16-005109 Department Of Financial Services, Division Of Workers&Apos; Compensation vs. Best Framing Usa, Inc. Status: Closed Recommended Order on Thursday, March 9, 2017.

Summary: Petitioner proved with clear and convincing evidence that Respondent understated its payroll to the insurance carrier. A penalty in the amount of $891,418.46 is warranted.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF FINANCIAL

SERVICES, DIVISION OF WORKERS'

COMPENSATION,

Petitioner,

vs. Case No. 16 - 5109

BEST FRAMING USA, INC.,

Respondent.

_______________________________/

REC OMMENDED ORDER

Pursuant to notice to all parties, a final administrative

hearing was held in this matter on December 21 and 22, 2016,

before the Honorable R. Bruce McKibben, A dministrative Law J udge

for the Division of Administrative Hearings, in Talla has see ,

Florida .

APPEARANCES

For Petitioner: Tabitha Harnage , Esquire

Alexander Brick, Esquire

Department of Financial Services

200 East Gaines Street

Tallahassee, Florida 32399 - 0333

For R espondent: Kristian Eiler Dunn, Esquire

Dunn and Miller, P.A.

215 East Tharpe Street

Tallahassee, Florida 32303

STATEMENT OF THE ISSUE S

The issue s in this case are whether Respondent, Best

Framing USA, Inc. (Ð Best FramingÑ ), understated its business

payroll as reported to the companyÓs workersÓ compensation

insurance carrier ; if so, whether a penalty should be imposed by

Petitioner, Department of Financial Services, Division of

WorkersÓ Compensation (the Ð DepartmentÑ) ; and whether the

Department properly calculated the penalty which it assessed

against Respondent . 1/

PRELIMINARY STATEMENT

The Department began an investigation of Best Framing in

the year 2015 . In May 2016 , the Department issued a busi ness

records request (ÐBRRÑ ) to Best Framing, seeking financial

information needed for its investigation . Based upon its

investigative finding s, the Department issued a Stop - Work Order

and Order of Penalty Assessment (ÐSWOÑ) on or about August 16,

2016. At that time, it also issued a second BRR, seeking

additional financial information. On August 22, 2016, Best

Framing filed a Request for Formal Hearing with the Department ,

seeking to rescind the SWO and contesting the assessed penalty .

T he Department f orwarded the request to DOAH on September 6,

2016, and it was assigned to the undersigned. At the final

hearing conducted in this matter , the Department called six

witnesses: Christopher Byrnes, investigator; Jill Skoglund,

investigato r; Michelle Loy, su pervisor ; Jesse Holman,

investigator; Kali King, investigator; and Lynn Murcia, auditor .

The Department Ós Exhibits 1 through 3 and 5 through 26 were

admitted into evidence. David Olmedo testified on behalf of

Best Framing and was designated as its corpor ate representative.

Best Framing Ós E xhibits 1, 2 and 3 were admitted into evidence .

A transcript of the proceedings was ordered. Parties are

allowed by rule to submit a proposed recommended order ( Ð PR O Ñ )

to the administrative law judge within 10 days of the filing of

the t ranscript at DOAH. The partie s requested and were granted

30 days from the filing of the t ranscript to submit PROs . The

T ranscript was filed on January 23, 2017 , making the PROs due on

February 22, 2017 . The Department and Best Frami ng both filed

their PROs timely , although Best FramingÓs PRO exc eeded the page

limit allowed by r ule . See Fla. Admin. Code R. 28 - 106.215.

Nonetheless, both PROÓs were duly considered in the preparation

of this Recommended Order.

FINDING S OF FACT

1. The Department is the s tate agency responsible for ,

inter alia, e nsuring that all businesses operating in th e s tate

secure workersÓ compensation insurance coverage for their

employees . Part and parcel of that responsibility is the

determination that employe r s are accurately reporting their

payrolls to the insurance carrier so that the proper level of

insurance coverage is provided. The premium paid by the

employer to the carrier is determined by the level of payroll ,

i.e., generally the higher the payroll, th e higher the premium

to be paid.

2. Best Framing is a duly - formed and validly - existing

corporation in the State of Florida. The company was formed on

S eptember 28, 2012 , for the purpose of conducting any and all

lawful business. 2/ At the time of its f ormation, Abraham I.

Olmedo - Cano was the only named officer of the corporation . (He

will be referred to herein as ÐAbraham Olmedo.Ñ) Since its

inception, Best Framing has primarily engaged in the business of

framing new houses , mostly in the Pensacola, F lorida , area .

3. The Department has been aware of Best Framing for a

number of years . It i s one of many construction businesses

routinely monitored by the Department for the purpose of

assuring compliance with workersÓ compensation insurance

requirements . By way of example, I nvestigator King h ad stopped

by job sites as early as 2012 where Best Framing workers were

engaged in construction. Investigator Byrnes first ran across

Best Framing in March 2015. Supervisor Loy had discussions with

Best Framing w orkers on a job site in March 2015; she talked

with Abraham Olmedo on a job site in October 2015 .

4. There was , incidentally, very contradictory testimony

at final hearing concerning Abraham OlmedoÓs ability to speak or

understand English. Several of the DepartmentÓs investigators

credibly recalled conversations with Abraham Olmdeo completely

in English. In fact, at least three investigators met Abraham

Olmedo in person at job sites and spoke to him in English.

However, the Best Framing corporate repres entative, David

Olmedo, said his cousin, Abraham Olmedo, d oes not speak English.

