Staffing Companies:
Know Your Rights And Be Prepared

By Lorne Lilienthal

One of the latest trends for California employers in dealing with the ever-increasing high costs of workers’ compensation insurance is the use of staffing companies (also known as payroll companies or employee leasing companies). Instead of directly hiring employees, as has been the tradition, more and more employers are turning to staffing companies as an alternative means of obtaining labor. In this scenario, workers are employed by a staffing company who, in turn, “leases” these workers back to the employer. In this regard, the staffing company assumes all responsibility of workers’ compensation insurance which would be a worrisome headache to most employers.

Unfortunately, staffing companies can encounter a specific problem concerning workers’ compensation insurance if an insurance company issues a notice of policy cancellation. Usually, the notice is not only sent to the staffing company, but also to all employers to whom the staffing company leases its employees. A state of upheaval then ensues because the failure to maintain workers’ compensation insurance is often considered a material breach of the staffing agreement. Consequently, staffing companies encounter a barrage of complaints from employers concerning a possible lapse of coverage, thus disrupting all normal business operations. Fortunately, the embarrassment and disruption that occurs from a policy cancellation notice can be minimized and controlled.

Know Your Rights & Your Insurance Policy

Pursuant to Insurance Code 676.8, a workers’ compensation policy cannot be cancelled without prior written notice. Depending on the basis for the cancellation, the notice requirement might be as few as ten days (e.g. failure to pay premium) or as long as thirty days (e.g., failure to comply with safety laws).

In addition, an insurance policy might provide its own notice requirements. For example, even though the law requires a minimum of ten days notice under certain circumstances, some insurance companies have been known to issue policies that require thirty days notice for a cancellation for any reason. Other insurers may issue a preliminary warning letter before actually sending a notice of cancellation letter.

Importantly, if additional time is needed to correct the problem or address a policy dispute, most insurance companies provide an internal administrative grievance procedure where, if a complaint is filed, the cancellation will be suspended until the dispute is resolved. This procedure can be very effective for obtaining sufficient time to remedy the situation. Always refer to your policy to determine your rights and obligations when faced with a notice of policy cancellation.

Advising Your Clients

Staffing companies need to mitigate their embarrassment and troubles by acting quickly. Once a warning letter or cancellation notice has been issued, immediately send a form letter to each employer explaining that actions are being taken to prevent a lapse of coverage and that they will be notified promptly when the matter has been resolved. Staffing companies can save a great deal of time and aggravation by simply communicating directly with the clients and addressing coverage issues head-on.

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