Employee Leasing Scams

Employee Leasing Scams - Buyer Beware.

This article highlights what can go wrong when signing up your small or midsize business with an employee leasing company or professional employer organization without doing your homework. The damage done (and potential liability) by not performing the proper due diligence can have a devastating effect

After almost 6 years, prosecutors are finally bringing to justice (after appeals) 3 more individuals whose audacity and greed ruined the lives of business owners and their employees in Florida, New Jersey, New York and the Midwest.

The Florida Times-Union
By Paul Pinkham

Judge sentences business men to prison

Three business owners who cheated millions of U.S. workers out of insurance benefits were sentenced to a total of 55 years in prison by a Jacksonville judge Thursday in what one investigator called Florida's biggest insurance fraud case. U.S. District Judge Virginia Hernandez Covington also ordered the men to forfeit $75 million in assets to the government to partially repay their victims. She said she was "repulsed" by the crimes and hopes the sentences send a message to the business community that fraud won't be tolerated.

Greed got the better of you," Covington told the defendants, all in their 50s.

In February, after a five-week trial, jurors convicted Donald Edward Touchet, Richard E. Standridge and Robert J. Jennings of mail fraud, wire fraud and money laundering. Prosecutors said the men used sham insurance companies to defraud tens of thousands of small business owners into paying premiums for nonexistent workers comp coverage. Five of the victimized businesses were in Jacksonville. As a result, millions of workers were left without insurance, and some suffered catastrophic financial setbacks, said Assistant U.S. Attorney Mark Devereaux. They included a Missouri man who lost both legs in a construction accident and was only able to get one replaced because the insurance, which he thought he had, never paid for the first one. Another victim, a Lake Butler trucker, suffered brain damage from a job accident but got no salary or hospitalization benefits. He lost his home and his marriage, according to trial testimony.

Covington sentenced Touchet, 54, of El Cajon, Calif., to 22 years in prison and ordered him to forfeit $35 million and property in San Diego County, Calif., to the government. Standridge, 59, a Tempe, Ariz., physician, was sentenced to 18 years in prison and ordered to forfeit $19 million, a $400,000 bank account and four vehicles. Jennings, 59, of Danville, Ill., was sentenced to 15 years and ordered to forfeit $21 million, property in Danville and a motor vehicle. He is dying of cancer, his lawyer said.

Fourteen people have been convicted in the insurance scam, which FBI Special Agent Doug Mathews called the biggest ever in Florida. A 15th defendant is at large in England, and another died while under investigation. Devereaux said prosecutors are proceeding with forfeiture against his New Jersey employee leasing company. The national FBI investigation spun out of the Jacksonville prosecution of Thomas King, president of the Jacksonville employee leasing firm Miralink Group, which collapsed in 2002. King is serving a 14-year sentence. Touchet owned a California employee leasing firm, Jennings ran an administrative services company and Standridge operated several medical corporations. They provided the administrative functions of the sham insurance that King and others purchased, Devereaux said.

In court Thursday, the three men claimed to have been victims themselves, but Covington didn't buy it. "I don't think this had to do with being naive," she said. "I think this had to do with being greedy." Although all three said they sympathized with the victims, Devereaux said their actions and testimony at trial show differently. "You don't get any more serious of a white-collar crime," he told Covington. "This is almost like an Enron where people's life savings are gone, and they [the defendants] just don't care. ... The amount of loss here is absolutely tremendous."

The defendants plan to appeal.

Legislators Mull Professional Employer Organizations

Regulating employee leasing companies and professional employer organizations can be a formidable task. Elected officials of West Virginia's Government Organization Subcommittee C is learning just how difficult it can be. Mannix Porterfield, a reporter with the Register-Herald, provides us with an insight into examining the operations of these companies.

This article makes a strong case why business owners and executives should seek professional advice when considering the selection of an Employee Leasing, HR Outsourcing, or Professional Employer Organization for their company.

Legislators Mull Professional Employer Organizations

By Mannix Porterfield
Register - Herald

An emergency rule is coming in mid-June to govern how Professional Employer Organizations align with workers’ compensation coverage, but other issues affecting them don’t end there. In fact, based on Sunday’s discussion by Government Organization Subcommittee C, lawmakers had best plan on looking at PEOs during interims for the rest of the year. Taxes, labor laws and unemployment compensation are all matters the panel plans to look at, Sen. Evan Jenkins, D-Cabell, a co-chairman, assured members. Until last year, there was no regulation of the growing business, and it was the PEO industry itself that called on lawmakers for some standards.

