Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, March 29, 1992 TAG: 9203270035
SECTION: BUSINESS PAGE: D-2 EDITION: METRO
SOURCE: By BARRY MEIER THE NEW YORK TIMES
DATELINE: LENGTH: Long
The practice is known as "employee leasing." In it, a service company hires the work force of a small business and then leases the workers, with insurance coverage and other benefits, back to their original employer.
In the 1980s, the concept became popular with small employers who were glad to get rid of headaches like payrolls and personnel benefits. Because a leasing company pools the employees of many small companies into one, it can offer discounts on health and workers' compensation insurance.
Driven largely by rising insurance rates, the practice has enjoyed explosive growth in recent years. Several authorities estimate that 1,200 to 1,500 companies offer employee leasing, which covered about a million workers across the nation last year.
But now, regulators in several states say a troubling number of employee-leasing companies have turned out to be fraudulent.
They have stolen millions of dollars and stripped tens of thousands of workers of their benefits, the regulators say. Leading insurers have also charged in court cases that leasing companies cheated them out of tens of millions of dollars in payments.
In a report issued this month, the Senate Permanent Subcommittee on Investigations said employee leasing was often a "subterfuge" aimed at evading insurance regulations.
The subcommittee called for changes in federal law that could sharply limit the ability of employee-leasing companies to offer discount insurance. "For some people, employee leasing is just a new way of engaging in insurance fraud," said Tim Ryles, the insurance commissioner of Georgia.
Many employee-leasing companies are legitimate. But stung by a wave of problems caused by fraud or mismanagement, four states have started to crack down, and more are expected to follow suit soon.
"Five years ago, employee leasing was being sold as the small-business man's salvation," said Peter Winn, a special assistant attorney general in Texas. "But for the employees of many small businesses, it has turned out to be a nightmare."
But some businessmen say leasing companies have provided good service to them and their employees.
David Hinds, president of Van Tone Co. of Dallas, which makes flavor extracts, said about 70 percent of his company's after-tax profits resulted from savings through employee leasing. "We also have dental and orthodontic coverage, and those are things we would have never attempted to get before," Hinds said.
Added Rob Lederer, executive director of the National Staff Leasing Association, a trade group in Alexandria, Va., "When you take all the problems small businesses face in getting insurance and providing benefits, employee leasing is a very viable solution."
Several other businesses have been less fortunate than Van Tone, largely because some officials of leasing companies have either stolen money or mismanaged it.
In 1990, Paragon Industries Inc., a maker of oil field pipe in Sapulpa, Okla., discovered after paying for workers' compensation that the coverage promised by Alliance Temporary Services Inc., a leasing company in Oklahoma City, did not exist.
Alliance is now defunct, and Paragon has to pay some $350,000 of benefits to injured workers out of its own coffers, said Russ Weidner, its vice president.
"On the surface, it looked like peaches and cream," Weidner said of employee leasing. "But it turned out to be a sham, and we're not going to get involved with it again."
In December, Gary Newsom and Jerome Wolf, the principals of Alliance Temporary Services, were indicted by a Texas grand jury on state felony charges stemming from the leasing problems. They pleaded not guilty.
Last month, one of the nation's largest employee-leasing firms, Action Staffing Inc. of Tampa, Fla., was declared insolvent by Florida officials after it failed to pay more than $2 million in health claims owed to some 10,000 workers.
Both federal and state officials are investigating the company's problems; company officials have denied wrongdoing.
In January, the Labor Department notified Action Staffing's chairman, David Miller, that based on the preliminary findings of its inquiry he had violated his fiduciary duties in the handling of the company's health insurance plan.
Through a company lawyer, Miller declined to be interviewed. But in a press release, Miller said that Action Staffing expected to announce new health and workers' compensation insurance programs. "The board is working diligently to solve the company's current problems and preserve shareholder value," he said.
The Labor Department notified Miller in January that he might soon be sued; agency officials have recently declined to comment.
Large insurance companies have also charged in lawsuits that some leasing companies have cheated them out of millions of dollars by fraudulently obtaining vastly reduced workers' compensation premiums.
The premiums are based on a simple premise: The more dangerous a job or workplace, the higher the cost. But insurance companies contend that some leasing companies defrauded them by paying premiums on fewer workers than they had, or by classifying high-risk employees like oil field workers in low-risk - and less costly - categories like clerks.
Much of the alleged fraud has been directed against state workers' compensation pools, which provide coverage for businesses that cannot obtain coverage directly from insurers. "This is just one more factor contributing to the overall meltdown of the workers' compensation system," said Lynn E. Szymoniak, a lawyer with the National Council on Compensation Insurance, an organization that establishes rates for workers' compensation coverage.
In a lawsuit pending in U.S. District Court in New Haven, Conn., Aetna Casualty & Surety Co. and four other insurers are seeking at least $8 million in damages from Labor Force of America Inc., a leasing company that does business in Connecticut, and related companies.
The insurers claim that the defendants defrauded them by misclassifying workers, among other tactics. All defendants have denied the claims and countersued, charging that Aetna and the other insurers are trying to drive leasing companies out of business, Szymoniak said.
The recent report by the Senate investigations subcommittee found that companies offering employee leasing contend that they are exempt from state insurance regulation under provisions of the federal Employment Retirement Income Security Act.
But the panel concluded that this claim was largely a subterfuge to evade regulation, and recommended that federal law be changed so that only a worker's true employer - not a leasing company - would qualify for that exemption.
State-regulated insurers are typically required to keep minimum reserves and are regularly audited.
In the wake of leasing company failures, even industry executives have started lobbying for some regulation, like rules that would require companies to be licensed or registered by state officials.
Four states - Maine, Arkansas, Utah and Florida - recently passed such measures and at least seven others, including are considering such action, said Gregory Hammond, a lawyer in Akron, Ohio, who works with leasing companies.
But some state officials wonder whether licensing alone will avert problems. Thomas Gallagher, commissioner of Florida's insurance department, said he thought a better step would be to require that leasing companies that sell insurance be fully backed by a major insurance company, rather than simply self-insured.
WHAT WAS supposed to be salvation to employers and `leased' workers has cost many of them millions in insurance fraud.\
by CNB