News Flash
California Ruling Exposes Risks of Fraudulent PEO Coverage
The Garcias Pallets case, designated as Precedent Decision, underscores a critical message: Individual employers cannot outsource their legal duty to secure valid workers’ compensation coverage even if they’re misled by bad actors.
How a Pallet Company Fell into a $1.3 Million Trap
The Players
Garcias Pallets: A pallet manufacturing company with 58–159 employees.
Fraudulent Professional Employer Organizations: Golden State Employment Corp. and Preferred Services Group.
Illegal MEWAs: CompOneUSA, American Labor Alliance, and Omega Community Labor Association.
The Scheme
Garcias Pallets entered into employee leasing agreements with these intermediary companies to handle payroll and workers’ compensation insurance. The PEOs provided certificates of compensation coverage from sham entities posing as insurers. These certificates were tied to illegal Multiple Employer Welfare Arrangements—unregulated schemes that lacked valid licenses or financial backing.
The Fallout
Inspections in 2017 revealed Garcias Pallets had no valid workers compensation coverage.
The Labor Commissioner issued two citations totaling $1.35 million for operating uninsured from 2016–2018.
The intermediary companies vanished, leaving Garcias Pallets to shoulder full liability for workers.
Legal Precedents & Why This Decision Matters
The ruling hinges on two key legal precedents…
Labor Code §2810.3: Defines Garcias Pallets as a “client employer” jointly liable for wages and liability for workers’ insurance compliance when using employee leasing agreements.
Insurance Code §11658: Offers no protection if the insurer is fraudulent. Even with certificates in hand, individual employers bear ultimate responsibility.
The Hearing Officer’s Stance
“Garcias Pallets is not entitled to relief because they did not provide valid workers’ compensation coverage… The Division has no discretion to afford relief under these facts.”
This legal precedent signals that ignorance is no defense. Individual employers must rigorously vet Professional Employer Organizations and their insurers.
What Individual Employers Must Know
The Cost of Compliance Failures
First Citation: $988,802.96 (reduced from $1.13M) for uninsured operations from 2016–2017.
Second Citation: $360,521.11 (reduced from $412K) for 2017–2018 violations.
Red Flags Garcias Missed
The intermediary companies shared the same address and rebranded repeatedly.
Certificates listed unlicensed “insurers” like ALA and Omega, later deemed illegal.
AIG confirmed it never issued policies to the PEOs.
3 Critical Takeaways for Individual Employers
Vet Professional Employer Organizations Relentlessly
Verify state licenses and insurance carriers through the Department of Labor.
Avoid PEOs tied to MEWAs or frequent name changes.
Demand Direct Proof of Compensation Coverage
Insist on policy numbers and contact underwriters directly.
Reject certificates from unverified third parties.
Understand Joint Liability for Workers
Under Labor Code §2810.3, individual employers with 25+ workers using labor contractors are jointly responsible for compliance.
Cleaning Up the Professional Employer Organization Industry
This decision is a win for legitimate Professional Employer Organizations forced to compete with fraudulent operators. The Department of Labor’s move to designate precedential decisions reflects growing scrutiny of complex employee leasing agreements. As MariCarmen Estudillo of DIR states:
“The rise in complex citation cases demands clear guidance. These legal precedents ensure consistent enforcement.”
Don’t Be the Next Garcias Pallets
Individual employers must proactively verify their employee leasing agreements and compensation policies. Fraudulent compensation coverage certificates are rampant, and the consequences of compliance failures are catastrophic.
If you suspect your compensation insurance policy or PEO partnership is fraudulent, act now:
Contact the Department of Labor.
Submit suspicious certificates for verification at CheckMyCert.org.
Stay informed. Stay compliant. Protect your business.
News Flash
California Ruling Exposes Risks of Fraudulent PEO Coverage
The Garcias Pallets case, designated as Precedent Decision, underscores a critical message: Individual employers cannot outsource their legal duty to secure valid workers’ compensation coverage even if they’re misled by bad actors.
How a Pallet Company Fell into a $1.3 Million Trap
The Players
Garcias Pallets: A pallet manufacturing company with 58–159 employees.
Fraudulent Professional Employer Organizations: Golden State Employment Corp. and Preferred Services Group.
Illegal MEWAs: CompOneUSA, American Labor Alliance, and Omega Community Labor Association.
The Scheme
Garcias Pallets entered into employee leasing agreements with these intermediary companies to handle payroll and workers’ compensation insurance. The PEOs provided certificates of compensation coverage from sham entities posing as insurers. These certificates were tied to illegal Multiple Employer Welfare Arrangements—unregulated schemes that lacked valid licenses or financial backing.
The Fallout
Inspections in 2017 revealed Garcias Pallets had no valid workers compensation coverage.
The Labor Commissioner issued two citations totaling $1.35 million for operating uninsured from 2016–2018.
The intermediary companies vanished, leaving Garcias Pallets to shoulder full liability for workers.
Legal Precedents & Why This Decision Matters
The ruling hinges on two key legal precedents…
Labor Code §2810.3: Defines Garcias Pallets as a “client employer” jointly liable for wages and liability for workers’ insurance compliance when using employee leasing agreements.
Insurance Code §11658: Offers no protection if the insurer is fraudulent. Even with certificates in hand, individual employers bear ultimate responsibility.
The Hearing Officer’s Stance
“Garcias Pallets is not entitled to relief because they did not provide valid workers’ compensation coverage… The Division has no discretion to afford relief under these facts.”
This legal precedent signals that ignorance is no defense. Individual employers must rigorously vet Professional Employer Organizations and their insurers.
What Individual Employers Must Know
The Cost of Compliance Failures
First Citation: $988,802.96 (reduced from $1.13M) for uninsured operations from 2016–2017.
Second Citation: $360,521.11 (reduced from $412K) for 2017–2018 violations.
Red Flags Garcias Missed
The intermediary companies shared the same address and rebranded repeatedly.
Certificates listed unlicensed “insurers” like ALA and Omega, later deemed illegal.
AIG confirmed it never issued policies to the PEOs.
3 Critical Takeaways for Individual Employers
Vet Professional Employer Organizations Relentlessly
Verify state licenses and insurance carriers through the Department of Labor.
Avoid PEOs tied to MEWAs or frequent name changes.
Demand Direct Proof of Compensation Coverage
Insist on policy numbers and contact underwriters directly.
Reject certificates from unverified third parties.
Understand Joint Liability for Workers
Under Labor Code §2810.3, individual employers with 25+ workers using labor contractors are jointly responsible for compliance.
Cleaning Up the Professional Employer Organization Industry
This decision is a win for legitimate Professional Employer Organizations forced to compete with fraudulent operators. The Department of Labor’s move to designate precedential decisions reflects growing scrutiny of complex employee leasing agreements. As MariCarmen Estudillo of DIR states:
“The rise in complex citation cases demands clear guidance. These legal precedents ensure consistent enforcement.”
Don’t Be the Next Garcias Pallets
Individual employers must proactively verify their employee leasing agreements and compensation policies. Fraudulent compensation coverage certificates are rampant, and the consequences of compliance failures are catastrophic.
If you suspect your compensation insurance policy or PEO partnership is fraudulent, act now:
Contact the Department of Labor.
Submit suspicious certificates for verification at CheckMyCert.org.
Stay informed. Stay compliant. Protect your business.
