Roseville businessman Gregory J. Chmielewski had what seemed like a brilliant idea: Create an alternative low-cost version of workers’ compensation insurance, at a time when the price for traditional coverage was soaring out of sight in California.
It was a failure, and a fraud. Chmielewski, 46, pleaded guilty to two counts of fraud in Sacramento last month, admitting he skimmed millions of dollars from the tiny Indian tribe that financed the operation while leaving scores of injured workers in the lurch.
Chmielewski’s guilty plea came nearly a decade after his scheme unraveled – and served as a sad epilogue to an era in which the rising cost of treating injured workers raged as a hot political issue across California.
More than a decade ago, workers’ comp insurance premiums were driving employers crazy, and newly elected Gov. Arnold Schwarzenegger was scrambling for an answer. Chmielewski was one of a handful of entrepreneurs who thought they could profit from the crisis by partnering with Indian tribes.
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Chmielewski convinced the Fort Independence Community of Paiute Indians, in Inyo County, to bankroll a company that would offer discount coverage by using tribal laws to cut through the red tape plaguing the state-run system.
The company they created, Independent Staffing Solutions of Roseville, signed up dozens of clients but fell apart after four years in business. Independent Staffing was unable to pay its bills despite hauling in $225 million in revenue from employers during its brief life.
What went wrong? In a written plea agreement filed in U.S. District Court in Sacramento, Chmielewski said he siphoned $7.3 million from Independent Staffing in order to fund his personal real estate investments.
Chmielewski likely will get a prison term of 41 to 51 months when he’s sentenced in April, according to the terms of the written plea agreement he signed. A former El Dorado Hills resident now living in Wisconsin, he remains free on bond pending sentencing.
The impact of the crime appears to have been widespread. When he was arrested in 2012, Fort Independence officials issued a statement saying his crimes had “a devastating effect on the tribe and … its impoverished membership.” Tribal officials didn’t return calls seeking comment for this story.
Injured workers were victimized as well, although it’s not clear exactly how many lost their benefits because of Independent Staffing’s demise. Chmielewski’s plea agreement says “the losses resulting from defendant’s fraud scheme” amount to $1.8 million in unpaid claims to 117 injured workers.
The pain might not be limited to those 117 workers. At least 31 injured workers who were supposed to have been covered by Independent Staffing still have claims for unpaid benefits pending with the state Department of Industrial Relations, which oversees the traditional workers’ comp system. It’s unknown if any of those 31 workers are among the 117 workers cited in Chmielewski’s plea bargain. The 117 workers weren’t identified and the U.S. attorney’s office declined comment on the case.
In any event, some workers who didn’t get covered could be eligible for payment from a state-run, employer-financed fund designed to cover uninsured claims.
Chmielewski’s case took some odd turns. He was indicted by a grand jury in Sacramento in February 2011, but police couldn’t find him to make an arrest for 20 months. When he was finally caught, standing outside his girlfriend’s apartment in Glendale, Ariz., he tried to pass himself off as someone else, according to court records. Over the objections of prosecutors, Chmielewski was eventually released after his father posted a $215,000 bond, and he’s remained free ever since.
Chmielewski and Independent Staffing Solutions weren’t the only entrants in the discount workers’ comp business in the early 2000s. The Blue Lake Rancheria in Humboldt County set up a competing company called Mainstay Business Solutions. Both companies made their headquarters in Roseville.
The two companies were “professional employer organizations.” Technically, they employed the workers they were covering. The firms handled payroll and other personnel functions, although the main draw was cheap workers’ comp.
In both cases, the plan was simple: By using the tribes’ sovereign-nation status, they could streamline the cumbersome process of workers’ compensation. They passed on the savings to employers by offering deep discounts – 20 percent or more – on premiums.
For the tribes, it was way to generate new revenue.
“Tribes were trying to expand their business opportunities,” said Joseph Wiseman, a Davis lawyer and expert in tribal law.
It worked at first. Mainstay and Independent Staffing signed up hundreds of California employers as clients, particularly those in industries where on-the-job injuries are common and premiums were the highest. Thousands of construction workers, roofers and other employees found themselves on tribal payrolls.
Controversy erupted almost immediately. The state Department of Insurance and Department of Industrial Relations took the position that the tribes weren’t licensed to sell workers’ comp insurance and that the service they were selling was illegal.
Injured workers said the tribal programs often ran roughshod over their legal rights. In the traditional system, they could appeal to a state-run board if they felt they weren’t getting proper medical care or the disability payments they deserved. With Mainstay and Independent Staffing, they were stuck arguing their case before councils run by the tribes.
“There was no way to enforce those benefits,” said Melissa Brown, a Sacramento lawyer who represents injured workers. “You could never get a hearing.”
In late 2003, the state temporarily shut down a small chain of IHOP pancake franchises in Sacramento and Fresno whose owner bought coverage from the Blue Lake tribe’s business, Mainstay.
For a while, the case loomed as a test of sovereign immunity, the legal doctrine that gives tribes broad protection to manage their own affairs. Blue Lake sued the state, saying it was illegally meddling in tribal business. The state said sovereign immunity didn’t extend to businesses that were operating outside reservation borders.
The conflict got resolved. The restaurants were allowed to reopen and the tribe’s lawsuit was settled. Blue Lake and Mainstay agreed to adopt a more traditional form of workers’ compensation, with greater legal protections for workers.
By that point, the Legislature was acting to make the tribes’ workers’ comp programs largely irrelevant. In 2004, Schwarzenegger signed into law a compromise overhaul of the state workers’ comp system aimed at reducing costs. Premiums began stabilizing within a couple of years, and employers that had chosen Mainstay or Independent Staffing started drifting back toward traditional workers’ comp.
Blue Lake’s company hung on as a personnel and payroll-services company for a few years, and then folded in 2011.
Independent Staffing didn’t last nearly that long. Chmielewski’s financial misdeeds had left the Fort Independence tribe’s company on much shakier footing when clients started leaving, according to court records.
“Revenues began a steep decline,” reads the plea agreement signed by Chmielewski. “Without sufficient reserves to pay ongoing claims, and lacking additional revenue from new insurance premiums, (Independent Staffing) began to default on its various financial obligations.”
Independent Staffing went under in September 2007, to the dismay of injured workers and their employers alike.
“They were valid and they did business as usual,” said one of Independent Staffing’s former clients, Redding roofing contractor Daniel Wait. “When the wheels fell off, they stopped paying and they left everybody high and dry.”
After Independent Staffing fell apart, the Fort Independence tribe pursued a more traditional method of making money. In 2008, the tribe opened a small casino.