In the recent California case of Kimco Staffing Services v. The State of California, the Court of Appeals for the 2^nd Appellate District agreed with the lower court that staffing services that provide temporary service employees cannot self-insure their workers compensation liabilities. In making this decision, the Court rejected the plaintiff’s arguments that the State’s position of prohibiting self-insurance was a violation of equal protection.

This litigation arose as a result of the 2012 adoption of §3701.9 of the California Labor Code that specifically prohibited a class of businesses from self-insuring their workers’ compensation liabilities.  The specific classes are a leasing employer (“LE”) and a temporary service employer (“TSE”). Each of these terms are defined in §606.5 of the California Unemployment Code to be a business that provides “workers to perform services for the client or customer”.  Section 606.5 then proceeds to list seven specific activities that define whether an entity is an LE or TSE:

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.

The rationale for justifying the difference between the treatment of LE’s and TSE’s with that of employer’s with standard workers’ compensation policies was the timing of making the self-insurance deposit for new employees. The timing issue was of concern because LE’s and TSE’s have a strong desire to rapidly increase their work force in any one year and if self-insured, they would not be required to increase their workers’ compensation self-insurance deposit until the following year.  This contrasts with an employer with standard workers’ compensation insurance that is required to pay an increased premium for each new employee hired.  The issue is that an LE or a TSE might increase too fast and find itself with solvency problems.  The responsibility of the workers’ compensation coverage would then fall to California’s Self-Insurers Security Fund (the “Fund”).  This in turn means that the responsibility for ensuring the injured employees who were still insured would fall upon the other self-insured employers because the Fund is financed by assessments levied upon other self-insureds.

The Appellate Court determined that solvency concerns of an LE or a TSE and the potential adverse financial impacts to other self-insured employers was a sufficient rationale to treat LE’s and TSE’s differently and prevent them from being self-insured.