No Sympathy For The Unwary Employer!

By Alex Sarajian

The firm of Roxborough, Pomerance & Nye is yet again at the forefront of protecting employers’ rights from devastating penalties assessed against California employers by the Department of Industrial Relations for not procuring workers’ compensation insurance through a state-admitted carrier. Unwary California employers recently discovered that the Department of Industrial Relations does not discriminate in imposing its crippling penalties against both uninsured employers, and those employers who made a good faith attempt to secure workers’ compensation for their employees, albeit through an out-of-state carrier. Most unsettling is the fact that the lower courts and administrative tribunals faced with challenges to “Stop Order Penalty Assessments” are consistently deferring to the State Legislature to address the constitutional issues raised by the stifling penalties.

In the last month, Roxborough, Pomerance & Nye filed two separate appeals in the Court of Appeals, Second Appellate District, challenging the Stop Order Penalty Assessments against two employer clients who were insured through an out-of-state carrier. The constitutional challenges centered on whether the Stop Order Penalty Assessments were inequitable and in violation of the employers’ due process rights when the employer secured workers’ compensation through an out-of-state carrier. It will be some time before the Court of Appeals renders a decision with respect to the issues raised on appeal. Thus, California employers should be cognizant of the following:

1. The Department of Industrial Relations may at any time conduct a random inspection of the employer’s premises and seek proof of workers’ compensation insurance coverage through a state-admitted carrier.
    
2. In the event the California employer cannot produce proof of workers’ compensation insurance through a state-admitted carrier or cannot provide a certificate of consent to self-insure, the Department of Industrial Relations will issue a Stop Order pursuant to Labor Code 3710.1. The Stop Order will require the employer to cease operations until the employer is in compliance with Labor Code 3700 which requires an employer using employee labor to be insured through an insurer “duly authorized to write compensation insurance in this state.”
    
3. The Department of Industrial Relations will at the same time the Stop Order is issued serve a Penalty Assessment Order on the employer to pay the sum of $1,000 per employee (maximum of $100,000) at the time the order is issued and served, as an additional penalty for being uninsured pursuant to Labor Code 3722.
    
4. All challenges to the Stop Order Penalty Assessments will result in the State courts and administrative agencies deferring to the Court of Appeals and/or the State Legislature to address the Constitutional challenges to the penalties.
    
5. Challenging the Stop Order Penalty Assessments can cost thousands of dollars in attorneys’ fees and costs, making such appeals cost prohibitive for most California employers.

Keeping these points in mind, California employers should always obtain workers’ compensation coverage through a duly licensed state-admitted insurer to assure compliance with Labor Code 3722 until such time as the Court of Appeals or the State Legislature provide further guidance on this critical issue. This holds true especially for California employers who rely on staffing companies to provide workers’ compensation insurance for the staffed employees.

Feel free to contact the firm with questions relating to the above-mentioned issues.

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