Court of Appeal Decision Holds Co-Employers Liable to Self-Insurers’ Security Fund When Payroll Employer Fails

October 20th, 2017

A California Court of Appeal sitting in Sacramento issued an important opinion on September 15, 2017, regarding the responsibility of employers who borrow employees from another employer when those employees file workers compensation claims. The case, Self Insurers Security Fund v. Blue Lake Rancheria, et al., was brought by the Security Fund after the failure of an employee staffing company, Mainstay Business Solutions, which was an arm of the Blue Lake Rancheria tribe. Mainstay was self-insured for workers compensation liability. In 2011 Mainstay stopped paying hundreds of workers compensation claims, and those claims became the responsibility of the Security Fund. When the Security Fund sued for reimbursement from the worksite employers, they argued that under their contracts, Mainstay had agreed to assume that responsibility. The court of appeal held that employers who obtain employees from another company which is self-insured for workers compensation must reimburse the Security Fund if the employer providing the employees fails to pay the claims. The fact that the company providing the employees promised to handle any compensation claims does not absolve the borrowing employer of responsibility for the claims, and such a contract will not provide a defense to an action by the Security Fund seeking recoupment of the claim costs from the employer who borrowed the employees.

This opinion is yet another wake up call to employers who use temporary or leased employees, or who otherwise borrow employees from, or share employees with, another employer on the jobsite. First, such employers and their insurance brokers should carefully review any agreement under which they obtain employees from another employer to make sure the other employer’s commitment to handle and pay workers compensation claims is clear, unequivocal, and enforceable in court in California. If it is not, the borrowing employer must purchase its own insurance. Second, the borrowing employer should obtain proof that the other employer has a valid workers compensation policy which will cover any claims made by the borrowed employees, and that the borrowing employer is covered under that policy as an “other insured.” Do not assume that such a policy exists or accept vague representations. Third, if the other employer is self-insured, the borrowing employer should make sure the other employer has a valid, current certificate of consent to self-insure issued by the Department of Industrial Relations. Note that since 2013 staffing companies can no longer legally be self-insured for workers compensation in California. And finally, recognize that a borrowing employer assumes the full financial risk of any compensation claims if the other employer is self-insured for workers compensation and fails to pay the claims for any reason.

You can read the published opinion here.