PROFESSIONAL EMPLOYER ORGANIZATIONS (PEOs)

IRS Hands PEOs a Setback on Retirement Plan Rules

PEO News: Tax Fraud Pleas, Embezzlement

January 31, 2005 - Two former top executives of a major national PEO have pleaded guilty to charges of conspiring to defraud the IRS and several banks in an $83 million tax fraud case related to the 2001 bankruptcy of Simplified Employment Services (SES) Inc.

Ronald Bray, the former chief operating officer of SES, joined Dennis Lambka, former CEO, in accepting plea bargains offered by federal prosecutors. Bray and Lambka could face a maximum five years in prison in the case, and could be fined up to $250,000, and ordered to pay restitution.

Former client employers and employees complained that prosecutors were letting the former PEO execs off too lightly.

Melanie Martin, a "leased" employee insured through SESA told Crain's Business News, "We trusted him to pay our insurance premiums and now I'm stuck with a $7,000 surgery bill. Every time I think about this, I cry." She said Bray and Lambka deserve 20 years in prison for the misery they inflicted on their clients and their clients' employees.

SES was one of the nation’s largest employee leasing/professional employer organizations before bankruptcy forced it out of business in 2001. and would collect payroll and taxes under contract to manage most human-resource responsibilities for customers, especially small and midsize businesses.

Couple Hit With $100,000+ in Unpaid Medical Bills By Michigan PEO

After Simplified Employment Service (SES), a Michigan PEO, filed for bankruptcy in July 2001, (see story above) it left thousands of employees unpaid and without health insurance. After the company was allowed to reorganize and be sold, employees were told not worry, because all medical bills would be paid.

According to one SES-insured dependent, Linda W, "in January 2002, I entered the hospital for emergency open-heart surgery. My bills are well over $100,000 and to date, SES and its health insurance administrator, the Whall Group, has only paid a few of the providers pennies on the dollar. This course of action, along with defrauding us out of our insurance premiums, have left us with thousands of dollars of debt for which the providers are coming after us for payment! Those providers who did not want to take the "pennies on the dollar" offer, are now coming after us! By the way---they defrauded us out of approx. $14,000 in premiums over two years!"

Two California PEOs Face $14 million Judgement in Workers' Comp "Shell Game"

In California, a state court awarded the California's workers' compensation system a $14.6 million judgment against two PEOs accused of using a "shell game" to avoid paying workers' compensation premiums and payroll taxes.

Ideal Payroll Plus and Ideal Management did not contest the action or the judgement. The lawsuit charged that the PEOs underreported payroll to the State Fund, the Internal Revenue Service and the California State Franchise Tax Board.

PEO/Staffing Industry Workers' Compensation Fraud Directory

When staffing companies, including PEOs and temporary agencies, sign contracts with employers, they agree to pay payroll taxes and health insurance premiums using the employer’s money. In many cases, staffing companies divert employer payments for their own use, leaving the employers and employees liable for unpaid taxes and health care bills.

Lynn E. Szymoniak, a Florida attorney who pursues staffing company fraud, has compiled a new listing of staffing company executives who have been charged with crimes related to their businesses. Here are a few entries from Szymoniak’s directory (see below for link to download the entire directory):

Anderson, Robert J. “Skip” – 27 months. Robert J. "Skip" Anderson was charged with conspiracy, Mail Fraud, Aiding and Abetting and Causing An Act To Be Done as a result of multiple employee leasing schemes in California and Texas. He was convicted and sentenced to 27 months in federal prison and ordered to pay $300,000 in restitution. Co-defendant Robert Laird was sentenced to 46 months’ confinement in federal prison, and restitution in the sum of $7,250,000. Defendants allegedly created sham companies in order to get workers' compensation insurance from the California state fund for employee leasing companies at below market rates. The damages in the scheme were $22 million.

Borgelt, James, Sr. – 36 months. Borgelt controlled Miller Personnel, Inc., d/b/a American Workforce. He was charged with diverting funds given to his companies for payment of taxes and insurance premiums to his personal use. He was sentenced to 36 months' incarceration and ordered to pay restitution of $416,000.

