08-005348 Department Of Financial Services, Division Of Workers&Apos; Compensation vs. John H. Woods, D/B/A Woods Construction Status: Closed Recommended Order on Friday, July 17, 2009.

Summary: Respondent failed to comply with the statute requiring employer to provide employees with workers' compensation coverage; no exemptions applied for; some not covered by PEO; and company records unreliable. Recommend a penalty of $306,214.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF FINANCIAL )

SERVICES, DIVISION OF WORKERS’ )

COMPENSATION, )

)

Petitioner, )

)

vs. ) Case No. 08-5348

)

JOHN H. WOODS, d/b/a WOODS )

CONSTRUCTION, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, a formal hearing was held in this case

before Daniel M. Kilbride, a duly-designated Administrative Law

Judge of the Division of Administrative Hearings on April 15,

2009, in Fort Myers, Florida.

APPEARANCES

For Petitioner: Kristian E. Dunn

Assistant General Counsel

Department of Financial Services,

Division of Workers’ Compensation

200 East Gaines Street

Tallahassee, Florida 32399-4229

For Respondent: Michael F. Kayusa, Esquire

Post Office Box 2237

Fort Myers, Florida 33902

STATEMENT OF THE ISSUES

Whether Respondent, John H. Woods, d/b/a Woods

Construction, conducted operations in the State of Florida

without obtaining workers’ compensation coverage which meets the

requirements of Chapter 440, Florida Statutes (2008) 1 , in

violation of Subsection 440.107(2), Florida Statutes, as alleged

in the Amended Stop-Work Order and Order of Penalty Assessment

and Second Amended Order of Penalty Assessment.

If so, what penalty should be assessed by Petitioner,

Department of Financial Services, Division of Workers’

Compensation, pursuant to Section 440.107, Florida Statutes.

PRELIMINARY STATEMENT

On August 14, 2008, Petitioner issued and served a Stop-

Work Order and Order of Penalty Assessment (SWO) directing

Respondent to immediately stop work and cease all business

operations in Florida because it failed to secure the payment of

workers’ compensation insurance coverage meeting the

requirements of Chapter 440, Florida Statutes, and the Florida

Insurance Code. The SWO was amended on August 18, 2008, and

served via certified mail on August 22, 2008. Petitioner

requested and received records during its investigation and

calculated an Amended Order of Penalty Assessment (AOPA) which

was served on Respondent on October 10, 2008. After Respondent

filed a Petition for Hearing, Petitioner referred the matter to

the Division of Administrative Hearings (DOAH) to conduct the

formal hearing.

On March 19, 2009, Petitioner filed a Motion to Amend Order

of Penalty Assessment in which Petitioner decreased the penalty.

The motion was granted on March 24, 2009. Following extensive

discovery, motion practice and several continuances granted at

the request of Respondent, the final hearing was held on

April 15, 2009.

At the hearing, Petitioner presented the testimony of two

witnesses: Maria Seidler and Lynne Murcia, an investigator and

a penalty calculator, respectively, for Petitioner.

Petitioner’s Composite Exhibits 1b, 2, 3 (a, b, and c), 4a, 5,

6, 7 (a through m), 8, 9, and Joint Composite Exhibit 10 were

offered and received into evidence. Respondent offered the

testimony of two witnesses: Lynne Hendry and Brad Hendry, and

Respondent testified in his own behalf.

The Transcript of the proceeding was filed with the DOAH on

May 26, 2009. Petitioner requested and received a time

extension for the filing of its proposed recommended order.

Petitioner timely filed its Proposed Recommended Order on

July 9, 2009. Respondent has not filed proposals as of the date

of this Recommended Order.

FINDINGS OF FACT

1. Petitioner is the state agency charged with the

responsibility of enforcing the requirement of Section 440.107,

Florida Statutes, that employers in Florida secure the payment

of workers’ compensation coverage for their employees.

§ 440.107(3), Fla. Stat.

2. Workers’ compensation coverage is required if a

business entity is engaged in the construction industry in

Florida. Securing the payment of workers’ compensation coverage

can be achieved via three different methods: purchase a

workers’ compensation insurance policy; ensure that workers are

paid and workers’ compensation coverage is provided by a third

party entity called a Professional Employment Organization

(PEO); or apply for a Certificate of Exemption from Workers’

Compensation Coverage (Exemption Certificate) assuming certain

statutorily mandated criteria are met. These methods are not

mutually exclusive of each other.

