Mainstay Unraveled

Lawsuits and accusations linger after the Blue Lake Rancheria quietly closed its staffing company



One morning in April, nine employees of Mainstay Business Solutions arrived at the company's corporate headquarters, a modern, glassy building not far from Kikkoman Foods Inc.'s soy sauce factory in Folsom, Calif. The doors were locked, and their keys no longer worked. There was no sign on the door. They waited outside for a couple of hours, until finally someone opened the door from the inside. It was a supervisor.

"He said, 'We're no longer in business,'" recalled Gary Bekowsky, an information technology specialist who was among those waiting. The supervisor said he was sorry, and that everyone was in the same boat. "And he handed us a pamphlet on how to collect unemployment."

The irony is difficult to overlook. Mainstay, an employee leasing company owned by the Blue Lake Rancheria in Humboldt County, has been wrangling with the California Employment Development Department almost since its founding, most recently over $19 million in unpaid state unemployment taxes, penalties and interest that the EDD said have accrued since 2009. The unresolved dispute led to the company's decision to shut down after the state, in early April, levied its bank accounts and operations, and recorded tax liens in 13 counties.

On the day it closed, Mainstay had 6,600 employees leased out to hundreds of client companies. About 150 people worked in its 15 corporate branches throughout California, including one here in Humboldt County at an office in Blue Lake and about 50 at the office in Folsom. (Most of them had gotten word about the closure the night before it happened.) Locally, Mainstay provided about 50 seasonal and a handful of full-time hires in McKinleyville-based Wild Planet Foods' seafood processing operations in Eureka, Crescent City and San Mateo. Other local Mainstay employees worked for Cox and Associates, Pierson Co. and Blankenship Construction. Some of these workers noticed only that they were suddenly getting their paychecks from a new staffing agency. Others lost their jobs, their benefits and their final paychecks. Mainstay's client companies had to scramble to pay their workers and make new arrangements for handling the staffing, payroll and other human resource functions that Mainstay had done for them.

The aftermath of Mainstay's sudden departure now is playing out in court, adding another twist to the tangle of lawsuits and legal disputes the Blue Lake Rancheria has had with state and federal agencies ever since it founded the company.



The 53-member Blue Lake Rancheria formed Mainstay Business Solutions in 2003 with the idea that it could save employers money on workers' compensation costs, while turning a nice profit. As a federally recognized tribe, the Rancheria figured it could use its own, much cheaper workers' comp plan to cover employees and then lease those workers to companies all over the state.

The business took off, and soon Mainstay was leasing tens of thousands of employees to companies throughout California.

Then the fights started.

The state Department of Industrial Relations threatened to shut down companies that used Mainstay unless it paid state workers' compensation insurance. The Rancheria and the state began arguing over which kind of state unemployment insurance Mainstay would have to pay. Later, the Rancheria said it had discovered the state was bungling unemployment calculations and began fighting to pay less. Meanwhile, the Rancheria and the federal government also clashed over federal unemployment obligations. And now that Mainstay has closed, the state has swung back with another suit over unpaid workers' compensation costs.

At every point, the Rancheria has pushed against state and federal bureaucracies, arguing that as a federally recognized tribe, it has sovereign immunity that allows it to do everything it has done.

Mainstay had to settle in that first workers' comp case, agreeing to obtain insurance through the state's self-insurers' program.

Sometimes, it has given ground. It settled that first workers' comp case, agreeing to obtain workers' comp insurance through the state self-insurers' program.

On occasion, however, it has prevailed.

For example, in one case a court ordered the state to lower by $9 million the amount it claimed Mainstay owed for unemployment insurance. And in another, a judge told the federal government to give back $2 million.

Now the Rancheria is fighting on two legal fronts.

One is over unemployment payments to the state. That's the one that triggered Mainstay's decision to close when the state filed those liens and levies in April. Mainstay has already won a round on that one, because a judge ordered them lifted, but the underlying payment dispute remains.

