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A California appeals court has upheld the California law that prohibits temporary services employers (“TSEs”) and leasing employers (“LEs”) from self-insuring their workers’ compensation liability even though other employers are permitted to self-insure.

The Case

In the case filed against the State of California, by and through the California Department of Industrial Relations (the “Department”) and Christine Baker, in her official capacity as director of the Department (collectively, “California”) by Kimco Staffing Services, Inc., and KimstaffHR, Inc. (together, “Kimco”) Kimco alleged that:

-       Kimco is a TSE that provides staffing solutions to various industries, including financial, healthcare, and technical/engineering;

-       Kimco has an internal staff in California of 137 employees, an average weekly workforce of more than 4,500 employees, and has filled approximately 300,000 staffing positions in California; and

-       KimstaffHR is an LE with a corporate office that employs 17 individuals in California and that has more than 2,000 client-based employees who provide services to more than 100 businesses in the state.

Kimco alleged a violation of equal protection under the Fourteenth Amendment to the U.S. Constitution (the first cause of action) and deprivation of equal protection under the California Constitution (the second cause of action). Kimco contended that California Labor Code Section 3701.9, which eliminated the right of TSEs and LEs to self-insure, was invalid because it singled out these employers and prohibited them from participating in California’s workers’ compensation self-insurance program. In doing so, Kimco alleged, Section 3701.9 “treats similarly situated entities differently and arbitrarily, and irrationally distinguishes between them.”

California contended that, even accepting the allegations as true, the legislature was within its authority in denying TSEs and LEs, as opposed to worksite employers, the privilege of being self-insured. California argued that Kimco had failed to allege sufficient facts to show they were similarly situated to worksite employers and, as such, that Kimco had failed to plead that the difference in treatment amounted to a denial of equal protection.

California asserted, moreover, that a rational basis existed for the difference in treatment, in that TSEs and LEs posed a different type of risk than worksite employers. California contended that, unlike worksite employers, TSEs and LEs could quickly change the scope of risk dramatically by adding employees and expanding into new industries. According to California, an employee staffing company had a financial incentive to increase the number of employees on its payroll because its income and profit grew as its payroll expanded. In contrast, California contended, a worksite employer did not have the same incentive to expand the number of employees on its payroll because its earnings did not increase with every new hire.

California explained that the concern addressed by Section 3701.9 was that a self-insured staffing company might grow rapidly during a calendar year without a concomitant increase in its workers’ compensation self-insurance deposit. As California pointed out, self-insured employers did not pay insurance premiums; instead, they posted a security deposit each year, and a self-insured employer would not have to increase the security deposit for its increased payroll until the following year, unlike a typical employer with workers’ compensation insurance, which was required to pay an increased premium on newly hired employees as soon as they were hired. When a self-insured employer’s security deposit was insufficient, California continued, the obligation for the loss fell on the Self-Insurers’ Security Fund and other self-insured employers might be charged a pro rata share of the funding necessary to meet the obligations of an insolvent self-insurer.

Accordingly, California argued that a rational basis existed for Section 3701.9’s differentiating between worksite employers that managed their own workforce and those employers that only were nominal employers providing payroll and other services to worksite employers.

The trial court found that a rational basis existed for treating TSEs and LEs differently from other employers with respect to self-insurance, and the dispute reached a California appeals court. 

California Law

California Labor Code Section 3701.9 provides:

(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. [¶] (2) A leasing employer, as defined in Section 606.5 of the Unemployment Insurance Code. [¶] (3) A temporary services employer, as defined in Section 606.5 of the Unemployment Insurance Code. [¶] (4) Any employer, regardless of name or form of organization, which the director determines to be in the business of providing employees to other employers. [¶] (b) 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.

Labor Code Section 3701.9 (emphasis added.)

The California Unemployment Insurance Code provides:

[A] “temporary services employer” and a “leasing employer” is an employing unit that contracts with clients or customers to supply workers to perform services for the client or customer and performs all of the following functions: [¶] (1) Negotiates with clients or customers for such matters as time, place, type of work, working conditions, quality, and price of the services. [¶] (2) Determines assignments or reassignments of workers, even though workers retain the right to refuse specific assignments. [¶] (3) Retains the authority to assign or reassign a worker to other clients or customers when a worker is determined unacceptable by a specific client or customer. [¶] (4) Assigns or reassigns the worker to perform services for a client or customer. [¶] (5) Sets the rate of pay of the worker, whether or not through negotiation. [¶] (6) Pays the worker from its own account or accounts. [¶] (7) Retains the right to hire and terminate workers.

Unemployment Insurance Code Section 606.5.

The Appellate Court’s Decision

The appellate court affirmed.

In its decision, the appellate court found that a rational basis existed for treating TSEs and LEs differently from other employers with respect to self-insurance. It reasoned that TSEs and LEs were in the business of providing employees to other businesses, so TSEs and LEs had “an incentive to expand their payrolls.” According to the appellate court, TSEs and LEs could “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 potential for a rapid increase in the number of employees, coupled with the delay in adjusting the amount of the self-insurance security deposit, was a “rational basis” for excluding TSEs and LEs from the workers’ compensation self-insurance program, the appellate court concluded.

The case is Kimco Staffing Services, Inc. v. California, No. B257258 (Cal. Ct.App. May 8, 2015). Attorneys involved include: Glassman, Browning, Saltsman & Jacobs, Anthony Michael Glassman and Rebecca Nell Kaufman, Beverly Hills; Roxborough Pomerance Nye & Adreani, Nicholas P. Roxborough, and Michael Adreani, Woodland Hills, for Plaintiffs and Appellants; Christopher Jagard, Chief Counsel, Fred Lonsdale and Vinodhini R. Keller, Staff Counsel for Defendants and Respondents.