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Nasir and Matt discuss the staffing agency that is being accused of negligent retention of an employee who embezzled funds with the company she was placed with.

Full Podcast Transcript

NASIR: All right. Welcome to our podcast where we cover business in the news and add our legal twist. My name is Nasir Pasha, here in Houston, Texas.

MATT: And I’m Matt Staub, in an undisclosed location, not in Houston, Texas.

NASIR: Undisclosed, in the middle of the desert of San Diego which is a desert, by the way.

MATT: You know, it has been pretty warm. Today was pretty warm. Rumors are there’s going to be some more rain which it rained a couple of weekends ago. It’s pretty rare but, yeah, it never really happens.

NASIR: By the way, I think we should start a tradition. Every Monday episode, let’s talk about the weather for five minutes before we start.

MATT: It always is you mention something and I’m just staring at the window as I’m talking and usually noticing what the weather is like as I’m recording. It’s just kind of how it happens.

NASIR: Well, my wife is there right now, enjoying the weather.

MATT: Oh, is she?

NASIR: Hello to her.

MATT: It’s a big city so I probably won’t see her.

NASIR: Oh, just keep an eye out. You may run into her.

MATT: I’ll keep an eye out.

NASIR: But everything’s going on in Texas.

MATT: We got a Texas story to start off here. There was a staffing agency and a company. The staffing agency placed a certain employee with this company and what the details of it are basically the staffing agency placed this – I believe it was an accountant, or at least I’m assuming such because it was dealing with funds – but the person that they placed with this company embezzled $15 million over eight years which doesn’t even really seem possible. I mean, if you’re generating a lot of income, then okay. But, still, for any business, that’s still a decent chunk of change. I mean, that’s what? A little under $2 million a year that this person was able to embezzle out of the company.

NASIR: But what’s weird is… I think this was a “she,” right?

MATT: Yeah, she.

NASIR: She was placed as a receptionist and then she was promoted to the head of accounting.

MATT: Not even Pam Halpert could get all the way to accounting. She went from receptionist to sales. Actually, not to get too far off-track but wasn’t it Kevin who came in for a receptionist position or something? Maybe even like janitor? And Michael’s like, “You know, I had a hunch so I hired him as an accountant.”

NASIR: Exactly, and I suppose the “head of accounting” – who knows exactly what that means of how big this company is but $15 million, obviously, how you lose that money and not notice it, I’m sure it was a large enough company for that to happen.

MATT: I would think so. And so, there was this big theft of $15 million essentially and what the company was saying was this was the staffing agency that’s at fault here because they should have conducted a criminal background check on this individual because, in this instance, she did have a prior theft record. I mean, I’m sure it probably didn’t amount to $15 million in over eight years theft issue but, still, nonetheless, there was a criminal background. And so, the company was saying the staffing agency failed to notify them of this individual’s criminal record. I guess, at some point, they discovered it down the road – and I’m not sure exactly what that was – but that was kind of the bulk of their argument and the first thing you’re going to think of was, “Well, what was in the agreement between the staffing agency and the company?” Because that’s probably going to give us a good idea of who’s ultimately going to be responsible for this.

NASIR: By the way, I have more information now. You know, Jacob, our law clerk helped us research this and he linked some old article from back in 2012 and I’m just like, “Why is this relevant?” and it’s because this is the exact same embezzlement. Apparently, this goes back, even though the civil liability is more recent, apparently, this goes back to 2012 where actually three people were sentenced to prison for embezzling. I think at that time they counted it up to $13 million and now we’re at $15.

MATT: Yeah, it does reference Davis-Lynch at the bottom of the article I was reading now so it’s got to be the same one – unless they’ve had multiple huge theft issues.

NASIR: That would be horrible. Hopefully it’s not a coincidence. Davis-Lynch is a pretty big energy company and that’s down in Pearland which is in Harris County. Well, actually, it’s just outside of Harris County in Southeast Houston, basically.

MATT: What’s the weather like there?

NASIR: Weather in Pearland is very, very humid compared to Houston because it’s more south and closer to the water. I wouldn’t want to live in Pearland, for sure, especially I wouldn’t want to work at Davis-Lynch. They’re like being embezzled left and right.

MATT: You would want to work there because you basically can just get free money.

NASIR: That’s a good point.

