Court Upholds Banning PEOs, Temp Firms, and Staffing Companies From Self-Insurance

By: Brad Cain

A California Court of Appeal agrees that the Legislature had a rational reason to exclude temporary staffing firms and professional employer organizations from self-insuring their workers’ compensation obligations. And that, despite plaintiff’s allegation, there was no violation of the constitution’s equal protections clause. The decision upholds an essential component of the SB 863 reforms that required plaintiff Kimco Staffing Services to begin insuring its workers’ comp obligations in the commercial market effective Jan. 1, 2015. Barrett Business Solutions, Inc (NASDAQ: BBSI) was also affected and did not press a legal challenge.

The decision is a victory for the Department of Industrial Relations and the administration and could be a positive sign that the reforms may survive similar legal arguments. Other legal challenges to provisions of SB 863 are taking a similar stance and claim that the reforms violated the equal protection clauses in the U.S. and state constitutions.

“As the trial court found, a rational basis exists for treating [temporary services employers or TSEs] and [leasing employers or LEs] differently from other employers with respect to self-insurance,” presiding justice Lee Smalley Edmon wrote for the Second District Court of Appeal in the case of Kimco Staffing Services v. the State of California. “TSEs and LEs can dramatically change the scope of their workers’ compensation risk by adding new clients and new employees, but the self-insurance deposit would not be adjusted until the subsequent year.”

The court noted that the potential for a rapid increase in exposure coupled with the inherent delay in collecting a larger security deposit “is a rational basis for excluding TSEs and LEs from the workers’ compensation self-insurance program,”

The court also noted that the Department of Industrial Relations lacked the ability to monitor effectively temporary staffing firms and professional employer organizations (PEOs) on an ongoing basis.

That point was brought home in the case of Barrett Business Solutions, which DIR discovered was under-reserved. Under deadline, Barrett had to borrow money in order to post adequate reserves.

A provision in SB 863 created a prohibition disallowing PEOs, leasing employers and temporary staffing firms from obtaining certificates of self-insurance as of Jan. 1, 2013 – the effective date of the bill. It also required that any certificates already issued prior to that effective date be revoked as of Jan. 1, 2015.

Kimco challenged the ban on constitutional grounds maintaining that it violated the equal protections clause of both the U.S. and California constitutions by barring firms such as itself from self-insuring, while still allowing self-insurance as an option for other employers.

Kimco operates as two separate companies, Kimco Staffing, and its PEO KimStaffHR. Both operations self-insured beginning in 2003 but are now covered by a large deductible policy issued by Zurich.

Kimco’s attorney Nicholas Roxborough tells Workers’ Comp Executive that no decision has been made on appealing the ruling to the California Supreme Court.

Mainstay Debacle Cited

As part of its case, attorneys for the state noted the debacle that followed the failure of Mainstay Business Solutions as part of the Legislature’s rational basis for treating staffing firms and PEOs differently than other self-insured employers. Mainstay’s failure as the “‘paper’ employer” forced the Self-Insurers’ Security Fund – and therefore other employers – to assume the workers’ comp liabilities for approximately 700 workers.

The state argued that this debacle was the rational basis for the Legislature to exclude PEOs and temporary staffing firms from self-insurance. The trial court and now the court of appeal agreed and rejected Kimco’s argument that the Office of Self Insurance Plans already has the authority to require an increase in a security deposit before a company’s annual report is filed.

The court noted “it is fanciful to suggest the Department has the ability to monitor TSEs/LEs on an ongoing basis to determine whether the scope of the risk has changed between reporting periods.”

Because the court found the Legislature had a rational basis for excluding staffing firms and PEOs from self-insurance it did not have to address Kimco’s other claims.

“As the trial court found, the Legislature reasonably could conclude that the annual method of determining the self-insured security deposit based on the self insured’s projected losses and liabilities calculated as of December 31 of each year is inadequate to account for a potential exponential increase in risk during a calendar year, notwithstanding the Department’s ability to audit and adjust security deposits,” the court wrote. “Thus, a rational basis exists for treating TSE’s and LE’s differently from other employers with respect to self-insurance. In sum, plaintiff did not and cannot allege a violation of equal protection.”