The other legal battle involves who is going to have to pay millions in workers' compensation costs for people who were injured on the job when employed by the now-shuttered Mainstay.

The state's Self-Insurers' Security Fund, which took over the open workers' comp claims that Mainstay defaulted on when it closed, sued the tribe on Nov. 7. It's seeking reimbursement for an unspecified amount that the state says will surpass $6 million: a $4.7 million shortfall in Mainstay's account discovered by a state audit, plus $1.8 million Mainstay should have added to the deposit it was required to maintain under the self-insurers' program, plus future costs for injured workers.


Mainstay's closure hit its 150 corporate employees hardest: They were all laid off. A few of them, according to several former employees, agreed to remain behind for a week or so to help shut things down and transfer the books to Select Staffing, the agency that Mainstay found to take on most of its 6,600 employees leased out to various businesses at the time. Some allegedly were not paid for that extra time. Former corporate employees said in news stories, in interviews with the Journal, and on a Facebook page they started after the closure (and now closed to the public) that they didn't receive their final paychecks for time worked and for accumulated paid time off; they couldn't access their 401k accounts; and medical offices were demanding payment for procedures that Mainstay's insurance was supposed to have covered. Some have alleged that Mainstay rescinded their second-to-last paychecks -- had them reversed right out of their bank accounts. The tribe, which declined to speak on the record to the Journal for this story because of the ongoing litigation, was quoted in news stories elsewhere, right after the closure, saying the reversed paychecks were the result of accidental double payments.

Gary Bekowsky, one of the nine in Folsom who didn't get the memo that his company was closing, was also one of those who didn't qualify for unemployment benefits, likely for the same reason: He was too new an employee. He'd only been with Mainstay since March 2.

Bekowsky, who's 50, had graduated the previous August from MTI College in Sacramento with certification in information technology and worked first for the California Department of Food and Agriculture. Then Mainstay called and offered him a package deal he couldn't refuse: $20 an hour, benefits after three months and free reign over the IT help desk.

"Meaning, 'You make this work, make this go the way it's supposed to go,'" Bekowsky said. "They hired two IT people to help revamp it. Before, there was a week turnaround per call [for help]; we got it down to less than an hour. We did it by getting rid of the backlog and organizing it better."

The office, occupying the entire upper floor of the tribe-owned building, was plush and comfortably furnished, with state-of-the-art equipment. If you needed something, you got it right away.

Bekowsky loved it. He'd still be there if it hadn't closed. He knew the company had been in some dispute with the EDD, but just the day before several Mainstay executives, including Chief Operating Officer Eric Ramos, had held an all-staff meeting late in the afternoon to announce they were still in talks with the EDD but were looking to come to an agreement pretty quickly.

"They told us, 'Don't worry, nothing's going to come of it,'" he said. "I went home feeling reassured."

The day after the supervisor handed out those unemployment brochures, Bekowsky hurried to the One Stop Employment Resource Center in Placerville, near his home in Diamond Springs, and filed for unemployment.

"I have a family," he said. "I lost my wife to cancer five years ago, and I was worried. I hadn't gotten paid, I have three kids at home, and I also had my mother -- she has cancer, too. I'm the sole provider."

His application for unemployment was rejected because he hadn't worked long enough in the last quarter. Besides, he said, he couldn't prove what had happened. Was he laid off? He didn't have anything official in writing from Mainstay.

"I started looking for a job, that day -- you betcha," he said. Three months, 489 job applications and several interviews later -- with too many offers of only part-time employment -- he landed a full-time job with Intel as a chipset validation technician. A true dream job, he said.

He still hasn't closed the book on Mainstay, however. A week after the office was closed, he and others were allowed to retrieve things from their cubicles. Bekowsky recovered a horse-shaped birch Miwok dance stick that his kids made for him, a sculpture, and some paperwork. But his professional tools -- CDs that held operating systems for running the computers -- and his personal laptop were gone. He doesn't know if the EDD or tribe has them. But he'd like them back, along with his final paycheck.