MATT: Possibly go to jail, but…

NASIR: So, it looks like these guys were sentenced. I mean, this person, Nancy Marino was sentenced for thirty years in prison. These guys got some heavy sentences. Apparently, it took some time to go after the staffing agency which, by the way, staffing agencies, we’ve had them as clients and we’ve had clients that have used staff agencies. It is just a legal mess in the sense that a lot of companies, especially companies like this oil and gas company, they use staff agencies really to kind of get around – I don’t want to call them loopholes but, basically, the big advantage of a staff agency is usually – and this is not always the case but usually – the employer is a staffing agency and you’re hiring the staff agency to provide services and that employee will come to your office and basically act as an employee but they’re not really. But the problem is that the liability from the employer’s perspective – I should say the businesses or business client of the staffing agency – can be held responsible as a co-employer. It happened with Microsoft in California about five or six years ago where they had the same kind of setup but these so-called non-employees ended up suing and being considered what are called common law employees and, you know, that’s kind of a strange law for most people but this could actually happen. It’s a whole mess so it’s not surprising to see this company going after the staffing agency but I don’t know. What do you think? I think the court held the right decision – I mean, as far as liability for embezzlement.

MATT: Yeah. Right now, it’s gone through two stages. The initial trial court decision held that the staffing agency did nothing wrong. When you look at the facts behind it, it makes sense. I’ll just detail a couple of these. The contract itself did not require the staffing agency to conduct a criminal background check – okay. The staffing agency did not owe the company a fiduciary duty in placing employees because their contract specifically stated the staffing agency was an independent contractor – I think you just touched a little bit on that. And then, these last two which are important when we get to the Court of Appeals, basically, the trial court found the staffing agency was not negligent both in supervising the employee because the contract excluded accounting from the list of departments – remember that she went from receptionist, she was initially hired as a receptionist but not accountant – and then not negligent in hiring or retaining the employee without a background check because it was not foreseeable that the employee would engage in embezzlement as a receptionist, like I said, the position she was originally placed. That makes sense. When you think about it from that standpoint, it’s like, well, yeah, they hired her as a receptionist. The only thing I would want to know is, when the staffing agency did find out she had a criminal background – because I think that’s going to play into it as well – but let me just get into the Court of Appeals decision. It found the same thing but it found that the staffing agency could be liable for negligent retention, i.e. for continuing to employ the employee after he had found out about her criminal record and after the company had found out that they had placed her in the accounting department and failed to notify the company of this background. That’s the claim that’s still outstanding and the jury is going to decide whether this is what they’re going to look into. It was foreseeable that an employee with a theft record would embezzle money when placed in the accounting department. I mean, that I think is foreseeable. I mean, that’s directly handling funds. We’ll see how they come out on that but it’s going to depend on a couple of things in terms of when they became aware of it, how much the staffing agency I guess knew.

NASIR: What’s interesting about that kind of ruling is that a staff agency would literally have in their contract that, “Okay, we don’t do background checks so it’s your responsibility to have certain security protocols, et cetera, to make sure that you’re not embezzled against.” I mean, it wouldn’t say it like that but my point is, if they said some kind of disclaimer to that effect, even if they knew she had a criminal background and she was placed in the accounting department, that kind of contractual language could protect them in that respect. The court mentions – and I think even the article that talks about this mentions – things that you can do when you’re dealing with these kind of staff agencies. But, like I said, these staff agencies, there are just so many legal issues – both from an employer perspective as the client but also from the staffing agencies from an employer perspective. There’s always misclassification issues, there’s issues when it comes to wage and hour laws, and very seldom do I see a completely clean kind of relationship when it comes to this without any issues – I mean, both from large to small, it’s just a very highly contested issue. But, by the way, we keep saying “head of accounting,” this criminal case back in 2012 actually says she went from – this is Nancy Marino, by the way – she went from receptionist all the way to chief financial officer of actually becoming an officer of the business. That’s according to the criminal case, apparently. They were going through some kind of an internal audit and they couldn’t locate a copy machine that was purchased and maintained with company funds. Apparently, this copy machine ended up being at the business of I think the son of Marino at some business and then they did a forensic accounting and apparently were able to find out that all this money had been taken and there was some co-conspirators on how this was taken which goes to show you, you know, when you’re putting people in trusted positions of your business, even if you trust them, you do have to have some checks and measures. It’s kind of a sad story, you know. This was a family-owned business and probably still is. Pretty tough loss, I would say.

MATT: Yeah. I mean, I guess she did a pretty good job of embezzling the funds if she was able to take that much. The only thing that triggered it was that copier.

