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Senate Committee Focuses on Underground Economy and Work Comp

Posted on 19 December 2011 by admin

By Greg Jones, Western Bureau Chief

The head of the California Department of Industrial Relations says compliance with workers’ compensation insurance requirements is one of the best tools for driving the so-called underground economy out of California, and she plans to step up efforts to catch violators next year.

Christine Baker, who was appointed just last week to serve as director of the Department of Industrial Relations pending Senate confirmation, testified during a Dec. 5 hearing of the Select Committee of the California state Senate Business and the Underground Economy that Gov. Jerry Brown has made it a top priority to drive out employers who ignore labor laws and regulations.

“Lack of workers’ compensation coverage is a good indicator that a business may be cheating and taking an unfair competitive advantage of those who do provide coverage and who are operating in compliance with the law,” Baker said.

Brown signed legislation on Oct. 9 authorizing fines of $500 to $15,000 per violation for willfully classifying an employee as an independent contractor. The bill allows civil penalties of $10,000 to $25,000 for a pattern of willful misclassification.

Baker said a collaborative effort between her department, the Employment Development Department and the Workers’ Compensation Insurance Rating Bureau is paying off.

Baker said 479 of 1,498 employers — about 31% of those randomly selected for review by the Employment Development Department this year — did not have workers’ compensation insurance for their employees. Further review found that 80 of the employers actually did have a policy and an additional 45 purchased insurance after receiving a notification from the department.

Baker said the department issued 56 citations against employers who had no workers’ compensation insurance and against 46 employers who let the coverage lapse. Fines totaled $400,958, Baker said.

The department will continue to randomly identify employers to review, but will focus heavily on new employers and those in the construction, agriculture and restaurant industries in 2012, Baker said.

Starting in January, computer monitoring of payroll information reported to the state will also be used to identify employers who are using more workers than they claimed when purchasing a policy or who are logging more work hours than are being reported.

Computer monitoring should also help identify businesses that need to be investigated, sparing headaches for good employers, Baker said.

Bruce Wick, director of risk management for the California Professional Association of Specialty Contractors, testified that sweeps focusing on all contractors in a specific geographic area inherently “pick on some very good employers and waste their time.”

He said he supports the idea of using a computer system to identify “red flags,” as long as state agencies act quickly. He said in the case of Petronella Roofing, an Orange County contractor accused of running the largest known workers’ compensation insurance fraud case in the history of the state, red flags were identified long before the company was shut down.

“When the red flags came up, it took five years to put them out of business,” Wick testified. “Had they been shut down earlier, we could have given more business to legitimate contractors.”

Devon Lynn Kile, 46, on Nov. 30 was sentenced to 10 years of probation and ordered to pay $2.8 million in reimbursement to the Employment Development Department and the Franchise Tax Board. Her husband, Michael Vincent Petronella, was sentenced to 10 years in state prison on Nov. 4, 2010. Prosecutors say the company reported about $3 million in payroll to State Compensation Insurance Fund when they were actually paying about $29 million.

The Contractors State License Board will also be stepping up its efforts next year to ensure contractors are carrying workers’ compensation insurance, according to compliance chief David Fogt.

Fogt said a board review of the more than 300,000 licensed contractors in California found about 60% are exempt from carrying workers’ compensation insurance.

“They’ve signed under penalty of perjury that they have no employees and we know that is not true,” Fogt testified. “The majority have their own workers or they’re picking people up at Home Depot.”

Fogt said Assembly Bill 484, which takes effect on Jan. 1, 2012, requiring contractors to provide proof of coverage or certify their exempt status every two years when renewing their license will help identify noncompliant employers.

The board also plans to target the pool-plastering industry in Southern California, working with district attorney offices in Orange, Los Angeles and San Bernardino counties to bring contractors into court for not having workers’ compensation coverage.

Fogt said for every $1 spent on enforcement efforts, he expects the state will see a $4 return through increased tax collections and penalties.

Sens. Mark DeSaulnier, D-Concord, and Mimi Walters, R-Laguna Hills, asked during the hearing in Sacramento if employers are not carrying workers’ compensation insurance and violating other state laws because there are too many state regulations for them to follow.

Wick said every regulation imposed on legitimate businesses gives the underground contractors a point of leverage, so he thinks the state’s regulatory environment is partially to blame.

Scott Hauge, president of Small Business California, said he thinks some employers may not know the requirements, but the vast majority of those not carrying workers’ compensation are doing so intentionally.

“It is not over regulations,” Hauge said. “Obviously, that should be addressed, but that is a front for somebody. Not to have workers’ compensation and not to pay taxes is unconscionable.”

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