"I think Eric Ramos and Blue Lake Rancheria ... should take care of their employees -- they hung us out to dry," he said.

Like Bekowsky, Jolie Bakken loved her job. She was one of five accountants in the finance department at Mainstay's Folsom office. She'd worked for Mainstay from 2006 to 2008, left for professional development, and had just returned in March.

"It was a normal job, a great atmosphere," she said. "It was a professional environment but people were friends. There were open-door policies with supervisors. There was always training available when I needed it. It was one of the best places I've worked."

Unlike Bekowsky, she came away from that April 12 staff meeting feeling worried. Sure enough, later that night her supervisor called her and told her the company was finished. The next day, she and a few more established employees were allowed to clear out their cubicles.

Since then, she hasn't heard a word from Mainstay. She says she's owed two weeks pay plus payment for accumulated paid time off. She applied for unemployment and was told she wouldn't get it for the two weeks she'd worked but not yet been paid for.

Bakken was on unemployment for six weeks then began working for a temp agency.

"I'm working on finding a full-time job," she said. "It's tough. The hard thing about this situation is, here I finally got a full-time permanent position and was just trying to work and be a productive member of society, and the EDD closed 'em down."

She blames the tribe as well as the EDD, although she doesn't attribute malicious intent to either. "Whose side am I taking?" she asked. "I'm taking my side."

Not everyone who worked for corporate in Folsom was pleased with the place. Kelley Garcia worked three years for Mainstay in sales, generating leads on high-risk companies to staff -- small to medium businesses with high accident rates, such as tree trimmers and roofers.

"Our company mantra was 'serving the under-served,'" Garcia said.

But Garcia said there were problems. Mainstay kept undergoing leadership changes -- four presidents in a very short time, she said. And it started cutting pay and hours. "There was a 10 percent across-the-board pay cut for nearly every corporate employee; my pay wasn't cut -- instead they cut my hours 50 percent."

She quit April 8, just a few days before things went south. She initially got her final paycheck and vacation pay, but her vacation pay later was taken back out of her account, she said.

"If you sign up for direct deposit, they can reverse it," she said. The bank told her the check had been returned for insufficient funds.

She also had to fight for payment of some dental claims. In all, she said, she's out $3,200.

Employees who wrote to the EDD about not being paid received a letter back saying the "EDD will not be making any disbursements" until the lawsuit filed by the tribe, its Economic Development Corporation and Mainstay Business Solutions has been resolved. The letter said workers could file a wage claim with the California Department of Industrial Relations.

As of last week, 137 wage claims have been filed with the department by former Mainstay employees, said DIR spokesperson Erika Monterroza.


Mainstay generated about $1 million a year, after expenses, Eric Ramos, president of the Blue Lake Rancheria's business operations, said in court documents.

The loss of that income forced the tribe to discontinue its dial-a-ride program and might put a crimp in its plans to build a water distribution system, according to Arla Ramsey, Ramos' mother and the rancheria's vice chairperson. Like Ramos, she provided that information in a declaration in support of the tribe's motion for a preliminary injunction.

Mainstay sued the state on April 26, soon after the state started to force collection by filing levies and liens in the unemployment insurance dispute. Mainstay argued that the state's collection efforts violated the tribe's federally granted sovereign immunity and placed undue hardship on the tribe. It asked a judge to order the state to lift the levies and liens.

Mainstay money helped support services for the tribe's 50-some members as well as for non-tribal residents in Blue Lake, Ramsey said. Among them: fire protection, emergency service, transportation, road maintenance, water quality monitoring, curbside recycling, school programs (including subsidizing Blue Lake Elementary School's music and athletic programs since 2010), food assistance, job training and scholarships. She acknowledged that grants, and the tribe's casino, also contribute healthy sums to many of those pursuits.

