California agency taps workers comp funds to probe its employees. ‘A huge slush fund’

Michael Loupe worked as a district manager for Cal-OSHA‘s enforcement branch in San Bernardino before retiring because of stress inflicted by an investigation by his agency into allegations he found ludicrous.

In 2023, the Department of Industrial Relations — Cal-OSHA’s parent agency — accused Loupe of shooting a toy bow and arrow at photographs of Gov. Gavin Newsom, DIR Director Katie Hagen and Labor Secretary Stewart Knox in the lobby of his office building.

“Why would I shoot an arrow at a picture of the governor?” Loupe said. “I voted for the guy.”

He was exonerated and stood down at 62 in 2024. He was a decorated Army veteran, a Bronze Star recipient for service in Iraq and Kuwait, but, he said, the stress from his agency investigating him for 18 months had caused him to have a stroke. He believed the actions were retaliation for his criticism of the department — he had questioned the reopening of a case after it had been closed, and he objected to a hire he considered nepotism.

The probe, conducted by an outside firm, not only cost him his health and reputation, he said, records show it cost the department an estimated $80,000, which was paid from workers’ compensation funds. State law prohibits this money from being used for anything other than funding workers’ comp claims and costs.

A review of contracts executed by the DIR from 2020 to 2026 found more than $30 million in contracts paid out of the workers’ compensation fund with little or nothing to do with workers’ compensation. They range from a $14.5 million advertising and marketing contract to millions in human resources consulting.

Elaine Howle, who served as California State Auditor for 21 years before retiring in 2021, said the practice concerned her.

“Typically if you’re going to do some kind of investigation of an employee, you’re not going to use restricted funds,” she said. “This should raise a concern in anybody’s mind, not just an auditor’s mind.”

In response to questions about the alleged practice and the investigation, DIR said in a statement that hiring an outside firm “served to ensure objectivity and impartiality,” and that the inquiry into Loupe “was not in retaliation and was properly administered.”

DIR has said this is standard practice, and that the money can be reimbursed.

“If the cost is appropriately applicable to any program funded by one of DIR’s other funds, the costs will be subsequently transferred from the WCARF to the appropriate fund,” the department said in 2024. WCARF is the Workers’ Compensation Administration Revolving Fund.

DIR spokesperson Denisse Gomez said in an emailed statement: “This is a common practice, used by many state agencies with multiple funding sources.”

The department has declined multiple requests to show whether the workers’ comp fund was reimbursed.

Jerry Azevedo, a spokesman for the Workers’ Compensation Action Network and an expert in workers’ compensation financing, said the DIR’s practice is troubling.

“The Labor Code doesn’t allow borrowing from the WCARF for non-workers comp programs,” he said. He said that issues at the Division of Occupational Safety and Health, also known as Cal-OSHA, are not connected to workers’ comp.

“Clearly, investigating internal employee complaints at DOSH has nothing to do with running the workers’ comp system,” he said. “If the money was reimbursed by DOSH, that should be easy to demonstrate. Even if it was paid back by DOSH, it raises a question over how the state is using billions in employer assessments. At its core, these assessments constitute a huge cost-shift from state government onto the private sector, on the theory that employers benefit from a strong and stable labor compliance regime. “

The bow-and-arrow investigation

According to a 2021 contract, DIR awarded a $500,000 non-bid contract to Sacramento-based Shaw Law Group to investigate employees for the department’s Office of Equity and Risk, which houses its internal audit and investigations unit. All told, DIR paid Shaw $317,786 across 34 payments, all of it from the workers’ comp fund, according to open-sourced state payment data.

This money was used to investigate Loupe and others at DIR. Loupe was investigated for seven allegations, including the bow-and-arrow accusation. Among the other six was a claim that he attempted “to sabotage or undermine” employees hired by Debra Lee, then Cal-OSHA’s deputy director and today the agency’s top official.

DIR declined to provide the Shaw contract or invoices, citing attorney-client privilege. According to another source, who did not wish to be identified for fear of retaliation, the contract was paid through the WCARF and was to investigate allegations “concerning violations of equal employment opportunity/civil rights protections.”

Shaw Law Group founder Jennifer Shaw said she did not know the workers’ comp fund was paying her firm. “We have no idea what (fund) that is,” she said of the account named in the contract. “It says it in the contract, but we don’t know what that is.”

Shaw said DIR, not her firm, decided what was investigated.

“The client determines the scope, so we don’t determine the scope,” she said.

Asked about the bow-and-arrow allegation: “I’m not even sure if we investigated that part, to be honest.”

A person familiar with Shaw Law Group’s investigations for DIR, who asked to remain anonymous because they are not authorized to comment on the matter, said at least four other Cal-OSHA officials were investigated. One was later paid a settlement by the state, the source said, “but none were as mistreated or were as obviously in the whistleblower category as Loupe.”

In a 2023 email, Loupe’s union lawyer accused Shaw’s investigator of being deceptive, of questioning him on matters “in no way relevant to the subject matter we were told the investigation would concern.”