Abraham Olmedo refused to attend his scheduled deposition during

the discovery phase of this case, ostensibly for the reason that

he did not speak English. Abraham Olmedo di d not appear at

final hearing nor did he provide any evidence concerning his

purported inability to speak or understand English. The most

persuasive evidence indicates that he can understand and speak

English , albeit not fluently .

5 . At some point in 201 5, the Department became concerned

that the number of employees associated with Best Framing was

not consistent with the level of workersÓ compensation insurance

coverage in place. After several Department investigators

conferred and compared notes about Best Framing employees at

various job sites, the Department made the decision to

investigate further. Investigator King commenced the

investigation by utilizing Daily Activity Reports prepared by

investigators in order to list all of the job sites where B est

Framing workers had been recently encountered. Then, based on

the geographic location of each site, she contacted general

contractors who we re building homes in th ose area s , requesting

evidence of their payment history to Best Framing during the

past few years. Based upon the payment histories she received,

Investigator King was even more confident that something was

amiss regarding Best FramingÓs insurance coverage.

6 . On May 25 , 2016, the Department prepare d a BRR for Best

Framing, seeking financ ial records and documentation in

furtherance of the investigation . BRRs are normally issued in

conjunction with an SWO, but this particular BRR was intended

for purposes of investigation only. Investigator King called

Abraham Olmedo and asked that he com e to her office in Pensacola

so she could personally serve the BRR to him . He expressed

confusion as to what she was telling him, so he asked her to

speak to h is cousin, David Olmedo. King explained the purpose

of the call to David Olmedo a nd scheduled a time for the men to

come to her office. The two Olmedos came in on May 31, 2016 ,

and accepted hand - delivery of the BRR . Investigator King also

told them what the investigation was about, i.e., the

possibility that Best Framing had understated payroll to its

insurance carrier.

7 . In response to the BRR, Best Framing provided the

Department with some financial information : information on t wo

Bank of America accounts , one ending in 8561 (referred to as

Ð Account 8561 Ñ ) and the other ending in 9199 (refer red to as

Ð Account 9199 Ñ ) ; copies of checks and check stubs ; handwritten

payroll ledgers ; Form RT6s for four employees ; and other

information. Best Framing did not provide any documentation or

information relating to subcontractors who were doing business

with the company. Upon review of th os e financial records, the

Department was convinced that Best Framing had grossly

understated its payroll to the insurance carrier. Tellingly,

Best FramingÓs quarterly tax reports to the Department of

Revenue disclose only a small portion of what the employees

actually earned , at least based on the information provided to

the Department pursuant to the BRR.

8 . On August 16, 2016, the Department issued an SWO and a

second BRR to Best Framing. The SWO indicated it was for

ÐFailure to secure the payment of workersÓ compensation in

violation of [statutes] by . . . failing to obtain coverage that

meets the requirements of Chapter 440, F.S., and the Insurance

Code.Ñ That is, Best Framing had insurance coverage in place,

bu t it did not meet the statutory requirements because its

payroll had been understated . The SWO was delivered to Best

Framing Ós legal counsel (Kristian Dunn) via certified mail,

return receipt requested . There are boxes that can be checked

on an SWO form to indicate specific violations. For example,

there is a box that states, ÐMaterially understating or

concealing payroll.Ñ That box was not checked on the SWO served

on Best Framing , even though that is the salient issue in this

proceeding. However, one of the disputed issues of fact listed

by the parties in their Prehearing Stipulation was whether Best

Framing had intended to materially understate its payroll.

Further, when the Department offered its Second Amended Order of

Penalty Assessment at final hearing, the box concerning

understated payroll was checked. Best Framing did not object to

the entry of the document (Petitioner Exhibit 20) and it was

admitted into evidence. There is no doubt each party was fully

aware of the specific allegation at is sue.

9 . T he second BRR issued by the Department to Best

Framing request ed five categories of records concerning Best

FramingÓs business for the period October 2, 2014 , through

October 1 , 2015 (the ÐFirst Au dit YearÑ) ; and October 2,

2015 , through July 2 7, 2016 (the ÐSecond Audit Year Ñ). The

Department requested information similar to what it had asked

for in the first BRR, including : payroll documents (including

time sheets, ear nings records, check stubs and payroll

summaries); account documents, such as check journals and

statements; disbursement information; names and contact

information for subcontractors; and documentation of the

subcontractorsÓ workersÓ compensation insurance coverage.

10 . Best Framing provided the Department some additional

docu ments in response to the second BRR, but still did not

provide any information concerning possible subcontractors doing

business with Best Framing.

11 . The DepartmentÓs review of the financial records

provided by Best Framing confirmed its concern s abou t the

company Ós underreporting of payroll . I t appeared that the

payroll checks written on Bank of America Account 8561 were

reported to Best FramingÓs insurance carrier . However, the much

larger payroll amounts written from Account 9199 had not been

repo rted to the carrier .

12 . The DepartmentÓs investigation focused on the number

of employees actually working for Best Framing during the last

two year s covered by the insurance policies . To this end, Best

Framing employees ( and/or subcontractors ) were id entified by

Department investigators in various ways. At job sites, s ome of

the workers produced valid identification cards while others

provided their employerÓs name and telephone number, i.e.,

Abraham Olmedo at his office . When investigators called Ab raham

Olmedo, he would verify the workers who had provided his name

and number as his employees. He would also provide information

about purported workersÓ compensation insurance coverage for

those employees. The bank records provided by Best Framing to

the Department also included check stubs used to identify dozens

of workers who were paid by Best Framing for construction work.

The Department ultimately counted 45 employees of Best Framing

working at 22 different job sites.