3. On August 14, 2008, a workers’ compensation compliance

investigator employed by Petitioner, visited a construction site

in Lee County, Florida. On the site, she observed several

groups of men conducting various construction activities

including the laying of a sidewalk along Lexington Street in

Fort Myers.

4. The work performed involved construction activities as

contemplated under the applicable agency rule. Fla. Admin. Code

R. 69L-6.021.

5. By a preponderance of evidence, it is determined that

among the entities on the worksite was a group of three laborers

who worked for Woods Construction. There was no proof of

coverage for workers’ compensation for the Woods Construction

Company, neither an insurance policy, nor any exemption

certificate for the individuals encountered on the worksite.

6. Woods Construction assumed that the three laborers were

covered by Able Body Labor, a PEO. The evidence confirmed that

two of the three laborers were covered. However, the third

laborer, Filberto Castro, was unable to be included on the work

roster due to his lack of corresponding documentation necessary

for employment in the United States. Therefore, Castro was

working without coverage.

7. An SWO was issued and a Request for Production of

Business Records for Penalty Calculation (BRR) was served on

J. Woods Construction, Corp. [sic] on August 14, 2008. The SWO

was later amended to conform to the correct name of the company,

which is not a corporation. The amended SWO was served on

John H. Woods on August 22, 2008, via certified mail.

8. Pursuant to the BRR, Respondent provided business

records to Petitioner. Petitioner’s Penalty Calculator’s duties

are to receive records from the employer, and organize,

identify, and audit those records which indicate payroll

activities, while delineating other business activities, which

may be related to the non-payroll activities of the business

such as purchasing supplies, maintaining a place of business,

etc.

9. The characterization of the voluminous records received

from Respondent were categorized into three distinct categories:

reliable, somewhat reliable, and unreliable records.

10. The records were characterized as “reliable” if they

were records from an independent third party or the bank with

whom Respondent conducted business, and were thus extremely

difficult to alter without a high level of expertise. They are

considered “source documentation.” The bank records capture the

transactions as they occurred, to whom money was paid, and for

what amount.

11. The next category of records deemed “somewhat

reliable” were those records which, on their face appear to be

legitimate records, such as copies of the checks with

corresponding amounts and dates to those in the “reliable”

category.

12. However, certain inconsistencies in these records

demonstrated that they were less than reliable. These records

were only used in select instances when there was corresponding

source documentation supporting their veracity. A prime

example, among many, is check number 1078 for $100.00 indicating

a payment for a credit card; the corresponding checkstub

indicates that the payment went to “Whitney,” a grand-child of

John H. Woods. In toto , the documents illustrated that

Respondent failed to follow generally accepted accounting

principles by mislabeling or mischaracterizing funds on a

regular basis.

13. The third category of records were records which were

considered “unreliable” as these records lacked any

corresponding source documentation and they could not be

considered in assessing the payroll activities of the firm.

14. In the construction industry, there are instruments

called “draw requests.” The draw request is an item that a

subcontractor or builder will utilize to show partial completion

of a project and concurrently request more funds (the draw) to

complete the remaining portion of the project. The draw

requests are often utilized at pre-measured stages of the

project, e.g.: 25 percent completion, 50 percent completion,

etc. The draw requests would have attached source documentation

such as receipts from suppliers, servicers, and other

miscellanea to show that the project is worked upon as opposed

to the funds being siphoned off elsewhere.

15. Nowhere, in the box full of records produced, was a

proper draw request found with attached receipts. Therefore,

none of the records produced could be considered as reliable

documents.

16. Many irregularities in Respondent’s methodology of

accounting were also noted; as an example, there were numerous

times that company checks from Respondent were deposited by an

entity known as “Hendry Contracting,” without explanation.

17. Respondent personally held the license as a General

Contractor, and would utilize Hendry Contracting as a

subcontractor. Hendry Contracting did not have any license

whatsoever. It utilized Respondent’s license while performing

construction activities. Brad Hendry, the principal of Hendry

Contracting, is married to Janice Hendry, the daughter of

John H. Woods, the owner of Respondent, Woods Construction.

18. Janice Hendry administered Respondent’s company

account and the company account of Hendry Contracting. The

evidence is clear that no separation of duties was attempted.