In her declaration, Ramsey wrote, "Historically, the majority of Tribal members received non-Tribal public assistance, few completed high school, and alcoholism, drug abuse and various health problems were prevalent. The Tribe's housing stock, water supply, sewage disposal, and roads were all grossly substandard. Because of Mainstay and the tribe's other business enterprises, fewer tribal members require public assistance, and alcohol and substance abuse is at an all-time low and declining. Further, there is virtually no unemployment among the Tribe's members who are of working age and are able to work, college attendance is at an all-time high, and virtually all of the Tribe's members have medical coverage."

U.S. District Judge John Mendez found Mainstay's arguments persuasive enough to issue a preliminary injunction on Aug. 11, ordering the state to lift its liens and levies until the larger case is resolved.

He said in his ruling that the tribe and Mainstay had shown that "the balance of hardships tips in their favor," that they had suffered irreparable injury, and that an injunction was in the public interest -- among the requirements that must be met in order for an injunction to be granted.

The judge also ruled that the tribe was correct in its contention that the state had violated its federally recognized sovereign immunity from suits filed by any agencies and from actions like putting levies on its bank accounts and filing tax liens. Contrary to the state's assertion, the judge ruled that the tribe had not waived its sovereign immunity when it arranged to reimburse the state for Mainstay unemployment taxes, and the state had never asked it to.

But because that's only a preliminary decision, the dispute remains over the huge sum the state says Mainstay owes it for unemployment insurance -- nearly $12 million in unreimbursed unemployment payments, which with penalties and interest had actually amounted to more than $16 million when the EDD started levying Mainstay's assets back in April. The total amount now has soared beyond $19 million.

The tribe refutes the $12 million figure, and that's the gist of the original dispute.

To understand what the fight is about, it helps to know that there are two different ways an employer can pay unemployment insurance for its workers.

Mainstay is a "reimbursable employer" -- paying the state only for the exact amount the state spends on unemployment benefits for Mainstay employees. (It had to fight for that status in one of its many tussles with authorities, because the state argued leased employees weren't working directly for tribe. The state wanted it to be a tax-rated employer -- paying a flat unemployment insurance tax rate.)

Being a reimbursable employer can be a better deal if the company opting for it has relatively few unemployment claims. Nonprofits and tribes are among those who qualify for this option. But it comes with risks -- chief among them, and most pertinent to this current case: If the EDD makes a mistake in its calculations for reimbursement -- tough luck. You still have to pay.

In Ramos' declaration, he described how, in mid-2008, Mainstay discovered "significant errors" in the EDD's assessment for reimbursement, "including charges for amounts paid by EDD to individuals who were never employed by Mainstay, charges for amounts paid by EDD to individuals who, at the time the benefits were granted and paid, were actually working for Mainstay, and charges for amounts paid to individuals who were not eligible for benefits."

Ramos wrote that Mainstay determined that such erroneous charges had been going on since 2003, and it told the EDD so. The EDD insisted on payment. They began negotiating.

Ramos' declaration notes that during the negotiations the tribe paid more than $6.8 million to the EDD.

In a written statement provided to the Journal, the EDD said that "Mainstay has admitted to EDD that it does owe the department for unemployment insurance benefits paid under its reimbursable account to Mainstay workers, but challenges the amount owed." The statement adds that the millions Mainstay paid to the EDD were disability insurance and personal income tax withholdings from employees' checks. (Unemployment insurance is paid by employers, not employees.) In addition, in an interview with the Journal, Stan Adge, with the EDD's tax branch, said that Mainstay didn't make any reimbursement payments to the EDD for about 12 months between 2009 and 2010.

In April 2010, Mainstay again asked the EDD to recalculate its charges, waive the penalties and to allow the company to revert back to being a rated employer, backdated to 2009. In a letter to Mainstay's Ramos dated May 12, 2010, John Obenauer, assistant chief counsel to the EDD, denied the requests. He wrote: "It is your responsibility to pay the costs of benefits whether we made errors or not. That is a risk that you willingly took on when you made the election to become a reimbursable employer."

Although the tribe won a temporary victory over the preliminary injunction, the bigger case is still pending, with the state awaiting a ruling on its motion to dismiss the tribe's suit.