13 . However, Best Framing h ad identified only four

employees to its insurance carrier: Abraham Olmedo, David

Olmedo, Diana Guillen, and Obed Soldevilla (the ÐNamed

EmployeesÑ). 3 / Best Framing also identified a small number of

subcontractors to the carrier. Each of the Named Emplo yees

received $1 , 200 biweekly as salary from Best Framing. The total

annual payroll to the four Named Employees and subcontractors

for the First Audit Year was less than $60,000; the payroll

checks were issued from Account 8561. In the Second Audit Year,

Best Framing still identified only the four Named Employees and

a few additional subcontractors and increased its estimated

payroll to $125,000 . That was still well below what the

Department later determined to be the companyÓs actual payroll .

14 . Histo rically (at least for the first couple of years

of its existence), Best Framing appeared to obtain appropriate

and sufficient workersÓ compensation insurance coverage. In

October 2012, Best Framing purchased its first workersÓ

compensation policy from Aut o - Owners Insurance Company (ÐAuto -

OwnersÑ) . Best Framing project e d its estimated payroll at

$100,000 for the period of October 2012 through October 2013. A

telephone audit performed at the end of that period resulted in

a finding that Best FramingÓs repo rted payroll for the period

was $30,975 for its employees and $7,600 for its subcontractors.

As a result, Best Framing received a refund of premium from

Auto - Owners. The next year (October 2013 through October 2014),

Best Framing again estimated $100,000 in payroll ; upon audit,

the amount was reported as $60 , 400 for employees and $28,800 for

subcontractors. Again, Best Framing received a refund from its

carrier. Beginning in the 2014 to 2015 period, Best Framing

began projecting the reported payroll amo unt s discussed above.

15 . The payroll reported by Best Framing to its carrier

for the two years at issue, however, simply did not comport with

the DepartmentÓs investigative findings. The Department

d iscover ed that two of the three entities for which Bes t Framing

did construction work had actually paid Best Framing well in

excess of the payroll amounts reported to the insurer. A

company known as D R Horton paid Best Framing approximately

$650,00 0 for framing labor during the First Audit Year and about

$6 30,000 during the Second Audit Year . Another entity, Henry

Homes , paid Best Framing about $ 1,180 ,000 during the First Audit

Year and $684,000 during the Second Audit Year . Those payments

were for labor only and did not include costs for materials.

When the Department compared those amounts to the Auto - OwnersÓ

audit reports for the two periods, it found that Best Framing

had reported significantly lower Ðactual payrollÑ amounts to the

carrier , even at the end of year audit .

16 . There is no evidence tha t Best Framing advised its

carrier during the First Audit Year to increase payroll amounts

consistent with what th os e builders were paying Best Framing .

Nor is there any evidence that Best Framing relied upon the end -

of - year audit by its carrier to accura tely correct the premium

amount owed for insurance. As a matter of fact, there was no

adjustment of the premium amount. (Best Framing did change its

projected payroll from $38,000 to $59,000 for employees and

$46,000 for subcontractors at the end of the First Audit Year.

However, those amounts were far less that their actual payroll

for that period as evidenced by the payments from Account 9199 .)

17 . Despite the payroll amounts provided to the carrier

and evidenced by the checks written from Account 8561 , there

were vastly larger amounts being paid to the four N amed

E mployees from Account 9199 . For example, Abraham Olmedo Ós Form

W - 2 for calendar year 2015 indicated he received a salary in the

amount of $15,600 for the year. He received checks totali ng

approximately that amount from Account 8561 for that year.

However, during the same year he received many additional checks

from Account 9199. Looking at j ust four of the numerous checks

issued to him, he was paid over $23,000 from Account 9199 .

T her e were many other checks written to Abraham Olmedo but the

total of those checks was not disclosed at final hearing

(although the amount could conceivably be derived from the bank

records entered into evidence) . David Olmedo acknowledged at

final hearing that Obed Soldevi ll a had been paid Ðtens of

thousands of dollarsÑ by Best Framing, all from Account 9199.

Suffice it to say that each of the Named Employees received

checks far greater than reflected in their W - 2 forms and more

than reported to the carrie r .

18 . None of the Named Employees provided evidence as to

wh ether the payments from Account 9199 were for any thing other

than framing work. David Olmedo , the only one of the Named

Employees to testify at final hearing, said simply that he was

paid for services out of Account 9199 when ever he Ð ran a

construction crew. Ñ

19 . Account 9199 also included numerous checks written to

dozens of other Best Framing workers. The memo line on most of

the checks identified street addresses or names of builders,

i ndicating the job on which the check recipient had been

working. The checks were persuasive proof that the person

receiving the money had done framing work at the site disclosed.

Although Best Framing maintains those framers were

subcontractors, it provi ded no proof to substantiate the claim .

Its position in that matter is directly contrary to what

Department investigators were told by the workers themselves and

by Abraham Olmedo. Nor did Best Framing provide any proof that

the so - called subcontractors had workersÓ compensation insurance

coverage.

20 . None of the payroll evidenced by checks from Account

9199 was reported to Best FramingÓs insurance carrier. Had the

actual payroll amounts been given to Lee Turner, Best FramingÓs

insurance agent, he wo uld not have written policies in the

amount of $58,000 and $125,000 for the two years in question.

Best FramingÓs premium for the First Audit Year was $6,575; it

should have been $298,550 based on its actual payroll. For the

Second Audit Year, the premiu m of $17,767 should have been

$209,231.