Ervasti, Gregory Charles – 63 months. Gregory Charles Ervasti and Dee Ervasti operated Corporate Financial Services, Inc., an employee leasing company in Minnesota. The Ervastis misappropriated $5.7 million which had been paid by over 100 of their clients for tax payments. The Ervastis were convicted of conspiracy, mail fraud and tax violations. Gregory Ervasti was sentenced to 63 months’ incarceration.

Krpan, Laura – 24 months. Krpan, the owner of Elite Employee Leasing in Duquoin, Illinois, was charged in September of 2000, with defrauding unemployment insurance of over $800,000 and with filing false tax returns. She was sentenced to 24 months' incarceration and ordered to pay restitution of $886,397.

Kyprianou, Nicholas. Kyprianou of Premier Staffing, Inc. in Long Island, New York, and five owners and officers were indicted in April, 2002, and charged with tax evasion, conspiracy and money laundering for an employee leasing scheme which operated under a quick succession of names, but always used the same address and employees. Over 100 employers paid approximately $13 million between 1998 and 2001 for federal payroll taxes to the companies, which failed to forward the payments to the IRS. The five employee leasing companies were Premier Staffing, Inc., Premier PEO Group Corporation, Syngen Group Corporation, Madison Staffing Solutions Corporation and PEO Services, Inc. The individual defendants were Nicholas Kyprianou of New York City, George Kalaitzis and Athanasios Tsidavis of Queens, New York, Paul Capozio of Kinnelon, New Jersey and Salomi Kyprianou of Clearwater, Florida.

Coyle, Jolene. Jolene Coyle and her daughter, Terri McGinn, owned and operated First Personnel Temps, Inc in South Carolina. When a poor safety record increased Coyle's workers' compensation premiums, she started a new company, Employment Personnel, Inc., and falsely represented that the two companies were not related. Coyle and McGinn transferred the revenues and payroll to the new company, and applied for workers' compensation insurance coverage under the name of the new company. When investigators put the two companies together, the resulting workers' compensation debt was $1.15 million. Coyle used a similar scheme in North Carolina, using a new company name, Thermal Belt Personnel, Inc. As part of the scheme, Coyle used her minor grandson's name on corporate documents and notarized these forged signatures herself. Both Coyle and McGinn were charged with mail fraud, wire fraud and conspiracy. Each pled guilty to one count of conspiracy.

Crucean, Eugene. Eugene Crucean operated various employee leasing businesses including Labor Systems, Inc. and Labor Resources, Inc. He diverted the funds paid by his client companies for taxes and insurance to his own use. On the day his trial was scheduled to begin, Crucean pled guilty to four counts of mail fraud, one count of wire fraud and one count of making false tax returns. He was sentenced to 60 months' incarceration and ordered to pay $15 million in restitution.

Gall, Joe. Gall was the largest employer in Rhode Island at the time he was indicted. He was convicted of conspiracy, mail fraud, wire fraud, false statements and failure to file tax returns in connection with his operation of Labor Force of America, Inc. and Employee Staffing of America, Inc. Gall and his office manager, Gloria Stevens, falsely described their operations and payroll in applications for workers' compensation insurance, issued falsified certificates of insurance and collected premium from client companies for time periods when there were no policies in force. Gall also created false financial statements in order to obtain bank loans. For a period of time, Gall claimed to have obtained coverage from Ascona, a fictitious insurance company created by Gall. The falsified financial statements were certified by Scinto & Company, a fictitious certified public accounting firm created by Gall. At times, Gall used the name Tom Martin and held himself out to be an attorney. Gall was sentenced to 110 months' incarceration and ordered to pay $13.7 million in restitution. He was also prosecuted for similar crimes in Massachusetts. Gloria Stevens, Gall’s chief financial officer, was charged with Gall and sentenced to 30 months’ incarceration.