Furthermore, Hendry admitted that she did not exercise any sense

of separation between the two different accounts (Woods

Construction and/or Hendry Contracting). The two businesses

were “commingled,” and the ability to retain any form of

standard accounting requirement of checks and balances has been

nullified.

19. Numerous irregularities that defied “generally

accepted accounting principles” appeared, including personal

loans to family members, wholesale transfers of monies from

Respondent to Hendry Contracting without explanation, and checks

drafted to Brad Hendry (personally). Further, Woods testified

that he exercised little or no control over his company in the

last ten years. Hendry also confirmed the haphazard method of

managing the two firms’ different accounts by writing checks

from one firm to another, when the other firm’s account was

running low. Hendry’s testimony regarding the financial

cooperation of Respondent and Hendry Contracting is indicative

of the commingling of accounts, as well. Hendry testified that

each entity would draw on each other’s accounts depending on the

cash levels within each respective account. Hendry also

testified that Hendry Contracting was utilized for obtaining

bank loans and utilizing Hendry’s name to purchase materials

when the other accounts were depleted.

20. By utilizing only the bank records, a general ledger

for Respondent was constructed which derived the amounts that

came into the business and the amounts paid out for labor. The

fact that Respondent had no general ledger meant that some items

would never be accounted for, such as building supply costs.

Based on that caveat, Florida Administrative Code Rule 69L-

6.035(i) was applied to the total payroll derived from the bank

records. This had the effect of reducing total payroll by

twenty percent to account for building supplies (which were

never accounted for due to the non-existent business ledger of

Respondent).

21. The amount of money flowing and commingling between

the two firms (Respondent and Hendry Contracting) and among

family members, numbered in the hundreds of thousands of

dollars. The commingled money was utilized for all manners of

payments: loans (not expected to be paid back) to family

members, inflated wages to family members for de minimis

services, or payment for services/goods for family members’

personal residences.

22. A proposed penalty in the amount of $365,876.82 was

originally assessed, as reflected in the AOPA, and served on

Respondent on August 26, 2008.

23. Based on further records produced and the

understanding that Respondent was a construction firm but was

unable to show any receipts of building supplies, the proposed

penalty, utilizing Florida Administrative Code Rule 69L-

6.035(i), decreased the payroll by 20 percent to account for

building supplies that were not documented. After consideration

of the documents provided and application of the rule, a Second

AOPA was prepared showing an assessment in the amount of

$306,876.82.

24. With Hendry as the sole financial officer of

Respondent, approximately $351,632.43 of payroll was allocated

to various family members. There was unambiguous testimony from

Woods and Hendry that family members were employed in various

roles, most notably the grand-daughters who were earning wages

while conducting secretarial duties. A further $472,292.94 was

paid to Hendry Contracting during the three-year audit time-

period. Hendry Contracting never had any discernible workers’

compensation coverage for this amount of payroll, rendering

Respondent liable for failure to secure workers’ compensation

coverage for the monies paid. The remainder of the unsecured

payroll assessed to Respondent was for various non-family

workers for whom no proof of workers’ compensation coverage

could be ascertained.

25. The Second AOPA was computed by calculating

Respondent’s payroll for the past three years using the business

records Respondent provided. The payroll was then divided for

each year by 100 and that figure was multiplied by an approved

manual rate assigned to the classification codes (class codes)

found in the National Council on Compensation Insurance’s Scope

of Trade Manual (Scopes Manual).

26. Class codes were assigned to the individuals listed on

the penalty worksheet according to their historical duties. The

grand-daughters and other female employees of Respondent were

listed as clerical employees (classification code 8810), while

the remaining names were listed as general carpentry workers

(classification code 5645). Next, the product of the approved

manual rate and the payroll for each year divided by 100 was

then multiplied by 1.5, pursuant to statute, to derive the

penalty for each year or part of a year. The penalties for each

employee and year or part of a year were then added together to

come up with a total penalty of $306,213.78.

27. Based on the assessment of the financial records in

conjunction with the documents admitted into evidence, the grand

total of $306,213.78 is a true and correct penalty amount for

Respondent.

CONCLUSIONS OF LAW

28. DOAH has jurisdiction over the subject matter of this

proceeding and of the parties thereto pursuant to Section

120.569 and Subsection 120.57(1), Florida Statutes.

