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Zefco Fraudulent Accounting for Workers and IRS Class Action

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It’s not unusual to see class actions taking employers to task for improper payment schemes that allow them to underpay workers. This class action takes things farther: It claims that Zefco, Inc. and its operators William and Lanette Zearley had such improper payment schemes that they led to false reporting and the underpayment of taxes to the Internal Revenue Service (IRS).

The class for this action is all individuals employed by Zefco, at any time between October 18, 2013 and the present, on whose behalf Defendants willfully filed a fraudulent return with the IRS.

Plaintiff Cody Queen worked at Zefco as an account manager while (unluckily for Zefco, it appears) obtaining an accounting degree. 

Queen and other similar employees worked more than forty hours per week. However, Zefco did not pay them a proper, hourly overtime rate. It gave them an “overtime per diem.” This was “an untaxed lump sum payment based on the estimate hours of overtime worked” that week, the complaint says. 

The complaint says that the company “paid other similarly situation employees their straight hourly wage for hours worked in excess of forty hours within a workweek.” The complaint alleges that the company “intentionally misclassified similarly situated employees as independent contractors to avoid paying overtime premiums and providing healthcare insurance, workers’ compensation coverage, Family and Medical Leave protection, and other employee rights and benefits.”

The company also required workers to complete a “probationary period” after they were hired. During this probationary period, the company did not deduct federal income taxes from their paychecks. What does this mean? The complaint claims that the company “willfully and intentionally did not report the income that [Queen] and similarly situated employees earned during their probationary periods” on their W2s.

The complaint alleges that the workers’ W2s are fraudulent because they do not report the pay earned during their probationary periods. If the probationary period began in one year and ended in the next, the complaint says, then both years’ W2s are fraudulent.

Also, the company “routinely issued bonus checks without deducting taxes to [Queen] and other employees … from 2015 until the IRS audit in 2018.”

In addition, the complaint says that the company “failed to issue any tax form for similarly situated employees misclassified as independent contractors in at least 2013 and 2014.” 

The complaint further alleges that invoices and payments sent to Defendant Zefco for services performed routinely were deposited into Defendant William Zearley’s personal account and not reported to the IRS. This means that during the company’s IRS audit in 2018, William and Lanette Zearley “successfully concealed from the IRS several millions of dollars of invoices and payments due to Defendant Zefco…”

Finally, the complaint claims that the Zearleys “ordered [Queen] to falsify records in furtherance of their scheme to conceal information from the IRS. [Queen], therefore, had no alternative but to resign from his position shortly thereafter.”

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