Gilbert, Michael. Gilbert of MG Enterprises in California leased employees to contractors in the San Diego, California, area. The firms paid Gilbert the employees' salaries plus 20%, but Gilbert allegedly diverted the 20% and paid the employees in cash. Contracting firms accused of participating in the scheme included Carlsbad Framing, Donald Souza Construction, Branco Construction Alvarez Construction, Sid Stone Construction and Tone Framing. The San Diego district attorney's office found claims files and first notice of injury reports for injuries, which occurred during the period where the companies purported to have no payroll. Gilbert was described as an expert at running underground employee leasing operations. IRS agents found a secret room in his house with $260,000 cash. When he was arrested, Gilbert was living in a 6,600 square foot home. Gilbert and his wife were also charged with tax evasion.

Lambka, Dennis. Lambka was an officer of Simplified Employment Services, Inc.("SES"), an employee leasing company in Auburn Hills, MI. SES operated in 40 states through six subsidiary companies: Michigan Staff Leasing, Dart, Inc., ERM, Elite Leasing, Polar Management and the Gardell Company. Lambka and his codefendant, Ronald Bray, pleaded guilty to conspiracy charges to commit more than $30 million in bank fraud, filing 23 false tax returns, and embezzling more than $1 million from an employee benefit plan. The check kiting scheme had money flowing through 21 separate accounts held by the seven related SES companies which caused a loss of $32 million to Michigan National Bank in violation of Title 18, U.S. Code, Section 1344, Bank Fraud. They also allegedly failed to pay over $51.7 million in taxes. Several years prior, the IRS had seized the records of SES and charged the corporation with tax evasion. Those charges were dropped after SES reached an agreement with IRS to pay over $7 million. Lambka and Bray also added other employee leasing companies to their Hartford policy without the authorization of Hartford and without paying for such coverage.

Palmerton, Ronald. Palmerton was the principal of several Labor Finders franchises. Palmerton used a new corporation, Nancy, Inc., which he claimed was owned by his sister, to obtain cheaper workers' compensation insurance for his Labor Finders franchises. Palmerton concealed the fact that his primary client was Pensacola Stevedoring, and reported that the workers were engaged in much safer work. Palmerton pleaded guilty to Perjury in Official Proceedings and Organized Scheme to Defraud and was sentenced on April 16, 2001, to three years' incarceration, suspended, five years' probation and 18 months' house arrest. Palmerton operated through a series of over 40 corporations and subsidiaries.

Purtrell, Richard. Purtrell operated New England Job Center, Inc., a temporary employment agency in North Andover, Massachusetts. He pleaded guilty on March 9, 2000, to three counts of workers’ compensation premium fraud. He was accused in a 25-count indictment with misclassifying his employees as independent contractors to fraudulently lower his premium by $700,000. Purtrell and his company were sentenced to probation and the company was ordered to pay $200,000 in restitution.

Smith, Charles Lee. Charles Lee Smith was charged with mail fraud, wire fraud and conspiracy related to workers' compensation premium fraud using several temporary help companies: Personnel Solutions, Inc. and Express Temps, Inc. Brenda Phillips, Brown's partner, was convicted and sentenced to 37 months. Smith was sentenced to 60 months. Phillips and Brown began working together at Personnel Temps, Inc. Smith used an off-shore company, Colonial Holdings, Inc., to hide the ownership of the temporary help companies.

Weinlein, Laurie. Laurie Weinlein founded, owned and managed American Payroll Network in upstate New York. Beginning in 1993, Weinlein began using the funds remitted by her client companies which were supposed to be used for payroll, taxes, insurance and other expenses of the client companies for her own operating expenses. She began kiting checks between two banks in 1994. When the scheme was discovered, Marine Midland estimated its losses at $1.1 million. Weinlein was indicted and convicted of one count of bank fraud. She also was charged and convicted of converting funds from the assets of a self-funded employee healthcare plan that she had created for her employee leasing business. Weinlein was sentenced to 63 months’ incarceration.

To download the complete Directory of Workers' Compensation Premium Fraud, click here.





