The attorney for American Labor Alliance and its parent Agricultural Contracting Services Association is asking a Fresno Superior Court to strike down a California Department of Insurance $5,000 per day penalty for selling what it purported to be an alternative to workers’ comp coverage. ALA argues that the state’s penalty statute is not only unconstitutional but also claims that CDI failed to prove its case.
CDI contends the program is illegal and that employers in the programs do not have legal workers’ comp insurance.
“[N]o penalty (or a very, very small penalty, at best) could have been imposed against ACSA in this matter,” says attorney Charles Manock in his opening memorandum challenging the state’s action. CDI’s response is due later this month, and the court is due to make a ruling based on the briefs in early December.
In the meantime, ALA’s alter ego Omega Community Labor Association and its Compass Pilot program continue to operate in defiance of a state-issued cease and desist order (for recent coverage see Details Emerge… and MEWA Still Operating…
When CDI initially levied the penalty, it was in the range of $3.4 million for soliciting, marketing, selling and issuing insurance certificates to employers and agents without a license, but later grew to $4.3 million due to ALA’s continued operations. Its alter ego Omega, which officials testified was set up to take on ALA’s accounts and liabilities, is using a modified cert that looks like a typical ACORD Certificate of Liability Insurance but has been edited to substitute the words coverage for insurance and issuer for insurer.
The penalty dispute is separate from the ongoing federal prosecution of ALA founder Marcus Asay and finance officer Antonio Gastelum. The pair face mail fraud and conspiracy charges related to their running of ALA and the
CompOneUSA program. Prosecutors allege that proceeds from the program were used to pay personal expenses, including one instance of Marcus Asay withdrawing funds and then depositing over $20,000 in his own individual retirement account. The charges followed an FBI raid on ALA’s operations and a lengthy grand jury investigation. Gastelum also provides financial services to Omega.
California Labor Commissioner Fails to Act
The DSLE – Division of Labor Standards Enforcement is charged with notifying employers without legal workers comp to either obtain it or be shut down. But, despite having the list of these MEWA employers has apparently taken no action to enforce the law.
CDI issued the fine under insurance code section 12921.8, which provides two penalty options for “acting in a capacity that requires a license, registration or certificate of authority from the commissioner.” The first option is a penalty of five times the amount of money received by the person for acting in the capacity for which the license, registration, or certificate of authority was required but not possessed. The second, which the department opted to use, is a $5,000 per day penalty for each day the person acted without a license, registration, or certificate of authority. The regulation states that “[i]n the absence of contrary evidence, it shall be presumed that a person continuously acted in a capacity for which a license, or registration, or certificate of authority was required on each day from the date of the earliest such act until the date those acts were discontinued, as proven by the person at a hearing.”
The MEWA cried foul.
“On its face, imposing penal damages at a rate of $150,000 per month pursuant to the Penalty Statute works a great injustice because it would not take long to bankrupt a small-scale violator, or a violator with modest profit margins, or a non-profit such as ACSA,” argues Manock. “In all, the Decision is the result of a wholly unfair hearing and post-hearing process and a patently biased hearing officer.”
Evidence in the latest action against Omega Community Labor Association, however, indicates that the penalty likely could have gone much higher if ALA’s revenues were similar. Over the last two years, it appears that Omega took in roughly $10 million on the program from California employers, which could expose it to $50 million in penalties under the alternate penalty structure allowed in section 12921.8. Omega also lacks any license, registration, or certificate of authority. Omega is still in the process of challenging CDI’s cease and desist order, and the case is not yet to the penalty phase.
Manock is asking the court to vacate and set aside the decision in the case against ALA. He is asking for a new decision denying any monetary penalty “against ACSA or any other person or entity.”