The California Labor Commissioner and the Division of Labor Standards Enforcement recently designated a decision as a precedent, upholding two citations against an employer for operating without workers’ comp coverage. The employer had contracted with Professional Employer Organizations (PEOs) for workers, payroll services, and insurance, but the PEO’s workers’ comp “coverage” was bogus.
The employer was held liable for over $1.3 million in penalties for operating without valid workers’ compensation coverage. This is a big win for legitimate Professional Employer Organizations, which are forced to compete with illegal operators who can charge less because of the fraud.
The case involves primary employer Garcias Pallets, which contracted for PEO services with Golden State Employment Corp. and Preferred Services Group, which did business as American Resource Group.
The PEOs used the same business address, and both provided certificates of liability insurance produced through an illegal MEWA—initially through CompOneUSA and American Labor Alliance and later through CompassPilot and Omega Community Labor Association. The MEWA and its principal officers were later convicted of fraud (for additional coverage of the illegal operation, see our Investigations section).
Garcias Pallets participated in the appeal before the Department of Industrial Relations, but the PEOs did not appear.
Designating a decision as a “Precedent Decision” is not new for many California government agencies. California Government Code section 11425.60 provides that state agencies can issue a “precedent decision” if it addresses a “significant legal or policy determination…that is likely to recur.” The California Department of Insurance also has a long history of designating decisions as precedential. It issued the Shasta Linen decision as a precedential decision due to the copious litigation surrounding Applied Underwriters and its EquityComp program.
The California Labor Commissioner, however, has not used the procedure until now. Without fanfare or announcement, the DLSE last October designated three decisions as Precedential Decisions that had been issued years earlier. Precedent decision 001 dates back to 2018, 002 is from 2019, and the Garcias Pallets case (DLSE-PD-003) is from 2021.
Department of Industrial Relations officials say that they are moving to adopt precedent decisions now due to legislative changes. “The [Labor Commissioner’s Office’s] citation authority has expanded over the past several years, allowing the LCO to cite for violations and parties which were not previously subject to citation authority,” says DIR’s MariCarmen Estudillo. “The LCO recently determined that given the rise in complex citation cases, decisions that contain a significant legal or policy determination of general application that are likely to recur may be designated as precedential. The cases selected as precedential meet this criterion.”
Case Facts
The underlying case involved the Labor Commissioner’s office’s November 28, 2017, inspection of Garcias Pallets. On the day of the inspection, some 50 workers were repairing or manufacturing pallets. Later evidence confirmed a workforce that varied from 58 to 159 employees during the citation periods. The company provided a workers’ comp certificate effective from March 4, 2017, to March 4, 2018.
The certificate identified the insured as Preferred Services Group LLC DBA American Resource Group. The producer was CompOne USA. The certificate also listed Marcus Asay as a contact and named two insurers: National Union Fire Insurance Company, a carrier member of the AIG group, and American Labor Alliance.
AIG confirmed that it issued no policy and provided no coverage to PSG or its employer clients.
Further investigation produced another certificate of insurance dated April 26, 2018. The new certificate listed the covered employer as Golden State Employment at the same business address that PSG had listed. The certificate listed the “Issuer” as CompassPilot, which was part of Omega Community Labor Association. Omega and American Labor Alliance were alter egos. Omega took over the operations to continue the scheme after the California Department of Insurance issued ALA a cease and desist letter and later found it to be an illegal operation. Omega was ultimately deemed to be an illegal operation as well.
Citations & Fines
DLSE issued two citations to Garcias for operating without valid workers’ comp coverage. The first citation, for $1,131,030.95, covered the uninsured period from April 10, 2016, to December 23, 2017. During the proceedings, the penalty was reduced to $988,802.96. The second citation, for $412,377.94, covered the uninsured period from December 24, 2017, to July 24, 2018. This, too, was reduced to $360,521.11. The total amended amount of the citations was $1,349,324.07.
Garcias appealed the citations, and the issue went to a Tier 2 hearing before a DIR hearing officer. The company provided testimony about its move from the State Compensation Insurance Fund to the PEO. Initially, the PEO was known as North State Marketing, then American Resource Group, and later GSE. Garcias Pallets’ bookkeeper testified that the PEOs were the same companies but with different names and that she interacted with the same people regardless of what the PEO was calling itself.
DIR’s hearing officer concluded that Garcias Pallets was the employer throughout the period. It was in the business of manufacturing and repairing pallets and selling pallets to clients. It hired the workers and supervised them. The hearing officer concluded that the PEOs were joint employers of the workers making pallets for Garcias.
“The evidence also supports a finding that Garcias was a ‘client employer’ under Labor Code section 2810.3. Under Labor Code section 2810.3(b), a ‘client employer’ shares legal responsibility and civil liability with a ‘labor contractor’ for workers supplied by the labor contractor to the client employer for payment of wages and failure to secure valid workers’ compensation coverage as required by Labor Code section 3700,” the hearing officer wrote. “’ Client employer’ means any business entity with a workforce of twenty-five workers or more that obtains or is provided six or more workers by ‘labor contractors’ to perform labor within the client employer’s ‘usual course of business.’”
No Coverage
Garcias argued at the hearing that it had provided workers’ compensation insurance when it contracted with the PEOs that provided the certificates and that Insurance Code Section 11658(c) provided protection.
The section holds that “the withdrawal of a policy form or endorsement by the commissioner pursuant to this section shall not affect the status of the policyholder as having secured payment for compensation or affect the substitution of the insurer for the policyholder in workers’ compensation proceedings.” In the case of the illegal MEWA, the Insurance Commissioner issued two separate cease and desist orders in a futile attempt to shut down the con, but the operation continued for years.
“The record reflects compelling facts surrounding Garcias Pallets’ mistaken belief they were provided valid insurance, ongoing provision of workers’ compensation insurance to eight employees during the citation periods with no denial of coverage, and the appearance of certificates of liability insurance as valid,” the hearing officer notes. “However…Garcias Pallets is not entitled to relief because they did not provide valid workers’ compensation insurance at the time of the penalty assessment and stop order. Nor does the Division have the discretion or statutory authority to afford relief under these facts.”
The hearing officer upheld the penalties as amended during the proceedings. Copies of the Labor Commissioner’s Precedent Decision in the matter of Garcias Pallets are available in our Resources section or by clicking here.