WHITE-COLLAR CRIME: MISREPORTING IN ORDER TO AVOID TAXES OR INSURANCE PREMIUMS

Sometimes the cost of doing business in California gives a business owner reason to consider whether it’s worth it at all. Between taxes, insurance costs and various fees, the cost of doing business in some professions can be exorbitant. Consider this: the cost of workers compensation insurance for roofing companies is around 90% of payroll. That’s right, for every $100 of payroll a roofing company pays to its roofing employees, it pays another $90 toward its workers compensation premium. While roofing companies have the highest workers compensation rates, other business classifications pay nearly as much. And then there are of course the aforementioned taxes and other fees that businesses pay.

So, what does this have to do with a criminal law blog? Plenty. The high cost of doing business in California has led some business owners to “get creative.” Sometimes this creativity becomes criminal.

Take the example of a small roofing company. Most of its employees are roofers and the cost of its workers compensation insurance almost doubles its payroll expenses. Maybe the owner of this small company decides to classify some of his employees as performing some tasks other than actual roofing in order to bring down his workers compensations premiums, or maybe he decides to underreport his payroll. Once he does this, he is breaking the law! He might think, oh well, if I get caught, I’ll just have to pay for the underreported insurance premiums.

Unfortunately, it is not so easy. The California courts are no strangers to criminal defendants whose only crime was underreporting payroll to its workers compensation insurance carrier or to the Employment Development Department (in order to avoid payroll taxes). California prosecutors vigorously investigate and pursue charges against business owners who use various methods to avoid insurance and tax costs.

Often business owners employ creative accounting or use corporations to hide their business activity. These owners almost never consider themselves criminal; they see it as just trying to make a profit. And they never imagine that they may end up in the state penitentiary.

Consider Michael Petronella, who owned a small roofing business in Orange County. He ended up being charged and convicted on 33 counts for underreporting his payroll to the State Compensation Insurance Fund (SCIF), which carried his workers compensation insurance policy. Mr. Petronella’s defense boiled down to an excuse; it might have seemed like a good excuse, but it didn’t clear him of the crime. Basically, Mr. Petronella argued that he had no intention of deceiving SCIF, but his workers compensation rates were so high that it made his cost of doing business prohibitive. He argued that the rate SCIF was charging on his roofer payroll was “so out of whack” that he couldn’t stay in business if he paid it.

Mr. Petronella went to trial believing he had a good defense. Unfortunately, the jury disagreed. Mr. Petronella was convicted and he was sentenced by the trial court to serve a term of 10 years in state prison! Mr. Petronella appealed his sentence, but the appellate court was not persuaded. The appellate court observed that Mr. Petronella knew he was underreporting his payroll and even if, as Mr. Petronella argued, SCIF was in error in the calculation of his premium rates, that would not make it legal for Mr. Petronella to basically take matters into his own hands and misrepresent his payroll.

Mr. Petronella’s case is but one example of the many variations of white-collar crime committed by business owners. While sometimes white-collar crime is blatantly illegal, sometimes it is not so obvious. If you think that the worst that can happen if you get caught cheating on your business taxes or insurance reporting is that you will have to pay up and incur penalties and fees, you could be very wrong. In all cases, when a business owner (or an individual) makes any report fraudulently with the intent to avoid taxes or insurance premiums, it is against the law.