Last week, construction workers were busy applying final touches to Wild Planet Foods' new crab-handling set-up inside the new Fisherman's Terminal building at the foot of C Street in Eureka. Weighmaster Sandy Ryan was kicking about, observing. Dungeness crab season wouldn't start until possibly January up here in Humboldt County, but some work was planned with crabs from the Bay Area.

Ryan has been hiring on seasonally to work for the owner of Wild Planet Foods, Bill Carvalho, for about 11 years -- starting back when the company was called Carvalho's and was mainly canning fish. For the past couple of years, she and other seasonals and several full-time workers -- here and elsewhere on the North Coast -- were officially employed by Mainstay Business Solutions, which then leased them to Wild Planet Foods. But Ryan didn't notice when Mainstay shut down.

"I never heard it was closed until it was all done," she said, laughing. And then she noticed her paychecks were being issued by a new carrier.

Carvalho, whose office is inside a nondescript building in McKinleyville that has a surprising, jungly garden in the lobby, said he uses staffing agencies to provide temps and full-timers who work down on the docks -- a high-risk occupation -- because he saves on such things as workers' comp insurance. Outfits like Mainstay, because they work in volume, can get a better deal.

"As a really small company, it's extremely expensive to have dock employees," Carvalho said. "Workers' comp is basically doubled to get it on our own."

When Mainstay closed, it immediately hooked Carvalho up with a staffing agency called Select. (Select ultimately took on most of Mainstay's leased employees.)

"It was a pretty simple transition," Carvalho said.

After a week with Select, Carvalho switched to another, Craft Labor & Support Services, which he said offered a better rate. Craft is a small company headquartered in Washington state with an outpost in San Diego and staff in ports around the country. Craft's specialty is providing USL&H (United States Longshore and Harborworkers) workers' comp insurance to companies that use dockworkers and such. Mainstay, in fact, had hired Craft as a subvendor to handle Wild Planet Foods' USL&H-insured workers. So everybody already knew each other. Melinda Cox, who was Mainstay's regional manager based in Blue Lake, even ended up getting a similar job with Craft, said Carvalho.

"Melinda's just short of staffing goddess," he said. "And that kind of service and attention to our needs was what attracted us to Mainstay in the first place."

Cox declined to be interviewed because she had signed a confidentiality agreement with Mainstay.

While Carvalho and his crew didn't notice much during the transition, Pete Madonna, one of the owners of Craft, did.

"Everything was fine until we received a check in April that didn't clear," said Madonna, calling from his office in the city of Federal Way, Wash.

It was Mainstay's check, meant to cover the weekly payroll for Wild Planet Foods employees, he said. So Craft cut the employees' checks from its coffers and paid all the relevant taxes. Madonna said Mainstay still owes him.

"The total impact was close to $80,000 in loss," he said. "That's cash we paid out and didn't get paid back -- payroll, payroll taxes and insurance, workers' comp. I had to hire a lawyer, which is more cost, to see what we could do to collect. I'm still working on that."

But in the end Craft made out OK in Humboldt. Although Craft traditionally provides mainly dock hands, crab handlers and stevedores, it ended up taking on several other local clients (and their Mainstay workers) after Mainstay's closure. Among them were Cox and Associates, which does everything from home repair to lawn mowing, Pierson Co., which does building, developing and property management, and Blankenship Construction. Greg Pierson declined to discuss his company's dealings with Mainstay, and executives for the other two businesses didn't return phone calls from the Journal.


While businesses and individuals struggle with how to move on after Mainstay, someone, ultimately, will also have to pay. Someone has to repay the state for the disputed checks it cut to unemployed workers. Someone has to pay for ongoing treatments to former Mainstay employees under workers' comp.

And we'll have to wait for an answer to the crux of the unemployment dispute that triggered Mainstay's decision to close: Did the EDD over-assess the amount of unemployment insurance owed by Mainstay during the contested period? If so, how did it happen? Was it paperwork errors by Mainstay, by the state, by both? Or something else entirely?

It's going to be a lot to sort out.


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