21 . David Olmedo, identifi ed as the person most

knowledgeable about Best FramingÓs business, became aware of the

two bank accounts during the course of the DepartmentÓs

investigation. He did not admit to having a ny knowledge of how

the accounts were utilized. He said that the companyÓs

accountant, Luis Ramirez, handled all of the bank transactions,

the payroll, the payments to employees and vendors, and

virtually all aspects of the business. Contra preferentem ,

Ramirez testified under oath he did next to nothing for the

company, simply putting financial information provided to him by

Best Framing o nto a form used for paying quarterly taxes.

Ramirez denied any knowledge of how the business operated

several times during his deposition(s) , as evidence by the

following excerpts:

ÐI donÓt run the business . Ñ [ Ramirez

deposition transcript , November 7, 2016 (the

ÐFirst DepositionÑ) , page 13 ] .

In his second deposition in this case,

Ramirez said his entire involveme nt with

Best Framing was that, ÐI do taxes for

them.Ñ (Ramirez deposition transcript ,

December 14, 2016 [ the ÐSecond Deposition ,

page 11 ] . 4/

When asked what he did for Diana Guillen, he

said, ÐWe donÓt do payroll for her.Ñ [ First

Deposition, page 14 ] .

ÐI donÓt run their b usiness.Ñ [ First

Deposition, page 18 ] .

ÐI donÓt do payroll for them.Ñ [ First

Deposition, page 20 ].

When asked if he was involved in setting

workersÓ compensation insurance for Best

Framing, he said, ÐIÓm not involved.

TheyÓre the ones who sets [sic] their

insurance.Ñ [ First Deposition, page 21 ] .

ÐWe donÓt provid e payroll services for

them.Ñ [ Second Deposition, page 21 ] .

22 . Ramirez said that he would receive handwritten notes

or verbal instructions from Best FramingÓs secreta ry, Diana

Guillen, indicating how much each of the N amed E mployees was

paid for the quarter, then insert those amounts into a tax

document for reporting purposes . A copy of one of RamirezÓ

handwritten statement s (taken down per Ms. GuillenÓs verbal

repres entation s) , attached to Mr. RamirezÓ deposition

transcript , shows a scribbled list of the Named E mployees

indicating the y each received exactly $600 biweekly during the

quarter. The statement has no other support and is very

questionable, i.e., it seems o dd that the secretary of the

company would receive the sa me salary as the president and the

others who did more substantive work. Neither Mr. Ramirez ,

Abraham Olmedo, nor Ms. Guillen testified at final hearing to

provide any explanation for the similar pa yments . N or was this

fact addressed in their depositions . David Olmedo did not

address this issue during his testimony at final hearing.

23 . There was no adequate or persu a sive testimony

concerning how Best Framing conducted its business. David

Olmedo was the only person testifying on behalf of the company

at final hearing. Though designated as the corporate

representative and the person with the most knowledge of the

company, he essentially knew very little regarding company

operations . H is testimon y in that regard was as follows:

Q: Okay, and what do you do for the

company?

A: I translate and order material, talk to

superintendents, you know. If thereÓs any

problem , I will check and see what t he

problem is, just take care of the day - to - day

operat ions.

Q: Okay, and what do the fellow members of

the company do; Abraham, for example?

A: Abraham is the owner and he signs the

contracts, looks for work, things like that.

Q: And how about Diana [Guillen]?

A: Diana was the secretary.

Q: And how a bout Mr. Obed Soldevi ll a?

A: He was the labor coordinator. He knew a

lot of people in Pensacola, so if we would

have a job set up and we didnÓt have

anybody, we call and see if he could find

someone for us.

Q: Okay. How many people are actual

employee s of Best Framing?

A: Four actual employees . . . Obed

Soldevi ll a, Diana Guillen, Abraham Olmedo

and [David Olmedo].

Tr . v ol. 3, pp. 340 - 341.

Q: And how many people were subcontractors

for your guys?

A: Everyone else that received a check.

Tr. v ol. 3 , p. 342.

Q: What do you consider Î when you said you

know the ins and outs of the company, what

do you consider to be the ins and outs of

the company ?

A: The ins and outs as in the work part of

the ins and outs.

Q: Yeah. What are the ins and outs?

A : The ins and outs of ordering material,

how a house needs to be made, speaking to

the superintendents.

Q: What about payroll, is that part of the

Ðins and outsÑ of the company?

A: No.

Tr. vol. 3, p. 360.

24 . Neither David Olmedo nor anyone else a ssociated with

Best Framing could explain how the company was managed, i.e.,

how insurance coverage was determined, how subcontractors were

handled, or why only four employees were designated as the

entire company. David Olmedo was obviously out of his el ement

as the spokesperson for Best Framing at final hearing. (He is

by his own admission a framer, not a businessman.) His minimal

and general knowledge about the company was totally inadequate

to establish substantive relevant facts for consideration by the

undersigned .

25 . David Olmedo candidly admitted that Best Framing

should have reported the payroll paid to employees fr o m Account

9199 and that the failure to do so was a mistake. While at

first refusing to a dmit any wrongdoing by Best Framing , he

u ltimately acknowledged the companyÓs failure. In response to

questions posed at final hearing , he said :

Transcript p ages 367 - 369

Q: Well, do you think now that you know

about the [insurance] policy, that Best

Framing should have reported that

subcontrac tor payroll to Auto - Owners?

A: I mean, now that weÓre going through all

of this, I think that we shouldnÓt have ever

got Mr. Ramirez to do our books.

Q: Right. But donÓt you think that Best

Framing should have reported that

subcontractor Î what you pai d to your

subcontractors?

A: I think Mr. Luis [sic] should have

reported what he should have reported. I

mean, Mr. Luis [sic] is the one that did the

books.

