Officials behind the illegal workers’ comp programs run by American Labor Alliance and its alter ego Omega Community Labor Union were back before a California Department of Insurance administrative law judge last week. The hearing was to examine their ability to pay a $4.3 million fine the state levied for operating without a license and in violation of two cease and desist orders.
The alleged and unapproved multi-employer welfare arrangement (MEWA) challenged the California Department of Insurance cease and desist order in a Fresno Superior Court. The cease and desist order was upheld. It was shut down and fined. There is a federal criminal case about the MEWA and its operators.
But according to testimony offered by its representatives, the MEWA continues to operate despite the California Department of Insurance’s cease-and-desist orders. Now it argues it does not have to pay the fine.
But the Superior Court judge said the Department failed to consider ALA’s ability to pay the fine. Caselaw requires such consideration. Last week’s hearing was the first step in that process. It is ALA’s burden to prove that it lacks the ability to pay.
“There are certainly operating funds, but there are no funds available to pay for a judgment,” says attorney Charles Manock representing American Labor Alliance and Omega. The former sold the CompOneUSA program, while the latter is operating as Compass Pilot.
“There is no balance of assets anywhere that come anything close to the amounts contemplated in the judgment,” added Antonio Gastelum, who handles finances for both organizations. He maintained that the organization’s financial fortunes have suffered amid the enforcement actions and that their assets have dwindled.
Gastelum claimed that the total assets of both organizations combined are less than one-third of the penalty imposed by the state. Additionally, he claimed that nearly half of these assets are in trusts for paying the benefits for injured workers. The administrative law judge overseeing the case ordered him to produce additional financial records to support these claims.
The Department’s fine was levied more than two years ago, yet the program continues to operate in defiance of a third cease and desist order. Officials maintain that they intend to continue operating despite the state actions, a federal indictment, and legal action by former clients. Brokers that sold the program have been sued and lost cases and could also face sanctions.
The program claims to be exempt from state regulations and that its benefits supplant the need for actual workers’ comp insurance. Omega challenged the latest cease and desist order, but a decision in the case is still pending.
The state issued the $4.3 million penalties in December 2018. The penalty represented a $5,000 fine for the 869 days the organization had been selling workers’ comp and liability policies to employers without a license.
Since that time, however, the organization has continued to operate through Omega, and its Compass Pilot program and Gastelum testified last week that “Omega definitely intends to continue operating.” He testified that the organization still has “thousands of members.”
ALA officials created Omega in 2017 to take over the program the state was attempting to shut down. Late that year, Omega assumed CompOne’s membership and also accepted a transfer of $3.1 million in assets from ALA, according to Gastelum.
Financial Records
Gastelum testified that ALA had minimal financial activity in its early years but experienced “explosive growth” with the workers’ comp program’s rollout.
Documents introduced as part of the case show that in 2015, ALA’s parent reported just $639,500 in total revenue, but this ballooned to $5.8 million the following year. In 2017, total revenue climbed to $7.8 million, with the CompOne program contributing nearly $7.5 million of the total.
At one point, officials testified that Omega covered around 300 employers with approximately 7,000 workers. Gastelum testified last week that ALA/Omega’s fortunes declined as word spread of the cease and desist orders and a federal indictment against Gastelum and founder Marcus Asay, but says it still retains thousands of members.
Detailing Omega’s current finances, Gastelum testified that it had total assets as of January 1, 2021, of $1.3 million and that $666,000 of this was locked in a trust account to pay for claims. He testified that ALA’s assets were less than $20,000 at the start of the year.
The case is continuing as administrative law judge Clarke de Maigret ordered officials to produce additional financial records and for both parties to file closing briefs in the case. So far, only ALA’s 2016 and 2017 federal tax returns were introduced into evidence. Maigret ordered Omega to submit its returns for 2018 and 2019.
ALA was classified as a 501(c)(5) tax-exempt nonprofit labor organization. Officials testified last week that Omega is a 501(c)(5) organization as well. Still, IRS records show that its tax-exempt status was revoked May 15, 2020, for failing to file the required form 990 that tax-exempt organization must file. It has apparently never filed any of the required tax forms.
Program Operations
Gastelum’s testimony shed more light on the program’s operations and where the dollars go. He offered that only 30% of what is in a typical program would be considered premium actually goes to claims. The group takes 49% off the top to fund its administrative expenses. The remaining 21% is set aside as a reserve that can be used to cover either claims or operations.
In previous testimony before the CDI, Gastelum says the program operates without reinsurance, and claims are paid out of cash-flow. He said the group did not maintain reserves for individual claims.
Gastelum also testified last week that while most of the monies in the trust accounts are cash, he did note that the trusts do have investments in two pieces of real estate. One property valued at $145,000 was identified as a Fresno area commercial property used as both an office and for storage. The second property is valued at $575,000, but Gastellum did not offer any details about this piece of property.
“Our intention was not to look for appreciation opportunities, our whole objective is just to maintain asset value at 100% of what was put in by the members,” he said of the real estate investments, adding that “we’ve gone in and out of these properties at different times as we’ve needed to access the cash or not.”
The parties are due to file closing briefs at the end of March, with a decision to come at some later point. For all of Workers’ Comp Executive past coverage of ALA/Omega and the numerous court and administrative actions against it, please see our investigations section by clicking here.