Calif.'s State Fund Wins $14.6 Million Judgment
NU Online News Service, Dec. 30, 1:10 p.m. EST?California's workers' compensation insurance program, State Fund, said it has won a $14.6 million judgment against two Rancho Cucamonga, Calif., businesses involved in a scheme to avoid paying workers' compensation premiums.[@@]
The businesses, State Fund said, used an elaborate 'shell game' to avoid paying the correct premiums and payroll taxes. State Fund announced the award earlier this week.
San Bernadino County Superior Court Judge Ben Kayashima awarded the judgment against Ideal Payroll Plus, Ltd., and Ideal Management LP–both Professional Employer Organizations (PEO).
San Bernadino County resident David W. Clancy, Jr., formed the PEOs, which underreported payroll to the State Fund, the Internal Revenue Service and the State Franchise Tax Board.
Under the scheme, Mr. Clancy enrolled workers in an alleged 'K-1 Dividend Distribution Plan' in which employees received two checks–one for what Mr. Clancy called 'W-2 wages' and another referred to as a 'dividend.'
Mr. Clancy, the general partner of Ideal's entities, claimed that he could reduce premiums by 50 percent and provide complete workers' comp coverage through State Fund.
As part of the scheme, he failed to disclose the amount of the alleged K-1 dividend paid to each employee, which usually amounted to more than half of the employee's income, and thereby avoided paying correct premiums to State Fund.
State Fund uncovered the scheme during an audit, canceled his policy and filed suit for damages.
The judgment represents an estimated $1.3 million in unpaid premium owed to State Fund–as well as interest and costs–and a penalty of 10 times the premium amount, which is permitted under state regulations.
"We hope that this judgment will send a strong message and serve as a deterrent against other companies who are considering defrauding California's workers' compensation insurance system," said State Fund Vice President and General Counsel Charles Savage in a statement.
San Francisco-based State Fund said it would continue to pursue legal action against others involved in the scheme.
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