“They are worried, in part, about the image an unscrupulous entity that would act like a PEO but not really be a PEO, and come in and spoil what an appropriately formed and structured PEO may do,” Jenkins said. Insurance Commissioner Jane Cline told the panel her office intends to file an emergency workers’ compensation rule governing PEOs with the secretary of state’s office next month. “The issue of health insurance coverage seems to be a big concern,” Cline said. Cline recalled “a disastrous situation” that occurred with a PEO in North Carolina when the company slipped into bankruptcy, leaving a number of employees in the lurch.

About 14 states have some type of legislation on the books similar to West Virginia’s new law. “Are there places that have a track record of PEOs that we could somehow follow and not have to re-invent the wheel?” asked Sen. Ron Stollings, D-Boone, a doctor. Cline said the industry is interested in the Legislature providing some levels of regulation. “There are legitimate ones doing legitimate things out there,” the insurance commissioner said. “They’re concerned about the ones who might be doing it in a rogue manner.” Committee counsel Brenda Thompson said legislation “varies so greatly” in states that have enacted such legislation, “and it’s really a new creature.”

A lawsuit in Nevada over a PEO law has traveled through four courts already and remains unsettled after eight years of litigation, she pointed out. “This is pretty heavy stuff we’re going into,” Stollings said. “I wish someone had plowed a furrow for us to follow.”

PEOs function as a go-between for a business and its employees, such as in the operation of a firm offering temporary secretarial help, Jenkins explained afterward. “So that company writes one check to the PEO, who would cover all aspects of the employees,” the senator said. “It’s almost like having a dual employer situation. The PEO promotes itself as relieving that employer of the many traditional employer-employee management responsibilities.” A company may retain its right to discipline and fire its workers, but the PEO is the actual entity writing the checks, paying taxes on wages and covering the benefits, he said.

“As we studied this last year, we kept peeling back layers of what these PEOs did,” Jenkins said. “We realized it’s a very complex system.” Last year’s measure merely requires PEOs to register with Cline’s office to lay the groundwork for getting workers’ compensation coverage. “We were wanting to make sure employers weren’t dodging their workers’ compensation responsibilities by using a PEO, and a worker, if injured on the job, wouldn’t find himself in a Catch-22,” Jenkins said.

The Risk of Using Independent Contractors

The authors highlight some of the recent changes which may effect companies who employ independent contractors. State and federal regulators and legislators have taken steps to address the widely used, (and often abused) practice of misclassifying entire classes of employees as independent contractors. The report reveals why large and small employers alike should take care in assigning independent contractor status to individuals engaged in consulting, delivery and transportation, sales and marketing, management, personal and technical services.

Compliance and the fear of litigation is just one of the reasons that so many employers are seeking the services of third party employee management firms. Many service models exist, from payrolling companies - providers who serve contingent workforces, employee leasing companies, and PEO's - Professional Employer Organizations.

Below are excerpts from a recent article in the New York Law Journal.
http://www.nylj.com

By Richard J. Reibstein, John A. Nixon, Dan A. Schulder, Stuart A. Shorenstein and Tiffany Raspberry.

The legal landscape involving independent contractors has dramatically and swiftly changed. For decades, legal challenges to an employer's use of independent contractors were infrequent, and many companies were willing to risk the remote chance that they would have to defend a lawsuit or a regulatory inquiry that they had misclassified certain employees as independent contractors.

Over the last year, however, there has been a wave of regulatory and legislative initiatives at both the federal and state levels seeking to stem the use of independent contractors. In addition, companies have been faced with substantial judgments in highly visible lawsuits brought on behalf of classes of workers who have successfully established that they were common law employees improperly classified by their employers as independent contractors.