Q: Should he have reported all that payroll

from that second account [ 9199 ]?

A: Maybe he shoul d have told us about it.

And if it would have been known, we would

have fixed the problem.

* * *

Q: And do you think that the payroll from

that second account to the subcontractors,

now that you know what you know, should have

been reported to Auto - Own ers?

A: Yeah, it should have been reported.

Q: Have you reported it yet to Auto - Owners?

A: No , we still havenÓt done our audit yet.

26 . It is abundantly clear from the evidence presented

that Best Framing did not report its entire payroll to the

insu rance carrier, resulting in much less insurance coverage

than was requir ed . The understatement of payroll resulted in a

significantly smaller premium for insurance than was warranted

by the actual provision of services. Again, Best FramingÓs

insurance ca rrier would not have issued the policy had it known

about the non - reported payroll.

27 . In its defense, Best Framing raised several issues and

concerns. First, David Olmedo said that the company was duped

by its accountant, Luis Ramirez. Ramirez was t he person

utilized by Best Framing to assist with filing tax reports and

end of year tax returns . Best Framing cannot absolve itself of

its duty to accurately report payroll by blaming Ramirez of

impropriety; the workersÓ compensation coverage is still

re quired. However, as noted above, Ramirez claims to have no

knowledge of how Best Framing operates; his only involvement was

preparing quarterly tax forms based on information provided by

Best Framing. When asked about how subcontractors were handled

by B est Framing, Ramirez said, ÐI donÓt know that. They donÓt

give me that. They donÓt provide me that information.Ñ (Second

Deposition, page 59.)

28 . Second, Best Framing says that its most recent

insurance period of coverage has not yet ended and it co uld

still report the actual payroll amount. That is, the initial

payroll and resulting premium was just an ÐestimateÑ by both the

employer and the insurer. While that is true, the facts of this

case prove that Best Framing intentionally understated its

p ayroll from the outset. It is clear from the evidence that the

payroll paid from Account 9199 was never reported to the

insurance carrier . The time for updating the policy period of

October 2014 to October 2015 has already passed, and Best

Framing did no t advise its carrier of the actual payroll amount

for that period of coverage . Nor did Best framing take step s

to increase the premium for the period October 2015 to October

2016 on a quarterly basis as required , at least until the

Department began its in vestigation . Even then, the attempted

increase in premium was based on a fallacious premise.

29 . Best Framing advised its insurance agent that it had

an offer to be the exclusive provider of framing for a large

company, D R Horton . That contractual ar rangement was to

supposedly generate some $1.2 million in work for Best Framing

over the next year. Such a contract would necessarily result in

the need to increase its insurance coverage. However, a

representative of D R Horton testified that t here was no plan to

provide Best Framing such a contract. And by the time Best

Framing went in to increase its premium under the false premise ,

the Department had already advised Auto - Owners about their

investigation and the carrier was not interested in amend ing

Best FramingÓs policy . 5/ Auto - Owners ultimately decided not to

renew Best FramingÓs policy at all , perhaps in response to the

news it had received from the Department. Auto - Owners stated as

the basis for its non - renewal Best FramingÓs use of

Ðsubcontract ors without insurance and/or pay[ing] workers in

cash.Ñ

30 . Third, Best Framing claims that the Department failed

to follow its own internal procedures concerning investigation

of an understated payroll case. Best Framing points to the

DepartmentÓs Tra ining Memo #04 - 001, dated February 26, 2009,

revised September 14, 2015, which states in pertinent part :

STATUTORY AUTHORITY:

Section 440.381(6)(b), Florida Statutes,

requires the department [to] immediately

notify the employerÓs carrier if we

determine t hat the employer has materially

understated or concealed payroll . . . .

The carrier shall commence a physical onsite

audit of the employer within 30 days after

receiving a notice of determination from the

department. In addition, a copy of the

carrierÓs audit of the employer shall be

provided to the department upon completion.

The carrier is not required to conduct a

physical audit of the employer if the

carrier gives written notice of cancellation

to the employer within 30 days after

receiving the notice of determination, and

an audit is conducted with the cancellation.

PROCEDURES:

Prior to issuing a Business Records Request

or Enforcement Action upon an Employer for

materially understating or concealing

payroll . . . the Investigator, District

Supervis or, Investigations Managers,

Underreporting Analyst, and Bureau Chief

together shall discuss and determine the

next action to be taken, if any, for such

cases.

Once an inves tigator determines, through

the issuance of a Stop - Work Order or Order

of Penalty A ssessment, that an employer

has materially understated or concealed

payroll . . . the Investigator shall

immediately notify the Bureau ChiefÓs office

by e - mail . . . and provide him with the

following information [name, FEIN, address,

etc.].

The informat ion provided will be included in

the Notice of Determination Letter that is

prepared and mailed (certified) and emailed

to the carrier . . . .

If the carrier does not commence a physical

on - site audit, or give written notice of the

cancellation within 30 days after receipt of

the notice of determination . . . the Bureau

Chief will notify the auditing professional

under contract with the department to

conduct the audit at the insurerÓs expense.

31 . Best Framing argues two points concerning the training

mem orandum : 1) t hat the Department did not issue a written

ÐNotice of DeterminationÑ that the employer had allegedly

understate d its payroll; and 2) t hat the carrier did not

commence a Ðphysical onsite a udit of the employerÑ within

30 days after receipt of t he Notice of Determination. Both of

those allegations appear accurate. However, Best Framing fail ed

to establish how the violation of a n internal training

memorandum by the Department absolves it (Best Framing) of the

requirement for reporting its entire payroll, for direct

employees and subcontractors alike. Best Framing also argues

that the training memorandum is an unpromulgated rule. It is

not. See the dis cussion in Conclusions of Law 47 through 49 ,

below.

