How Workers' Comp Could Get Mangled

It started routinely enough. Two months ago, armed with orders from California's Labor Standards Div., state officials arrived at a two-story storefront building next to a Texaco station in Torrance, Calif. Once there, they served papers ordering the occupant, an employee-leasing company called Stafcor that supplies large groups of garment workers to Los Angeles employers, to either procure temporary workers' compensation insurance or shut down.

But what started out as enforcement on a routine bit of state regulation has become the latest--and possibly most significant--challenge yet to California's wobbly $11 billion-a-year workers' compensation insurance program.

LOOPHOLE. Stafcor, a unit of Dallas-based Employee Staffing Services Inc., successfully blocked California's order in federal court in San Francisco. The temporary restraining order may not hold for long. But the issues raised won't die soon. Indeed, California officials openly worry that the little-known case could allow dozens of other companies to escape paying into the state's workers' compensation fund. "A lot of other companies would just love to do the same thing as this one," frets Lloyd W. Aubry Jr., director of California's Industrial Relations Dept., which administers the workers' compensation program. "That means a weaker program and some workers that may eventually suffer."

At issue is Stafcor's method of coverage. Using a plan first developed in Texas, where workers' compensation is voluntary, Stafcor administers its own workers' comp program by combining it with its health-insurance plan. The company claims that its so-called "24-hour program"--it covers workers on and off the job--is entirely legal under the federal Employee Retirement Income Security Act of 1974 (ERISA).

That federal law, passed to guarantee workers' pension benefits, gives Stafcor the loophole it needs to avoid California's more rigorous workers' compensation regulation, the company claims. By doing that, says Stafcor's San Francisco-based attorney, Karen E. Ford, the company can provide workers with full benefits while saving as much as 40% of the average $4 to $5 per $100 of payroll that California companies now pay to cover their workers in the state's program.

California officials say they can't challenge such numbers because they don't have enough information about Stafcor's operations. And they can hardly dispute the underlying problem that led Stafcor to go its route: Wracked by exploding litigation and medical costs, California's workers' compensation premiums are now among the highest in the nation. In the past decade, the premiums have risen at an average rate of 10% annually.

But Stafcor's approach could add other problems, such as forcing an overwhelmed federal court system to resolve payment disputes routinely handled by the state administratively. And it could lead to bands of underfunded companies that lack the resources to handle major claims. "It could be open season for a lot of disreputable companies," says John M. Rea, chief counsel for California's Industrial Relations Dept. "They'll provide the cheapest coverage around, but you'll never get a cent from them."

PULLING THE REINS. The case has implications beyond California. Employers in Oklahoma, Texas, and New Mexico have adopted programs similar to Stafcor's, says Rea. Already, some have failed under the weight of injury costs. That prompted the Labor Dept. to intervene in the case. In a letter to U.S. District Court Judge Stanley A. Weigel on Nov. 25, the department wrote that the 1974 ERISA statute was never intended to supplant statewide regulation of workers' compensation plans. Meanwhile, California Insurance Commisioner John Garamendi has warned state employers of companies "fraudulently marketing ERISA insurance policies as a substitute for workers' compensation insurance."

While the Stafcor case plays out, California struggles to rein in its exploding workers' comp program. Worried that sharply higher costs are forcing companies to flee California, Republican Governor Pete Wilson called a special session of the Democratic-controlled state legislature two months ago in a losing attempt to shave the program's costs.

Both sides agreed to launch a pilot program with five companies, allowing them to twin their health and workers' comp programs to save on administrative costs, a la the Stafcor model. Garamendi, a likely 1994 gubernatorial candidate, has proposed extending the program to every company in the state.

Until the political wrangling produces a compromise, however, California's workers' comp travails will continue. On Nov. 30, Garamendi refused to allow a 12.6% premium increase for insurance companies writing workers' comp policies. That left the carriers with hefty cost hikes and no new revenues to cover them. And it probably made the cost-cutting loophole that Stafcor found look even better to many of them.

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