29. Because administrative fines are penal in nature,

Petitioner is required to prove by clear and convincing evidence

that Respondent failed to provide its employees with workers’

compensation coverage from August 15, 2005, through August 14,

2008. Department of Banking and Finance Division of Securities

and Investor Protection v. Osborne Stern & Co. , 670 So. 2d 932,

935 (Fla. 1996).

30. Every employer is required to secure the payment of

440.38(1), Fla. Stat. Subsection 440.107(2), Florida Statutes,

means obtaining coverage that meets the requirements of this

chapter and the Florida Insurance Code.”

31. Petitioner has the duty of enforcing the employer’s

compliance with the requirements of the workers’ compensation

law, and is authorized to issue stop-work orders and penalty

assessment orders in its enforcement of Florida’s workers’

compensation coverage requirements. § 440.107(3), Fla. Stat.

32. An “employer” is defined as “every person carrying on

any employment.” § 440.02(16)(a), Fla. Stat.

33. “‘Employment’ . . . means any service performed by an

Fla. Stat. Furthermore, employment in the construction industry

includes “all private employment in which one or more employees

are employed by the same employer.” § 440.02(17)(b)2., Fla.

Stat.

34. Additionally, “‘[e]mployee’ means any person who

receives remuneration from an employer for the performance of

any work or service while engaged in any employment. . . .”

§ 440.02(15)(a), Fla. Stat. The statutory definition of

employee also includes “[a]n independent contractor working or

performing services in the construction industry.”

§ 440.02(15)(c)3., Fla. Stat. Certain corporate officers can

become exempt from the coverage requirements of Chapter 440,

Florida Statutes, but must affirmatively make that election.

§§ 440.02(15)(b), 440.05, Fla. Stat.

35. “Construction industry” is defined as, “for-profit

activities involving any building, clearing, filling,

excavation, or substantial improvement in the size or use of any

structure or the appearance of any land.” § 440.02(8), Fla.

Stat. Subsection 440.02(8), Florida Statutes, further provides,

“[t]he division may, by rule, establish standard industrial

classification codes and definitions thereof which meet the

criteria of the term ‘construction industry’ as set forth in

this section.” Pursuant to this statutory authority, the

Division of Workers’ Compensation has promulgated Florida

Administrative Code Rule 69L-6.021, which adopts the definitions

found in the Scopes Manual. Fla. Admin. Code R. 69L-6.021(2).

36. Florida Administrative Code Rule 69L-6.021(1), lists

workplace operations that fall within the statutory definition

one or two family dwellings,” using the Scopes Manual’s

definition under classification code 5645.

37. As Respondent was in the construction industry, it was

Fla. Stat. Respondent’s business records detail payments to

multiple individuals for work performed for Respondent. The

statutes and rules do not differentiate between employees who

are family members and employees who are not family members, and

likewise, do not contemplate the propriety of overcompensating

family members for their services. Therefore, Respondent was

required to secure the payment of workers’ compensation for its

employees for the amounts that it paid them, regardless of

kinship and motive for compensation.

38. Since the failure to secure the payment of workers’

compensation has been statutorily deemed “an immediate and

serious danger to public health, safety, or welfare,” Subsection

440.107(7)(a), Florida Statutes, authorizes Petitioner to issue

a Stop-Work Order whenever it determines that an employer has

failed to obtain worker’s compensation insurance coverage, and

the effect of the order is to require that employer to cease all

business operations in the state. In fact, when Petitioner

determines that an employer has failed to secure the payment of

workers’ compensation to his or her employees, it is required to

issue a Stop-Work Order within 72 hours of making that

determination. § 440.107(7)(a), Fla. Stat.

39. Petitioner is also required by Subsection

440.107(7)(d)1., Florida Statutes, to

assess against any employer who has failed

to secure the payment of compensation as

required by this chapter a penalty equal to

1.5 times the amount the employer would have

paid in premium when applying approved

manual rates to the employer’s payroll

during periods for which it failed to secure

the payment of workers’ compensation

required by this chapter within the

preceding 3-year period or $1,000, whichever

is greater.

40. Since Petitioner is obligated by statute to use an

established formula to calculate a penalty, it was justified in

penalizing Respondent in an amount equal to 1.5 times the

workers’ compensation premiums the employer evaded during the

period extending from August 15, 2005, through August 14, 2008.