32 . Fourth, Best Framing pointed out tha t there were no

work - related injuries to any of its employees or subcontractors

during the two years at issue. While that is laudable (and

somewhat miraculous), it does not absolve Best Framing of its

insurance requirements.

33 . At final hearing, the D epartment offered a Second

Amended Order of Penalty Assessment into evidence. The amended

order set the penalty at $891,418.46, an amount somewhat less

than the original calculation. Best Framing did not object to

the calculations that resulted in the pe nalty amount , although

it still maintains that no penalty is warranted. The assessed

penalty is accepted as reasonable and accurate.

CONCLUSIONS OF LAW

34 . The Division of Administrative Hearings has

jurisdiction over this matter pursuant to sections 120.569 and

120.57(1), Florida Statutes. Unless otherwise stated

specifically herein, all references to Florida Statutes will be

to the 201 6 version.

35 . The burden of proof in matters such as this is on the

Department because it is asserting the affirma tive of the issue ,

i.e., that Best Framing did not have workersÓ compensation

insurance in place which would Ðmeet the requirements of Chapter

440, Florida Statutes . Ñ See Ferris v . Turlington , 510 So. 2d

292 (Fla. 1987).

36 . In the instant case, t he adm inistrative fines being

proposed by the Department are penal in nature. The standard

of proof for such cases is clear and convincing evidence.

See Dep Ó t of Banking and Fin . , Div . of Sec . & Inv . Prot . v.

Osborne Stern & Co. , 670 So. 2d 932 (Fla. 1996).

37 . Clear and convincing evidence is an intermediate

standard of proof which is more than the "preponderance of the

evidence" standard used in most civil and administrative cases,

but less than the "beyond a reasonable doubt" standard used in

criminal cases . See State v. Graham , 240 So. 2d 486 (Fla. 2d

DCA 1970). Further, clear and convincing evidence has been

defined as evidence which:

[R]equires that the evidence must be found

to be credible; the facts to which the

witnesses testify must be distinctly

re membered; the testimony must be precise

and explicit and the witnesses must be

lacking in confusion as to the facts in

issue. The evidence must be of such weight

that it produces in the mind of the trier of

fact a firm belief or conviction, without

hesita ncy, as to the truth of the

allegations sought to be established.

Slomowitz v. Walker , 429 So. 2d 797, 800 (Fla. 1st DCA 1983).

Citations omitted.

38 . Chapter 440, Florida Statutes, is known as the

ÐWorkersÓ Compensation Law.Ñ Section 440.10, within th at

chapter , states in relevant part:

(1)(a) Every employer coming within the

provisions of this chapter shall be liable

for, and shall secure, the payment to his or

her employees, or any physician, surgeon, or

pharmacist providing services under the

provi sions of s. 440.13, of the compensation

payable under ss. 440.13, 440.15, and

440.16. Any contractor or subcontractor who

engages in any public or private

construction in the state shall secure and

maintain compensation for his or her

employees under this chapter as provided in

s. 440.38.

(b) In case a contractor sublets any part

or parts of his or her contract work to a

subcontractor or subcontractors, all of the

employees of such contractor and

subcontractor or subcontractors engaged on

such contract w ork shall be deemed to be

employed in one and the same business or

establishment, and the contractor shall be

liable for, and shall secure, the payment of

compensation to all such employees, except

to employees of a subcontractor who has

secured such payme nt.

(c) A contractor shall require a

subcontractor to provide evidence of

workersÓ compensation insurance. A

subcontractor who is a corporation and has

an officer who elects to be exempt as

permitted under this chapter shall provide a

copy of his or her certificate of exemption

to the contractor.

39 . Section 440.107 states at paragraph (3), ÐThe

Department shall enforce workersÓ compensation coverage

requirements, including the requirement that . . . the employer

provide the carrier with information to accurately determine

payroll . . . . Ñ The law mandates that subcontractors are to be

treated the same as contractors, having the same responsibility

for obtaining coverage for their employees. W here a

subcontractor fails to provide proof of coverage for its

employees, the contractor is responsible for providing such

coverage. See § 440.10(1)(b), Fla. Stat.

40 . At final hearing, Best Framing posited , without any

support whatsoever, that the framers paid from Account 9199 were

subcontractors. (This posit ion squarely contradicts the

testimony of David Olmedo who said the persons receiving checks

from Account 9199 should have been reported to the insurance

carrier as employees.) Even if that was true, Best Framing

would be required to provide proof that th e subcontractors had

valid workersÓ compensation insurance in place. If not, then

Best Framing would be required to provide the coverage for

the subcontractors. Clearly, the persons paid out of Account

9199 were engaged in ÐemploymentÑ for Best Framing a s defined by

section 440.02(17)(b)( 2) . Whether employers or subcontractors,

Best Framing was responsible for ensuring they had workersÓ

compensation coverage.

41 . This case is not a run - of - the - mill case involving an

employerÓs failure to obtain workers Ó compensation coverage for

his or her employer . The underreporting or concealment of

payroll is a different animal in the Workers Ó Compensation Law,

Chapter 440 .

42 . Section 440.107 states in pertinent part:

(1) The Legislature finds that the failure

of an employer to comply with the workersÓ

compensation coverage requirements under

this chapter poses an immediate danger to

public health, safety, and welfare.