CFCW wants to hear more about your experience as either an employee or employer using a PEO. Please send us a email with your story and how to contact you for more information. Contact CFCW by email. Offshore PEOs Benefiting US Execs? In a new scheme described by the IRS, some US companies are using sophisticated international employee leasing arrangements to avoid taxes for high-paid execs. The scheme harkens back to the earliest days of employee leasing, when doctors set up phony leasing arrangements to give themselves better retirement benefits than their employees. The IRS revenue ruling (Notice 2003-22) warns taxpayers who are avoiding and evading taxes by entering into Offshore Deferred Compensation Arrangements that these schemes are not allowable for federal tax purposes. The scheme uses multiple steps involving domestic and foreign parties. First, the executive ends their employment with a domestic corporation (which the executive usually owns), and signs an employment contract with a foreign corporation. The foreign corporation leases the executive’s services to a US leasing company, who in turn leases the executive’s services back to the real employer. The IRS says it will challenge the tax benefits from this scheme on a number of grounds, asserting that executive remains the employee of US employer, and amounts paid to the US leasing company are taxable. As the IRS says, “Any person who willfully attempts to evade or defeat taxes may also be guilty of criminal offenses.” PEO and Employer Point the Finger at Each Other PEOs claim that what makes them different from other staffing firms is a "co-employment" relationship, where both the employer and the leasing firm are responsible for meeting employment laws and liabilities. But as two Tennessee employees and their attorney discovered, the "co-employment" relationship can also be used by employers and PEOs to evade responsibility for unpaid wages and benefits. When Yona Boyd and Brenda Collier recently filed a lawsuit against their former employer, Dr. Donald Bruce, for unpaid compensation and benefits, the judge dismissed the case because on paper the employer-employee relationship was between the workers and Prime Focus, Inc., a PEO doing business in Tennessee. The decision, by Davidson County Judge Carol McCoy, said documents in the case "unequivocally establish the existence of an employer-employee relationship by and between the named plaintiffs and Prime Focus, Inc." Yet when Boyd and Collier turned around and filed a complaint against the PEO, Judge McCoy ruled that the "undisputed facts…demonstrate that Prime Focus exercises no control over the hiring, firing or compensation procedures or policies of its small business customers," and dismissed the case with prejudice. In this case, "co-employment" turned what should have been a straightforward legal action into an example of finger-pointing by the real employer and the PEO leaving the employees with no remedy. IRS Hands PEOs a Setback on Retirement Plan Rules An IRS "guidance letter" on professional employer organizations (PEOs) concluded that most PEO retirement plans fail a key IRS tax test. Revenue Procedure 2002-21 affirms the current law stating PEOs cannot offer retirement plans because they are not real employers of the leased employees on their payrolls. The IRS letter offers PEOs a chance to escape prosecution for operating illegal benefit plans if they terminate their current plans or convert them to "multiple employer" plans before until the end of next year. The decision leaves PEOs and their client employers with two hard choices-converting to a "multiple employer" plan, or forcing client employers to operate their own plans. Each of these options will create major problems for PEOs and employers who use their services. The PEOs and client employers must jointly meet IRS non-discrimination tests for "highly-compensated employees," including owners and other client employees not paid through the PEO. Offering multiple employer plans is more difficult for both PEOs and their clients, and the combined multiple employer plan may not meet the discrimination tests. In addition, PEOs might still be liable for failure to meet other IRS requirements. In the second option, if employers leave the PEO plan and set up their own employer benefit plans, they will have the same hurdle of meeting the IRS non-discrimination tests for highly compensated employees, and have less reason to use the PEO for payroll services. While the industry trade group (NAPEO) and individual PEOs are claiming the decision as a victory for removing the immediate threat of noncompliance penalties, NAPEO had asked the IRS in 2002 for major rules changes to "permit PEOs to provide retirement benefits to workers under uniform, clear, and workable rules." The IRS instead affirmed the current law, throwing the legality of PEO benefit plans into disarray.