41. The methodology for calculating the penalty is

mandated by rule and statute. Florida Administrative Code Rule

69L-6.027 adopts a penalty calculation worksheet for

Petitioner’s investigators to utilize. Analysis of the

worksheet shows that an essential calculation is to establish

the premium that should have been paid. Premium is equal to

1/100th of each employee’s pay -– i.e., the gross payroll -–

which is then multiplied by an established rate based on the

risk of injury (the approved manual rate).

42. “Payments, including cash payments, made to employees

by or on behalf of the employer,” and “[p]ayments, including

cash payments, made to a third person or party by or on behalf

of the employer for services provided to the employer by the

employees” are included as remuneration paid to employees for

the purposes of calculating a penalty. Fla. Admin. Code R. 69L-

6.035(1)(b), (c).

43. Respondent’s claims that workers’ compensation

coverage payments for wages paid to Woods are unnecessary and

thus the penalty, as well, are not persuasive. A thorough

review of the applicable agency rule, Florida Administrative

Code Rule 69L-6.035, proves otherwise.

(1) For purposes of determining

payroll for calculating a penalty

pursuant to Subsection 440.107(7)(d)1.,

F.S., the Department shall, when

applicable, include any one or more of

the following as remuneration to

employees based upon evidence received

in its investigation: . . .

* * *

(e) Payments made to employees by or

on behalf of the employer on any basis

other than time worked, such as

piecework, profit sharing, dividends,

income distribution, or incentive

plans; . . .

44. Likewise, Respondent’s payments to its family members,

whether overcompensated or not, are still considered

remuneration for services as long as they worked for Respondent

in any capacity, per Florida Administrative Code Rule 69L-6.035:

(1) For purposes of determining payroll for

calculating a penalty pursuant to Subsection

440.107(7)(d)1., F.S., the Department shall,

when applicable, include any one or more of

the following as remuneration to employees

based upon evidence received in its

investigation:

(a) Wages or salaries paid to employees by

or on behalf of the employer;

(b) Payments, including cash payments, made

to employees by or on behalf of the

employer;

(c) Payments, including cash payments, made

to a third person or party by or on behalf

of the employer for services provided to the

employer by the employees;

(d) Bonuses paid to employees by or on

behalf of the employer. . . .

45. Based on the findings of fact herein, Petitioner has

proven by clear and convincing evidence that the SWO and Amended

SWO were justified, and it correctly calculated the payroll for

Respondent’s employees for the period at issue herein and was

justified in assessing a penalty to Respondent for failing to

comply with Section 440.107, Florida Statutes.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is

RECOMMENDED that the Chief Financial Officer of the

Department of Financial Services, Division of Workers’

Compensation, enter a final order:

1. Finding that Respondent failed to secure the payment of

workers’ compensation insurance coverage for its employees in

violation of Subsections 440.10(1)(a) and 440.38(1), Florida

Statutes; and

2. Assessing a penalty against Respondent in the amount of

$306,213.78, which is equal to 1.5 times the evaded premium

based on the payroll records provided by Respondent and on the

applicable approved manual rates and classification codes for

the period extending from August 15, 2005, through August 14,

2008, as provided in Subsection 440.107(7), Florida Statutes.

DONE AND ENTERED this 17th day of July, 2009, in

Tallahassee, Leon County, Florida.

S

DANIEL M. KILBRIDE

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

[phone]

Fax Filing [phone]

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 17th day of July, 2009.

ENDNOTE

1/ All references to Florida Statutes are to Florida Statutes

(2008) unless otherwise indicated.

COPIES FURNISHED :

Tracy Beal, Agency Clerk

Department of Financial Services

200 East Gaines Street

Tallahassee, Florida 32399-0390

Honorable Alex Sink

Chief Financial Officer

Department of Financial Services

The Capitol, Plaza Level 11

Tallahassee, Florida 32399-0300

Benjamin Diamond, General Counsel

Department of Financial Services

The Capitol, Plaza Level 11

Tallahassee, Florida 32399-0307

Kristian E. Dunn, Esquire

Department of Financial Services

Division of Workers’ Compensation

200 East Gaines Street

Tallahassee, Florida 32399-4229

Michael F. Kayusa, Esquire

Post Office Box 2237

Fort Myers, Florida 33902

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of this Recommended Order. Any exceptions

to this Recommended Order should be filed with the agency that

will issue the Final Order in this case.