(2) For the purposes of this section,

Ðsecuring the payment of workersÓ

compensationÑ means obtaining coverage that

meets the requirements of this chapter and

the Florida Insurance Code. However, if at

any time an employer materially understates

or conceals payroll , materially

misrepresents or conceals employee duties so

as to avoid proper clas sification for

premium calculations, or materially

misrepresents or conceals information

pertinent to the computation and application

of an experience rating modification factor,

such employer shall be deemed to have failed

to secure payment of workersÓ co mpensation

and shall be subject to the sanctions set

forth in this section . A stop - work order

issued because an employer is deemed to have

failed to secure the payment of workersÓ

compensation required under this chapter

because the employer has materiall y

understated or concealed payroll, materially

misrepresented or concealed employee duties

so as to avoid proper classification for

premium calculations, or materially

misrepresented or concealed information

pertinent to the computation and application

of an experience rating modification factor

shall have no effect upon an employerÓs or

carrierÓs duty to provide benefits under

this chapter or upon any of the employerÓs

or carrierÓs rights and defenses under this

chapter, including exclusive remedy.

(Emphas is added).

43 . Department representatives at final hearing

erroneously stated that even one dollar of unreported payroll

would be a violation. The statute, however, speaks in terms of

a Ðmaterial understatementÑ of payroll. It is clear from the

evidenc e that the understatement by Best Framing was material.

44 . Section 440.381 addresses applications for workerÓs

compensation insurance coverage and states in relevant part:

(2) [T] he application must contain a sworn

statement by the employer attesting to the

accuracy of the information submitted and

acknowledg ing the provisions of former

s. 440.37(4). The application must contain

a sworn statement by the agent attesting

that the agent explained to the employer or

officer the classification codes that are

used for premium calculations.

* * *

(4) Each employer must submit a copy of the

quarterly earnings report required by

chapter 443 at the en d of each quarter to

the carrier and submit self - audits supported

by the quarterly earnings reports required

by chapter 443 and the rules adopted by the

Department of Economic Opportunity or by the

state agency providing reemployment

assistance tax collect ion services under

contract with the Department of Economic

Opportunity through an interagency agreement

pursuant to s. 443.1316. The reports must

include a sworn statement by an officer or

principal of the employer attesting to the

accuracy of the inform ation contained in the

report .

* * *

(6 ) (b) If the department determines that an

employer has materially understated or

concealed payroll , has materially

misrepresented or concealed employee duties

so as to avoid proper classification for

premium calcul ations, or has materially

misrepresented or concealed information

pertinent to the computation and application

of an experience rating modification factor,

the department shall immediately notify the

employerÓs carrier of such determination .

The carrier s hall commence a physical onsite

audit of the employer within 30 days after

receiving notification from the department .

If the carrier fails to commence the audit

as required by this section, the department

shall contract with auditing professionals

to con duct the audit at the carrierÓs

expense . A copy of the carrierÓs audit of

the employer shall be provided to the

department upon completion. The carrier is

not required to conduct the physical onsite

audit of the employer as set forth in this

paragraph if the carrier gives written

notice of cancellation to the employer

within 30 days after receiving notification

from the department of the material

misrepresentation, understatement, or

concealment and an audit is conducted in

conjunction with the cancellati on .

(Emphasis added ) .

45 . There is no evidence that Best Framing attempted to

resolve its understated payroll conundrum by complying with the

quarterly reporting requirements set forth above. Operating

perhaps out of ignorance of the facts but more like ly by design ,

B est Framing continued to mis report its payroll amount every

single quarter. Its agent, Luis Ramirez, allegedly contributed

to the problem , but th at is no excuse for Best FramingÓs

failure. Someone on behalf of the employer signed a sworn

s tatement attesting to the accuracy of the payroll as submitted.

Clearly, that statement was in error.

46 . The Department did notify the carrier, Auto - Owners, of

its determination that Best Framing had understated its payroll.

The Department did not issu e a written ÐNotice of DeterminationÑ

to the carrier ; however , it was done verbally . The statute does

not require written notification although the training

memorandum does and it would be the better practice. That the

carrier failed to commence an on - si te audit within 30 days, and

the Department did not thereafter schedule an audit by its

contracted auditing professionals, is inconsistent with the

statut ory mandate . However, inasmuch as Best Framing admits its

failure to provide accurate payroll figures , and it is no longer

doing construction work, the negative impact of the DepartmentÓs

shortcomings are de minimus. An audit would likely increase,

not dec rease, the proposed penalty for non - compliance.

47 . As to Training Memo #04 - 001 relied upon by Be st

Framing in its defense, it is axiomatic that not every document

produced by an agency is a rule. A Ðr uleÑ is an Ðagency

statement of general applicability.Ñ See § 120.52(15), Fla.

Stat. The training memorandum at issue applies only to

employees of th e DepartmentÓs Bureau of Compliance and merely

addresses the requirements already set forth in section

440.381(6)(b).

48 . When determining whether the training memorandum is an

illicit rule, the primary concern is its effect. DepÓt of Rev.

v. Vanjara , 675 So. 2d 252, 255 (Fla. 5th DCA 1996). An agency

statement is a rule if it Ðpurports in and of itself to create

certain rights and adversely aff ect othersÑ or serves Ðby

[its] own effect to create right s, or to require compliance,

or otherwise to have t he direct and consiste nt effect of law.Ñ

DepÓt of Transp. v. Blackhawk Quarry , 528 So. 2d 976, 977 -

978 (Fla. 1st DCA 1984). A training memorandum is not the

equivalent of a rule where it merely informs of a process or

procedure. Coventry First, LLC v. O ff. of Ins. Reg. , 38 So. 3d

200, 204 (Fla. 1st DCA 2010)(citing DepÓt of Rev. v. Novoa ,

745 So. 2d 378, 382 (Fla. 1st DCA 1999)).

49 . By its terms, the training memorandum is an internal

tool, used by and applying to employees of the Department. It

does not directly require any action by employers . It does not,

in and of itself, create or adversely affect any of Best

FramingÓs rights. Training Memo #04 - 001 is not a rule.

