Defunct Worker Leasing Firm Hit with $14.6M Workers' Comp Judgment

December 29, 2004 ( - A California judge has ordered a defunct employee-leasing firm and a related trust company to pay $14.6 million for not submitting enough to cover their workers' compensation premiums.

San Bernardino (California) Superior Court Judge Ben Kayashima issued the ruling against the worker-leasing company, Ideal Payroll Plus, and the trust company that partly resolved a civil suit against them filed by the State Compensation Insurance Fund, according to a news report by the San Jose Mercury News. State Fund is the largest provider of workers’ compensation insurance in California.

According to the report, State Fund is continuing to prosecute its lawsuit against Ideal general partner David Clancy Jr., and the trustee of the other company, Telma Moguel.

From 2001 to 2003, Ideal Payroll was a professional employer organization (PEO) handling payroll, taxes and certain insurance and benefits tasks for small businesses. Like many PEOs, Ideal became a co-employer of its clients’ employees – up to 3,500 of them at one point, issuing their paychecks and handling their payroll taxes and other back-office chores for a fee, the Mercury News said.

According to the Mercury News, the difference in this case was that Ideal treated the employees of its clients as partners in a limited partnership, which means that the workers were paid about 50% of their salary in a paycheck and the rest in partnership dividend income. The newspaper said that the effect of that arrangement was that employers saved about half of the normal workers’ compensation insurance premiums because only the paycheck income was reported to State Fund. The fund charges premiums as a percentage of payroll.

In its lawsuit State Fund argued that the dividends were actually reportable salary. The dividend income “was paid strictly for work performed,” State Fund said.

Kayashima agreed and ordered the companies – which were not represented by lawyers and did not contest the finding — to pay $1.3 million in past-due premiums plus a penalty of 10 times certain underpaid amounts.

In recent years, a number of employee-leasing companies have tried novel ways to ease the skyrocketing cost of California workers’ compensation insurance. Costs soared due to higher-than-expected medical costs and past mispricing by insurance companies.