The state’s case against a claimed labor organization for selling a purported workers’ comp alternative is nearly six years old, but the illegal multi-employer welfare arrangement (MEWA) continues to operate in one guise or another. The California Department of Insurance’s first cease and desist order against American Labor Alliance and its alter egos came in 2016 and led to a $4.3 million penalty. But so far, CDI has failed to collect.
A state court did order the Department to review the penalty to determine if the organization and its leader Marcus Asay had the ability to pay. After a review, the assigned administrative law judge found that indeed it did, and Insurance Commissioner Ricardo Lara adopted the findings upholding the penalty.
The CDI decision came down over a year ago. But the Department failed to produce a copy of the decision despite a public records act request. Workers’ Comp Executive recently obtained a copy via other means.
Department officials have consistently failed to respond to multiple requests for comment on the collection activities in this case or about a parallel enforcement action against ALA’s alter ego, Omega Community Labor Union.
The California Attorney General is now seeking to collect the $4.3 million penalty plus interest, but the legal battles continue. The collection fight is expected to continue into 2023.
The program, which operated as CompOneUSA and CompassPilot, claims to be exempt from state regulation. It maintained that it was an entity claiming exemption under the MEWA rules and that it provides ERISA benefits in lieu of traditional workers’ compensation. CDI found it to be a MEWA operating illegally in the state.
DIR & DSLE FAIL TO ENFORCE
Department of Industrial Relations and Division of Labor Standards Enforcement officials continually failed to shut down employers operating with the MEWA’s coverage in violation of Labor Code section 3700. Despite Workers’ Comp Executive’s confirmation that DSLE has or had the names of more than 300 employers illegally covered by the program.
The labor code section gives employers two options to “secure the payment of compensation” as required by law:
- By being insured against liability to pay compensation by one or more insurers duly authorized to write compensation insurance in this state; or
- By securing from the Director of Industrial Relations a certificate of consent to self-insure either as an individual employer or as one employer in a group of employers.
DSLE, under Labor Code Section 3722(b), has the affirmative obligation to penalize an employer operating without legal workers’ comp:
- “At any time that the director determines that an employer has been uninsured for a period in excess of one week during the calendar year preceding the determination, the director shall issue and serve a penalty assessment order requiring the uninsured employer to pay to the director, for deposit in the State Treasury to the credit of the Uninsured Employers Fund, the greater of (1) twice the amount the employer would have paid in workers’ compensation premiums during the period the employer was uninsured, determined according to subdivision (c), or (2) the sum of one thousand five hundred dollars ($1,500) per employee employed during the period the employer was uninsured. A penalty assessment issued and served by the director pursuant to this subdivision shall be in lieu of, and not in addition to, any other penalty issued and served by the director pursuant to subdivision (a).”
The MEWA’s coverage does not meet either standard. DIR has the authority to issue a stop work order demanding an employer to cease all employee labor until coverage is procured.
Employers operating without coverage also are not protected by the workers’ compensation act’s exclusivity provision and can be subject to tort liabilities.
Penalty Upheld
Fresno County Superior Court Judge Jeffrey Hamilton denied the earlier petition and complaint for declaratory and injunctive relief filed by ALA parent Agricultural Contracting Services Association. It sought to block the state’s cease and desist order and CDI’s findings that it was operating illegally. The court did remand the issue of ALA’s ability to pay the $4,345,000 penalty back to the Department.
ALJ Clarke de Maigret handled the review and found that it does have the ability to pay, even though it might take time to pay it off.
“With ongoing operations and annual surplus exceeding $250,000, Respondent has the ability to pay the penalty in a substantially shorter time than the payment period contemplated in Aviles,” Maigret wrote. The cited case ordered a defendant to make payments on a judgment even though it might take decades to pay off the award, and his future earnings were uncertain.
Maigret noted that ALA could pay the debt off even quicker using existing assets. “Respondent’s financial statements show that on January 1, 2021, ALA and Omega had combined assets of $1,743,265 and liabilities of only $112,927, leaving them with net assets of $1,630,338.”
ALA’s finance officer Antonio Gastelum claimed at the evidentiary hearing that roughly $1 million of the assets were restricted trust assets that could not be touched to pay the fine. Maigret was not swayed.
“The ALJ does not find this testimony credible, nor is he persuaded by terms such as ‘trust,’ ‘plan’ or ERISA program’ in the various financial statements, property deeds and bank records that respondent offered,” he wrote. “Respondent introduced no trust agreements or ERISA plan documents to establish the existence of the alleged trusts or to show that any assets are ‘restricted’ and unavailable for Respondents’ general expenses.”
Maigret issued his proposed order finding that ALA had the ability to pay on May 13, 2021. Insurance Commissioner Ricardo Lara adopted the proposed decision on June 9, 2021.
AG Action
Acting on behalf of the Insurance Commissioner, the California Attorney General sent a payment demand last fall and gave ALA 10 days to pay the full penalty. After that failed, it filed a complaint under Insurance Code section 12976 with the Fresno superior court for failure to pay.
The complaint seeks to hold ALA, Asay and Omega jointly and severally liable for the full $4,345,000 penalty “plus interest at the statutory rate from and after December 19, 2018.” The statutory rate in California is 10% per year and would add more than $1.5 million to the bill, and interest is still accruing.
The Attorney General also seeks the costs to investigate and prosecute the action, including expert and reasonable attorney’s fees. The AG is also asking for other collection and enforcement costs.
In addition to Agricultural Contracting Services Association and American Labor Alliance, other identities associated with the case include CompOneUSA, Omega Community Labor Association, Compass Pilot, and World Workforce International.
The state has not seized bank accounts to effectuate the judgment.
Federal Action
Parallel to the state enforcement actions, the U.S. Attorney for the Eastern District of California is pursuing criminal charges against Asay and Gastelum. Earlier this summer, he filed additional charges against Asay for allegedly filing false income tax returns and social security disability benefit fraud. The authorities allege that Asay caused ALA to pay more than $300,000 for his personal expenses, including $50,000 for dating service websites and $126,000 in rental payments for his private residence.
The latest charges follow initial federal fraud and money laundering allegations filed after the Federal Bureau of Investigations raided ALA’s headquarters. Following a trial status conference in May, the jury trial is slated to start later this fall.