It took over two years, but a Fresno County Superior Court Judge finally issued a decision, and it dismantles piece by piece claims by founder Marcus Asay and others associated with American Labor Alliance (ALA) and CompOneUSA that its replacement workers’ comp program is exempt from California regulation.
The operators of the illegal program, a MEWA, or Multiple Employer Welfare Arrangement, now known as Omega Community Labor Association, had challenged the California Department of Insurance’s cease and desist order but lost in court for the second time.
Broker’s Exposure
Brokers who sold the program should be concerned about many issues. The program did not have a certificate of authority to operate and selling it as a replacement for workers’ comp may be illegal. Employers covered by the program have injured employees who will now not have coverage.
Employers have a lot to worry about too. Since the program was not legal employees who have no coverage may or may not fall under California’s uninsured employer fund which will file to collect against the employer for costs associated with the claim. Employees can sue their employers for damages because the no-fault system does not exist without insurance.
Brokers likely have direct exposure to these risks.
Criminal Charges
Asay (see photo) and finance officer Antonio Gastelum are also facing federal criminal charges for conspiracy, mail fraud, and money laundering around their actions running the programs. Additional criminal charges are being prepared, according to federal prosecutors.
The backers of the illegal program reiterated claims that federal Employee Retirement Income Security Act (ERISA) laws preempted the Department’s oversight of their operations and also challenged the fairness of the hearing they received before CDI’s Administrative Hearing Bureau.
But the court noted the petitioners held the burden of proving the ERISA preemption but failed to do so. It also found the administrative law judge’s handling of the case, including relying in part on a federal letter rejecting the program’s claim to be a bona fide labor organization, was proper and lawful.
Illegal Claims
American Labor Alliance and its successors claim to provide ERISA benefits that supplant traditional workers’ comp insurance or self-insurance. The program was sold heavily into the ag and staffing industries. ALA officials maintain that it is an entity claiming exception (ECE) under the multi-employer welfare arrangement (MEWA) regulations. Still, the court says it failed in numerous ways to prove either of these assertions.
ERISA Preemption Doesn’t Apply To Comp
The federal ERISA preemption is specifically excluded from applying to an employee benefit plan that is maintained solely to comply with a state’s workers’ comp laws. ALA officials argued that because their program provided benefits in addition to workers’ comp, such as funeral benefits, ERISA preemption still applied. The court was not convinced.
“That is not the law,” Judge Jeffrey Hamilton wrote. Citing both U.S. Supreme Court and Ninth Circuit opinions, he pointed out that “[a]s California requires an employer obtain workers’ compensation coverage only from an admitted insurer or a state-approved self-insured plan, ERISA cannot apply to workers’ compensation coverage held by a California employer.
Not An ECE
Hamilton also noted that the cease and desist order applied to the defendants’ actions as insurance agents and producers without having a license or certificate of authority. Here they claimed federal preemption because ALA also provided health benefits, but the court rejected this based on its finding that the program is not an ECE as it claimed.
The judge pointed out that federal regulations provide a clear path for being recognized as an ECE by the Secretary of Labor but that ALA failed to do so. “While petitioners were not required to seek such a ruling, their failure to do so means that they are not a valid ECE,” he wrote.
“Further, entities may not claim ‘ECE’ status where the welfare plan at issue is self-funded in whole or in part and marketed by ‘an individual who … has failed to obtain a license as an insurance producer,” Hamilton noted. “Because the workers’ compensation coverage at issue was self-funded and sold by petitioners without a license, this iteration of petitioners’ federal preemption defense also fails.”
The court noted that the petitioners never tried to dispute the fact that they did not hold a license to transact insurance in California “only that one was required for any of their activities.
Bias Claims Rejected
ALA officials also alleged that CDI chief administrative law judge Kristin Rosi was biased and, in particular, objected to her taking notice of a letter from the Department of Labor to Marcus Asay. The letter was issued during the administrative deliberations and stated that Asay and his organization did not qualify as a labor organization for multiple reasons. ALA objected and attempted to cast doubt on the letter’s authenticity, but the letter was ultimately entered into the record, and its authenticity verified.
“The ALJ found the letter to be highly relevant, though not dispositive on the issue of the exemption from MEWA status because the letter contradicted testimony by Mr. Asay,” the court said, finding that judicial notice of the letter was permissible.
Ability To Pay
The court went on to find that “the administrative record contains substantial evidence that petitioners transacted the business of workers’ compensation insurance in California by soliciting and marketing coverage, issuing Certificates of Liability Insurance (‘COLIs’) and policy declarations to its employer members purporting to provide workers’ compensation coverage in compliance with California law,” Hamilton wrote. “This evidence is sufficient to establish the violations at issue.”
The court, however, stopped short on enforcing the state’s $4.3 million penalties for these proven violations. Instead, Hamilton says the case needs to go back to the Department’s Administrative Hearing Bureau to determine if the defendants actually have the ability to pay the fine.
“Evidence of petitioners’ ability to pay the particular amount imposed cannot be inferred from the administrative record, and no specific findings on this subject were made,” he noted. “Remand is necessary to permit production and consideration of evidence on the issue of petitioner’s ability to pay the amount required by the statute before the penalty may be imposed.”
The penalty covered not only the time in which ALA was operating the CompOneUSA program illegally but also the time after ALA’s assets and liabilities were transferred to Omega. The ALJ found that Omega was the alter ego of the American Labor Alliance – a finding that is not disturbed by Hamilton’s ruling.
Copies of the Fresno Superior Court’s ruling in the case is available in our Resources section or by clicking here.