California Court Affirms Penalty Against Employer for Failure to Obtain Workers' Compensation Insurance
Insurance Law Update
Starving Students, Inc. v. Department of Industrial Relations, California Court of Appeal
In Starving Students, Inc. v. Department of Industrial Relations, 125 Cal.App.4th 1357, 23 Cal.Rptr.3d 583 (2005), the California Court of Appeal affirmed a $100,000 penalty assessed against an employer who failed to obtain workers’ compensation insurance from a carrier authorized to issue workers’ compensation insurance in California.
Starving Students, a moving company with approximately 300 employees, hired Human Dynamics Company (“HDC”), an employee leasing company, to obtain workers’ compensation insurance. HDC obtained insurance from ICA, which was not authorized to write workers’ compensation insurance in California. The Division of Labor Standards Enforcement (“DLSE”) issued a stop order requiring Starving Students to cease using employee labor until it obtained workers’ compensation insurance through an authorized carrier. The DLSE also assessed a penalty against Starving Students in the amount of $100,000.
HDC then advised Starving Students that it had obtained alternative coverage through another employee leasing company and that the insurer was authorized to write insurance in California. Starving Students protested the stop work order and the penalty. At the hearing, the DLSE presented evidence that the insurer, Kemper, had not agreed to provide the insurance and that no policy was in effect.
Starving Students filed a petition for writ of mandate ordering the DLSE to set aside the order affirming the penalty assessment. The trial court concluded that California Labor Code §3727.1, which authorizes the DLSE to withdraw a penalty assessment, did not apply, and that the penalty was not unconstitutional.
The court of appeal affirmed, holding that the penalty was mandatory and was not unconstitutional. While Starving Students was assessed a $100,000 penalty for failing to obtain workers’ compensation insurance from an authorized carrier, the appellate court observed that Starving Students had previously saved more than $200,000 in premiums by obtaining insurance through an unauthorized carrier. Accordingly, the court held that the penalty was constitutional as applied to the facts of the case.