NASIR: Yeah, that’s how they did it. They basically created fake invoices to made-up companies and that’s the problem when you have three people in your business that are entrusted sources because you could have a CFO and then a controller or someone else – someone separate than the CFO to actually write checks. But, if they’re all in on it then it’s like, what kind of checks and measures can you have when that kind of corruption goes so deep into your organization?

MATT: Yeah. And so, you mentioned staff agencies, how it can be tricky. For the employer, employment law, especially in California – this obviously wasn’t in California but generally speaking – it already can be complicated enough. And then, just involving the staffing agency, you were talking about the co-employment issues. I mean, the IRS in a lot of state statutes use a twenty-factor common law test. I mean, we’ve talked about that many times before on the employee independent contractor multifactor test and how there’s no black and white and it’s just so hard to decipher.

NASIR: Yeah.

MATT: You could be fine with using staffing agencies. You just have to be very careful and very narrowly defined in what you’re getting out of it and what the contract says.

NASIR: Absolutely. Even when the appellate court mentioned background checks, that’s problematic too because, when you do background checks of your employees, every state has their own guidelines on how you do that but, especially a staff agency, you’re assuming that they’re going through a lot of employees and doing a lot of background checks. You can very easily fall into a trap of discrimination based upon those background checks – illegal discrimination, that is. Like I said, it’s just a mess of liability and it’s not uncommon to see even those that have retained counsel and advised them accordingly just because of the nature of it just being rampant of violations here and there. I know for a fact, the IRS and their state equivalent agencies are going after are really scrutinizing of these kinds of relationships for sure. But then, again, the law is a little weak in the enforcement of that, to be fair.

MATT: That’s what I was going to ask you. Based on what the jury’s going to look into on this one claim for negligent retention, I mean, do you think that it’s possible that the staffing agency is going to be held liable, at least to some extent?

NASIR: Well, based upon the appellate court’s opinion, I don’t think so. I’d be surprised. Frankly, I don’t think they should because embezzlement is an intentional tort. You know, it’s an intentional criminal act and, even if they have a background, maybe if they have a background of stealing money or embezzling and, like the appellate court says, they knew that they were getting into a position where they could do this, maybe. But, even then, it’s not like a clear cut. It has to be compelling that somehow the staffing agency had a duty and that the staff agency was in the best position to prevent the harm. But the reality is that, even if somebody has that kind of background, it was a bigger problem than just this employee. They had two other co-conspirators to actually go through this. By the way, even the criminal article from 2012, it says three of six people were charged. And so, there’s an indication – or you can gather from that – there might have been more people involved and perhaps they didn’t have enough against them or maybe they didn’t have anything to do with it but it seems very unique.

MATT: Yeah, and there’s no mention that the other people were hired by the same staffing agency so I would assume that they weren’t.

NASIR: Unless the staff agency is like they just hire criminals and that’s it, and all three were placed in that position. It might be one of those kind of staffing agencies.

MATT: Maybe you’ll get selected for that jury. Too much knowledge of the case, but…

NASIR: Well, jury duty seems to be strict out here. Matt, you and I found out Los Angeles County is strict too because, in San Diego – I’m not advising this for those listening but – if you don’t show up, they just stop sending you requests. But I showed up when I was called in San Diego. You have too, right? We’ve talked about this.

MATT: The last time I was called in San Diego, it was the first day that you could be called for the year so it was like January 2nd or something. I’m trying to think what year that was. Maybe 2011? 2012? I forget. I mean, I showed up. We sat there for a bunch of hours. They gave us like a two-hour lunch and then we came back for I think 45 minutes and then they called names throughout the time and then they let everyone else go so I didn’t really have an opportunity. I guess I could have not showed up like you suggested.

NASIR: I didn’t suggest that. I don’t think I did. Don’t get me in trouble.

MATT: The nice thing was, at the time, I was living very close to where it was and I worked close so, I mean, despite the fact of not being able to be in an office but I at least could walk home for the lunch.

NASIR: Mine was so easy. I was there for like an hour or two, sitting in that waiting room, and I just went to the clerk and I’m like, “This is what I’m going to tell the judge of the reasons why I can’t go,” and then she just told me to leave. I later found out that it wasn’t a clerk. It was just some random person that I was talking to. Well, I think that’s our episode.

MATT: I think so.

NASIR: Our Texas-only episode for once. All right. Thanks for joining us.

MATT: Keep it sound and keep it smart.

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Legally Sound | Smart Business covers the top business stories with a legal twist. Hosted by attorneys Nasir N. Pasha and Matt Staub of Pasha Law, Legally Sound | Smart Business is a podcast geared towards small business owners.

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