50 . The clear and convincing evidence in this case

established Best FramingÓs fail ure to obtain workersÓ

compensation insurance coverage sufficient to cover all of its

employees and/or subcontractors. Best Framing either

intentionally hid payments from Account 9199 or was woefully

ignorant of its responsibilities, thereby placing all o f its

employees at risk. Such action posed a Ðsignificant danger to

[the] health, safety, and welfare of those persons it was

charged with protecting. See § 440.107(1) , Fla. Stat .

51 . The penalty calculation is accepted as accurate and

properly derive d. 6/

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is RECOMMENDED that a f inal o rder be entered by the

Department of Financial Services upholding the Stop - Work Order

and the Amended Penalty Assessment in the amount of $ 891,418.46

imposed against Respondent, Best Framing USA, Inc .

DONE AND ENTERED this 9 th day of March , 2017, in

Tallahassee, Leon County, Florida.

S

R. BRUCE MCKIBBEN

Administrative Law Judge

Division of Administrative Hea rings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 9 th day of March, 2017 .

ENDNOTE S

1/ At final hearing, Best Framing essentially stipulated to the

DepartmentÓs calculation of the penalty amount, but not as to

whether a penalty was warranted.

2/ The corporate documents were filed by Luis Ramirez, who

became the companyÓs accountant and is th e person Best Framing

blames for much of its turmoil in this matter.

3/ Amazingly, David Olmedo, corporate representative for Best

Framing, did not know Obed Sold e vi ll aÓs name as recently as

September 2016 during his deposition taken in this case.

Mr . Olmedo said he only knew the man as ÐGordoÑ and did not know

his real name, despite allegedly being only one of four

employees at the company.

4 / A second deposit i on was necessitated by the actions of Best

FramingÓs attorney, Kristian Dunn, at the initia l deposition.

Mr. Dunn, despite acknowledging that he did no t represent

Mr. Ramirez, nonetheless offered Ramirez legal advice and

basically counselled Ramirez to terminate the deposition until

he could obtain his own legal counsel. At his second

depositi on, Ramirez appeared with legal representation, Michael

Guttman, Esquire. Mr. Guttman is either unfamiliar with or does

not care about the procedural rules governing discovery

depositions. By way of example, Mr. Guttman on numerous

occasions invoked the Fifth Amendment on behalf of Mr. Ramirez

(rather than Mr. Ramirez doing so on his own) without specifying

how the question might possibly lead to incrimination in a

criminal proceeding. Mr. Guttman invoked the privilege, for

example, when Mr. Ramirez was asked if his signature appeared on

a document he had already identified. When Mr. Ramirez was

asked to verify his email address, Mr. Guttman invoked the Fifth

Amendment. He made numerous improper and irrational objections

to questions posed by the Depart mentÓs counsel. He offered

unsolicited statements and comments on the record. He was rude

and condescending to his client. He was disruptive and seemed

more intent on scuttling the deposition than representing his

clientÓs interest. In whole, Mr. Guttm anÓs behavior was

deplorable and totally inconsistent with the standards

enumerated in the Oath of Admission to the Florida Bar.

Frankly, it is a wonder his reprehensible behavior has not been

reported to the Florida Bar.

5/ David OlmedoÓs testimony abo ut meeting with Best FramingÓs

insurance agent was confusing, at best, and perhaps misleading.

He first said that he and Abraham Olmedo went to see the agency

because Best Framing was not receiving monthly bills from Auto -

Owners. Then Olmedo said they we nt to see the agent for the

purpose of increasing their policy amount, but he said that

maybe that was tied to them not getting billed. The testimony

was v ery disjointed and was not p ersuasive.

6/ Subsequent to the final hearing, at a motion hearing r elated

to an earlier award of fees, the Department filed - Î u nder seal Î -

an audiotape from the second deposition of Mr. Ramirez . The

audiotape remains under seal and was not considered in the

preparation and issuance of this Recommended Order ( or Order

regar ding attorneysÓ fees ).

COPIES FURNISHED:

Kristian Eiler Dunn, Esquire

Dunn and Miller, P.A.

215 East Tharpe Street

Tallahassee, Florida 32303

(eServed)

Susan L. Herendeen, Esquire

Department of Financial Services

Division of Workers' Compensation

20 0 East Gaines Street

Tallahassee, Florida 32399

(eServed)

Trevor S. Suter, Esquire

Department of Financial Services

200 East Gaines Street

Tallahassee, Florida 32399

(eServed)

Bennett M. Miller, Esquire

Dunn and Miller, P.A.

215 East Tharpe Street

Tall ahassee, Florida 32303

(eServed)

Alexander Brick, Esquire

Department of Financial Services

200 East Gaines Street

Tallahassee, Florida 32399

(eServed)

Tabitha G. Harnage, Esquire

Department of Financial Services

200 East Gaines Street

Tallahassee, Flor ida 32399 - 0333

(eServed)

Julie Jones, CP, FRP, Agency Clerk

Division of Legal Services

Department of Financial Services

200 East Gaines Street

Tallahassee, Florida 32399 - 0390

(eServed)

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.