Regulatory Initiatives

Within the past year, there have been a number of initiatives regulating the use of independent contractors. In May 2007, the Internal Revenue Service undertook a worker misclassification program and announced that the misuse of independent contractors would be a major area of emphasis for the IRS in fiscal 2008. By Nov. 6, 2007, the IRS had entered into data-sharing agreements with 29 state workforce agencies to share the results of employment tax examinations. The IRS has also started to focus in earnest on large corporate employers that allegedly have misclassified employees as independent contractors. In December 2007, the IRS assessed FedEx Ground for $319 million in unpaid employment taxes and penalties, just for calendar year 2002, following the IRS's determination that FedEx Ground drivers had been misclassified as independent contractors.

The Risks of Misclassification

Some of the most substantial risks faced by employers that are found to have improperly reported the income of employees as independent contractors are liability for unpaid federal, state and local income tax withholdings and liability over Social Security and Medicare contributions that are not paid on a Form 1099. Other large financial risks include unpaid unemployment insurance premiums, unpaid Workers' Compensation premiums and unpaid overtime compensation and work-related expenses. These types of liabilities (plus interest and penalties for non-payment) can be potentially devastating for employers that make considerable use of independent contractors.

Another substantial risk is a claim of benefit entitlement by or on behalf of common law employees misclassified as independent contractors. Claims have been successfully brought for pension and profit-sharing benefits, medical benefits and even stock options.

Reclassification

One way to avoid future liability is to reclassify questionable independent contractors as employees. After determining the identity of the 1099ers, counsel should undertake an individualized assessment as to whether each person or class of persons so identified is legally an independent contractor or actually a common law employee.

The legal test for independent contractor or employee status varies according to the law being enforced. The IRS abandoned its fabled 20-factor test several years ago; its current test is supposedly more simplified, focusing on three principal aspects of the worker's relationship with the business: (1) the degree of behavioral control that the business can exercise over the individual; (2) the degree of financial control that the business can exercise over the individual; and (3) the parties' views and perceptions of the relationship. In the employee benefits arena, the U.S. Supreme Court has stated that the test under ERISA focuses upon the hiring party's "right to control the manner and means by which the product is accomplished."⁴ Although the Supreme Court, the IRS and state agencies have articulated their criteria for determining employee status, the application of these criteria is oftentimes vexing, even to experienced legal practitioners.

Employee Leasing

The use of a responsible employee leasing organization is a practical and viable alternative that allows 1099ers to continue to provide services to the company, yet it substantially minimizes a company's exposure to liability under the tax, employee benefits and labor laws. This alternative can dramatically reduce a company's risk of liability and substantially diminish the likelihood of a lawsuit or an audit by a governmental agency.

Unlike payrolling companies, an employee leasing organization is a third-party employer. Some or all of the company's 1099ers (as well as its long-term temps, project employees, per diems and consultants) can be hired as employees of the leasing organization, which withholds taxes; makes Social Security, Medicare and unemployment payments; pays Workers' Compensation premiums; and may also provide basic medical and dental benefits and offer participation in a 401(k) plan maintained by the leasing organization.

Employers have allowed themselves to be imperiled by such risks because there is a very significant economic inducement to avoid an array of payments required to be made for employees but not for independent contractors. Along with lax enforcement in the past by the IRS and state agencies, these financial incentives have led many businesses to overuse the independent contractor classification.

Conclusion

Now that the IRS and the states have prioritized and targeted employer misuse of independent contractors, companies that use 1099ers to supplement their work force should examine whether they may have legal exposure for employee misclassification. If the potential tax, employee benefits or labor law liability is significant, companies would be wise to seek the most appropriate ways to eliminate or minimize their exposure and comply with laws governing the use of independent contractors. A coordinated, interdisciplinary approach may best serve the company's interests.

There is a significant economic inducement to avoid an array of payments required to be made for employees but not for independent contractors. Along with lax enforcement in the past by the IRS and state agencies, these financial incentives have led many businesses to overuse the independent contractor classification.

The authors are members of WolfBlock's independent contractor compliance working group. Richard J. Reibstein (rreibstein@wolfblock.com) (employment), John A. Nixon (jnixon@wolfblock.com) (employee benefits), Dan A. Schulder (dschulder@wolfblock.com) (tax), and Stuart A. Shorenstein (sshorenstein@wolfblock.com) (government relations) are partners of WolfBlock. Tiffany Raspberry (traspberry@wolfblock.com) is a government relations specialist with WolfBlock Public Strategies.

