Authored by Mary Prenon via The Epoch Times (emphasis ours),
Staffing agencies provide job and career opportunities to more than 10 million Americans, including more than 1.7 million in California. While the state has the nation’s largest temporary employment market, experts said staffing agency fraud is rampant due to a lack of oversight.
Many employees are unable to access workers’ compensation due to these fraudulent practices, and taxpayers ultimately bear these medical costs, the experts noted.
According to the California Department of Insurance, authorities identified 2,932 suspected workers’ compensation fraud cases in the 2023–24 fiscal year in the state, resulting in 128 arrests and potential fraud losses of about $157 million.
Legitimate Firms Undercut
Siyamak Khorrami, host of The Epoch Times’ “California Insider,” recently spoke with employment and legal experts in the state to explore the issue.
“The staffing companies have the employees, and they assign those employees to their client employers,” said Jennifer Lentz Snyder, a former Los Angeles County district attorney.
“They are the employer, so they’re responsible for things like workers’ compensation insurance and payroll taxes and all of that.”
Snyder noted that when these staffing firms offer their client companies deals that are “too good to be true,” they often quote a rate that would not permit them to pay into the payroll tax funds that legitimate businesses pay into for workers’ comp premiums. In the end, she said, these illegitimate staffing agencies are competing unfairly with legitimate staffing firms.
“They’re absolutely taking advantage of the workers, and they’re lining their pockets at the expense of the legitimate businesses,” Snyder added.
“In an environment where we want to create a robust and maintain a robust economy in California, the last thing you need to do is to permit this cheating to continue.”
As a result, legitimate entities have to pay more than their fair share as workers’ compensation costs continue to escalate, she said.
Fraud Runs Into the Billions
“It’s now significantly more profitable and less risky to engage in workers’ compensation fraud than it is to rob a bank,” Mike DiManno, CEO of EmployInsure, said.
According to DiManno, an “underground market” for workers’ compensation and staffing has existed for nearly 30 years. He noted that clients hiring temporary staff are often unwilling to accept insurance certificates from some staffing agencies because they often fear that those certificates are not legitimate. As a result, the client would be responsible for any claims.
However, when demand for labor increases, he said, employers have no choice but to rely on these “shady” agencies to provide the personnel.
“The state doesn’t slap them on the hand, and so now, especially after COVID, there’s absolute, complete disregard to check and make sure that a staffing agency has workers’ [compensation],” DiManno said.
“You know if you can come in and undercut the legitimate players, the market share goes to you, and right now, all of the honest staffing owners can’t compete.”
When that happens, DiManno said, those legitimate agencies start leaving the business and are placed by “criminals” engaging in workers’ compensation fraud.
“When you put a criminal in charge of that with no governance, they start stealing tax money, and they start stealing wage money from these workers who don’t have attorneys to defend themselves, and they don’t have the knowledge to really understand what’s being done to them,” he said.
DiManno said that the fraud runs into the billions. For example, he noted, bad actors can buy a small company, “a little landscaping company with, let’s say, 12 employees on it,” and get an insurance policy under that company. Then they attach an inflated payroll to the policy and defraud insurers into paying out fraudulent claims.
In such a scheme, DiManno said, if an employee suffers minor injuries, the employer pays them under the table. However, if the injury is more serious, the employer is likely to shut down the company and start another, thereby bypassing any responsibility to pay the claim. That leaves the State of California to foot the bill.
Banks and factoring companies usually helped prevent fraud, DiManno said—but the COVID-19 pandemic changed everything. During that period, he said, all staffing agencies—both legitimate and illegitimate—received funds from the federal Paycheck Protection Program and used them to pay off their bank debts.
Sitting on huge stacks of cash and realizing that little enforcement was applied to these schemes, banks and factoring companies began financing the agencies without verifying their insurance, DiManno said. As a result, the fraudulent practices “exploded,” he said.
“This worker’s [compensation] practice is kind of like the gateway where the criminals have entered this trust business called staffing, where I can undercut somebody and get all of the cash flow, the wages, the taxes, and you tell the client, we’re taking care of everything, and you know, it’s my liability, and I just steal,” DiManno said.
Workers Also Take a Hit
Shaddi Kamiabipour, a former senior deputy district attorney for Orange County, told Khorrami that much of the fraud began with larger firms seeking seasonal help in manufacturing or warehousing.
“They don’t want to have people year-round. They want to have staffing during their high season, right when they’re doing that kind of work,” she said.
Nationally, U.S. staffing firms hired 12.7 million temporary and contract employees from 2023 to 2024, according to the American Staffing Association.
Nearly 73 percent worked full time, with 36 percent in industrial jobs, 24 percent in clerical or administrative positions, 21 percent in managerial positions, 11 percent in engineering and tech roles, and 8 percent in healthcare roles, according to the American Staffing Association.
If someone is injured on the job, Kamiabipour noted, both the employer and the staffing agency are technically liable under workers’ compensation to provide services to the employee. However, she said that, too often, employees who ask for compensation face retaliation in the form of reduced job offers.
The reason this exists is that there’s no oversight in the nation’s most populous state, according to Kamiabipour.
“Even in California, there’s only a small category of businesses that have special licensing for staffing, yet California has the biggest temporary employment market in the country,” she said.
Kamiabipour noted that temporary work is attractive for employers because of the costs often associated with running a business. However, she believes there needs to be an incentive or disincentive for employers to avoid transferring liability to a temporary agency rather than carrying it themselves.
New Bill Targets Staffing Fraud
In discussing solutions, DiManno mentioned a new bill proposed by California state Sen. Eloise Gómez Reyes, a Democrat, on Feb. 10, which would require licensing, background checks of staffing agency owners, and legitimate certificates for workers’ compensation insurance.
The bill would require staffing agencies to register annually with the California Labor Commissioner, provide their financial status and proof of workers’ compensation coverage, submit the names and addresses of the firms’ owners, partners, or those with a financial interest, and pay a $5,000 fee at the time of registration.
The bill would also require the commissioner to post a list of registered staffing agencies on the California Department of Industrial Relations website. Under the bill, businesses must verify a staffing agency’s registration before using its services.
The bill would further allow a registered staffing agency to take action against an unregistered agency or a business that uses an agency without verifying its registration.
Snyder is confident that the new bill is a good first step to ending the fraud.
“Every employer in California has to have workers’ [compensation] insurance or be self-insured,” she said. “Why should staffing agencies be any different?”