Use of workers’ comp funds

Labor Code section 62.5 states three permitted uses for the fund: administering the workers’ compensation program, a return-to-work program for injured workers and enforcement against employers who operate without insurance.

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The money, the statute says, “may not be used or borrowed for any other purpose.” The cost employers pay for workers compensation has risen dramatically in recent years for a variety of reasons.

“Should employers really be footing the bill for internal HR disputes?” Azevedo said.

Mary Inman, one of the founders of Whistleblower Partners, a San Francisco law firm, said that DIR’s practices raise legal questions. “On its face this is the misappropriation of government funds for purposes like going after a whistleblower,” she said. “You don’t get to take funds that are earmarked for a particular program and pull it out and use it however you want to. That’s not how it works.”

Garrett Brown worked for more than 20 years as a Cal-OSHA compliance officer and later served as special assistant to the chief of the division. “What a stunning breach of public trust,” he said. “The people at DIR clearly viewed a fund, which is supposed to ensure fair treatment of injured workers, and treated it like a huge slush fund, to fund pet projects and to target whistleblowers.”

Money for a consulting firm

Some of the fund has been used to pay for an external consulting firm, now headed by a former director of DIR.

A year ago, the state auditor found Cal-OSHA delinquent in staffing, criticizing it as too short-staffed and dysfunctional to protect California’s 19 million workers. After last year’s state audit, officials from Cal-OSHA said they had a plan to turn things around. Part of that was to find ways to streamline the hiring process.

Records show more than $20 million in contracts — over half committed after the audit was published — have been allocated to CPS HR Consulting, a human resources consulting firm, now led by Katie Hagen, DIR’s former director. State payment records show $5,87 million, 92% of what DIR has paid the firm through 2025, was paid through the restricted workers’ compensation fund.

CPS HR is a Sacramento-based consulting firm with a long record of human resources analysis for the state. Current and former DIR officials described its work as ranging from “valuable and excellent” to “wasteful and a tool for upper management to justify mismanagement,” according to Julio Alfaro, a former special investigator with Cal-OSHA’s Bureau of Investigations, the unit that investigates worker deaths for criminal liability.

Last year Lee was questioned by legislators after the audit found staffing shortages and process failures had left thousands of cases inadequately investigated, including serious injuries and deaths. Cal-OSHA officials at the hearing said the agency was fixing the problem, in part by studying its classification process and the way it hires inspectors.

DIR already had been paying CPS HR for classification studies for years, some of which refer to unnamed experts who echo existing DIR and Cal-OSHA policy.

The year Newsom appointed Hagen, DIR paid the firm about $209,000. By 2024 the bill was roughly $1.8 million a year, nine times as much, nearly all of it still charged to the comp fund, according to Open FI$Cal, the state’s public spending portal, which records every payment state departments make to vendors, including which fund the money came from.

Hagen, through CPS HR, declined to comment. Geralyn Gorshing, a spokesperson for CPS HR said:“This question concerns the funding source for DIR’s contracts and therefore falls within DIR’s purview rather than ours.”

In 2023, Alfaro and other investigators wrote to Hagen and Newsom describing a staffing crisis at the bureau. Part of the problem was the perennially low pay of investigators building complex manslaughter cases. The state auditor would later find the unit had been reduced to three field investigators for the entire state, and that Cal-OSHA closed roughly 1,800 cases without referring them for prosecution.

For raising the pay and staffing shortages, “we were retaliated against and subject to an internal investigation,” Alfaro said.

That same year, CPS HR delivered a classification study of the bureau. At the time, DIR had a $518,336 contract in place to perform worker classification studies.

The study backed DIR and Cal-OSHA management’s current approach to classifying its criminal investigators. Explaining its methodology, CPS HR said it interviewed “several subject matter experts in the Enforcement Branch” intermittently over seven months. The four investigators whose jobs were the subject of the study were interviewed over six days.

“That study was BS, it still hurts,” said Chris Kuhns, another former investigator at the bureau. Kuhns and Alfaro resigned shortly after.

The toll on the investigated

The investigation funded by workers’ comp money ended with DIR clearing Loupe of all the allegations.

Whistleblower expert Inman said that investigation raises questions about the ethics at DIR internal investigations unit.

“Where did this false bow and arrow allegation come from?” she said. “Why was it taken seriously and not just knocked down if it was without merit? What happened with this case borders on sort of harassment of a whistleblower — or absolutely retaliation. If you’re now just looking at them to try and dig up dirt because you don’t like what they exposed, that’s absolutely retaliation.”

In addition to the bow and-arrow, he was accused of posting “inappropriate post-it notes…which were also witnessed by the public.”

Loupe says it was all pure fiction.

“Well, someone obviously has a vivid imagination,” he said. “I did have a box of toys on my desk because some of my employees had kids who would visit the office. There was a Nerf bow and arrow. The whole thing was just so absurd. A grown man shooting toy arrows.”

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