CA Firm Accused of Helping Firms Avoid Paying Workers' Comp

November 8, 2007 ( - California Attorney General Edmund G. Brown Jr. has accused a Southern California corporation of training construction companies to violate workers' compensation laws by the use of "fake corporations with phantom executives."

According to a news release on the lawsuit filed in Orange County Superior Court, Brown said, “PacifiStaff developed a sophisticated scheme whereby companies would fire their workers and rehire them in fake corporations with phantom executives. These illegal maneuvers enabled construction companies to avoid state laws which require all employers to provide workers’ compensation insurance.”

The news release said the California Department of Justice opened an investigation into PacifiStaff after receiving reports that a growing number of Southern California construction companies were starting to drop workers’ compensation for their construction workforce. The companies improperly labeled their employees as shareholding corporate executives to take advantage of a labor code exemption which does not require workers’ compensation insurance for such executives.

During the investigation, the AG’s office said, undercover agents attended PacifiStaff sales meetings where representatives pitched an illegal scheme to help construction companies avoid paying workers’ compensation to their employees. On print advertising, in Internet promotions, and during these sales pitches, the company falsely stated that their scheme was approved by a government agency.

The investigators found that construction companies were advised by PacifiStaff to fire their construction workers and rehire them as corporate officers of a sham corporation. The construction workers were then given executive titles and a single share of worthless stock in the new corporation and were sent back to construction sites – without the required workers’ compensation insurance.

The AG’s office said PacifiStaff brushed off questions about what might happen if a construction worker were actually injured on the job. Investigators also found that staff representatives engaged in the unauthorized practice of law by offering legal advice without a license.

The lawsuit seeks a $2,500 per violation penalty. The number of violations could be in the thousands.

A news report from Business Insurance says PacifiStaff denies the business model adopted by its clients in any way “constitutes an unlawful or unfair business practice violation.” PacifiStaff said in a statement employers that adopt their business model do not “seek to avoid their obligation to provide meaningful benefits to their workers,” and Californians have “benefited” from their business model, according to Business Insurance.