. He says the chores are divvied up equally between him and his father. He would not divulge how much State Fund pays Connerly & Associates in administrative fees. Estimates run $300,000+ per year.

Connerly says he's not sure how much payroll audits are going to cost.

"[SCIF] still has a committee that's going to determine that. They asked us what kind of information we want them to audit," Connerly says.

"They want to squeeze the little guy," says Dave Gardner, owner of R&D Roofing, another sole proprietor who installs metal roofs. "All the work will go to these big companies that focus on quantity, not quality. It's money in their pockets."

Gardner says the bill is illegal because it requires him to get insurance for something he doesn't have.

Most small-business groups Workers' Comp Executive spoke with acknowledged that some legitimate individual contractors will be snagged by the legislation, but they favor it anyway in the interests of stopping the underground economy.

 Other Ways to Cheat

In an industry not known for its honesty in reporting payroll, large roofing contractors have many more ways to cheat carriers. Industry wisdom holds that roofers may misclassify employees by mixing and matching employment categories to get lower rates. Paying hourly wages is one way to cheat; another is to classify roofers as carpenters. Another common type of fraud is paying some employees in cash, or partially in cash, thus keeping salaries off the books and underreporting payroll, on which premiums are based. Many large contractors are said to use day laborers – illegals – and not report the wages.

"Even if he is a bona fide one-man operation, he should have more protection in case he falls," says Ron Johnston, executive director of the Union Roofing Contractors Association. "We think the pros outweigh the cons."

"They want to squeeze the little guy."
—Dave Gardner,
owner, R&D Roofing

But State Fund's workers' comp policies exclude sole-proprietor owners.

Injured roofers don't even receive the most payments from the trust fund. According to the most recent data from fiscal year 2003-2004 sorted by occupation, roofer claims constituted only 1.39 percent of the money paid out of the trust fund. Laborers (non-construction) were the highest at 13.86 percent.

Better Mechanisms Instead

Other legislative sources say rooting out fraudulent roofers could be accomplished without this bill, and the "un-artful drafting" should have been caught earlier in the process. The problem they were trying to solve  wasn't solved and they created more problems.

"I wouldn't have done  the way [Emmerson] did it. 'We're taking away your statutory insurance, but there is a waiver process. Here's what you have to do, it'll cost you $300.' That's all they had to do," says one Senate staffer, who spoke on condition of anonymity, adding that this is just another example of State Fund's heavy-handedness.

"[SCIF was] going to make this guy, an honest guy, sign a form that said 'I have no employees but intend to get them,' so he'd be lying," says the staffer.

Numerous enforcement mechanisms are already in place to confirm whether an employer is required to carry workers' comp insurance. The Department of Labor Standards and Enforcement (DLSE) enforces workers' comp coverage of employers, and the Economic Employment Enforcement Coalition (EEEC) conducts targeted enforcement activities in high-risk industries such as residential construction, roofing, restaurants and the garment industry.

According to Dean Fryer, Department of Industrial Relations spokesman, 85 citations were issued for workers' comp violations by construction firms in fiscal year 2005-2006. There is no breakdown by construction trade.

Both the California Department of Insurance and WCIRB also have ways of confirming whether an employer has employees and thus should carry workers' comp insurance.

Hieb says this bill will hurt small businesses by hampering their ability to grow. It also does nothing to stop fraud that will continue to be perpetrated by roofing contractors who carry workers' comp insurance but underreport payroll and misclassify employees. Perhaps these outfits should have their C-39 licenses at stake.

"If you say you're going to yank my license, now you've got my attention," he says.