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This is the same guy that wanted to borrow tools of yours after he left, right? Unbelievable!
Maybe you can call him and in as calm a voice as you can, tell him that since he's decided to make things ugly, you may do the same, including calling the Dept of Labor, the tax man, etc, just to check to make sure he's doing things by the book, including worker's comp, paying taxes, etc.
IMHO the last thing you ever want to do is give a competitor a reason to want to ram you into the ground. Looks like he's just done that.
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