Use of Health Savings Accounts up 35 Percent; Critics See Them as Tax Shelter

The number of Americans with insurance plans tied to health savings accounts has passed the 6 million mark, according to America's Health Insurance Plans. HSAs are tax-favored, individually owned savings accounts that can be used to pay for medical expenses in conjunction with a high-deductible insurance plan. About 6.1 million Americans were covered through HSA plans in January 2008, up 35 percent over the same period a year earlier, according to AHIP, a trade association representing insurers. The plans have been in existence since January 2004.

About 30 percent of individuals covered by HSA plans worked for small businesses, 45 percent worked for large employers, and 25 percent bought insurance in the individual market. The small-group market is the fastest-growing segment for HSAs. The AHIP survey found that HSAs are helping more Americans afford health insurance. HSA plans accounted for 31 percent of new coverage in the small-group market over the past year, and 27 percent of new coverage in the individual market.

The average deductible for the best-selling HSA plans in the small-group market was $2,244 for single coverage and $4,356 for family coverage, according to AHIP.

Average annual out-of-pocket limits were $3,462 for single coverage and $6,690 for family coverage.

Premiums averaged $3,189 for single coverage and $8,125 for family coverage.

"The increasing popularity of HSAs is a result of managed care's failure," said John Goodman, president of the National Center for Policy Analysis, a Dallas-based public policy research organization. "The best way to control health care costs is to put patients in control of more of their health care dollars."

Critics of HSAs, however, pointed to another study. The Government Accountability Office found that taxpayers with HSAs in 2005 were, on average, more than twice as wealthy as other taxpayers. Contributions to HSAs were more than twice as high as withdrawals. "HSAs clearly are attractive to higher-income people who are looking for tax shelters," said Rep. Henry Waxman (D-Calif.). "But they aren't the answer for providing adequate health insurance coverage for the average American. This report provides further evidence that we need to re-examine whether this is the right way to use the government's resources to address our health care needs."

The House recently passed legislation that would require HSA trustees to substantiate that withdrawals from the accounts were used for allowable medical expenses. Republicans who opposed this provision said it was designed to undermine HSAs by adding unnecessary administrative burdens. "Democrats should stop trying to dismantle this coverage option," said Rep. Charles Boustany (R-La.). "These accounts help cover the uninsured and lower health costs with preventive care, lower-cost medicines and fewer visits to emergency rooms."

The HSA studies are available at www.ahipresearch.org and www.gao.gov.

The 4 P's of HRO and PEO Evaluation

By Bruce Silver
May 4, 2008

All too often companies spend hours analyzing, assessing, and comparing the cost or savings that one HRO or PEO service provider offers versus another. While a detailed spreadsheet of costs may help to determine "hard dollar" expenditures, it very rarely accounts for the intrinsic value of the competing service models you are trying to compare.

Usually, items such as the co-pays of a health plan, workers compensation rates and administrative fees take precedence over far more important questions. Are you teaming up with a HRO or PEO partner who offers complimentary strengths or merely duplicative expertise and services? Is your corporate philosophy compatible?

Focusing on our 4 P's will help you to make the "right" choice.

People – Meet with the management and team you will be working with in person, by phone or tele-conference. What are their backgrounds, functions, qualifications, and responsibilities? What are the scope of services each will deliver, how, and how often?

Process – What is the plan for a smooth transition? Map steps for employee notification, orientation, and enrollment. Identify the who, what, where, and when of plan implementation. Set goals, time-lines, reviews and evaluations.

Platform – Human Resource Information Systems (HRIS) provide a robust set of tools for employee administration, benefits, compliance, payroll, and risk management. Identify levels of employee and management access, orientation, and training. How will you coordinate IT staff for system integration with automated attendance and Point Of Sale systems, 3rd party software and hardware?

Programs – Employee Benefit programs provide a competitive edge in attracting and retaining a highly motivated and productive workforce. Evaluate the quality, value, and choices of health, life, dental, disability and retirement plans. What employee communication, mediation, recognition, rewards, and relocation services are available?

Bruce Silver is the founder and managing member of Employers Rx LLC.
The author can be reached at 561.843.4333 or bruce@employers-Rx.com.
Your comments are welcome. For additional information visit our websites:
http://employers-Rx.com
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