05.18.2015
California Court Of Appeal Upholds Labor Code Section 3701.9 Prohibiting Staffing Companies, Labor Leasing Companies, and Professional Employer Organizations From Self-Insuring For Workers Compensation Liability

In 2012, Legislature enacted Labor Code section 3701.9 providing that “(a) A certificate of consent to self-insure shall not be issued after January 1, 2013, to any of the following. (1) a professional employer organization (“PEO”).  (2) A leasing employer [“LE”] …. (3) A temporary services employer [“TSE”],” and providing that “A certificate of consent to self-insure that has been issued to any employer described in subdivision (a) shall be revoked by the director not later than January 1, 2015.”  This effectively forbade such employers from self-insuring for workers’ compensation liability.

On May 30, 2013, in an action entitled Kimco Staffing Services, Inc., et al. v. The State of California, et al., Kimco Staffing Services, Inc., and KimstaffHR , Inc., (“Kimco”) filed suit against the California Department of Industrial Relations (“DIR”) and Christine Baker in her capacity as Director of the DIR seeking declaratory and injunctive relief.  Kimco contended Labor Code section 3701.9 is invalid and unenforceable because it violates the Equal Protection Clause of the United States Constitution because the statute impermissibly treats PEOs, employee leasing companies, and staffing companies differently from other categories of employers, all of which are permitted to self-insure for workers’ compensation liability.  The trial court sustained the DIR’s demurrer to Kimco’s complaint on the ground Kimco did not and could not allege the Legislature did not have a rational basis for enacting Labor Code section 3701.9.

Kimco appealed the trial court’s decision.  On May 8, 2015, the Court of Appeal affirmed the trial court’s decision.  The Court of Appeal explained that the rational basis for Labor Code section 3701.9 is as follows:

Unlike traditional or worksite employers, which only hire employees consistent with their business needs, TSE’s and LE’s are in the business of providing employees to other businesses, TSE’s and Le’s admittedly have an “incentive to add new clients” and to expand their payrolls.  Therefore, as the trial court observed, TSE’s and LE’s can change the scope of their workers’ compensation risk dramatically during the course of a year, by taking on new clients and adding employees to their payroll.  While a TSE’s or LE’s payroll may grow rapidly during a calendar year, the company’s self-insurance deposit would not be adjusted until the subsequent year.  [Citation.]  The potential for a rapid increase in the number of employees, coupled with the delay in adjusting the amount of the self-insurance security deposition, is a rational basis for excluding TSE’s and Le’s from the workers’ compensation self-insurance program.  [Citation.]

 In light of this decision, employers using staffing companies, labor leasing companies, or PEOs to provide workers’ compensation coverage for employees working in California should make certain that the staffing company, labor leasing company, or PEO does not purport to self-insure workers’ compensation liability and that the staffing company, labor leasing company, or PEO maintain at all times required workers’ compensation insurance.   Similarly, staffing companies and labor leasing companies using PEOs to provide workers’ compensation coverage for employees working in California should make certain the PEO does not purport to self-insure workers’ compensation liability, and that the PEO maintain at all times required workers’ compensation insurance.

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