2005-3

Division of Labor Standards Enforcement Lacks Discretion to Withdraw Employer Penalty for Failure to Obtain Workers’ Compensation Insurance.

In Starving Students, Inc. v. Dept. of Industrial Relations of Labor, 2005 DJDAR 911 (Cal. App. 2nd District, filed January 24, 2005), the California Court of Appeal reviewed an employer’s appeal of the court’s denial of a petition seeking an order directing the DLSE to withdraw or reduce a $100,000 penalty assessment for the employer’s failure to obtain workers’ compensation insurance from an authorized insurer. The Court affirmed the lower court’s decision and held that the DLSE does not have discretion under Labor Code § 3727.1 to withdraw the penalty assessment and furthermore, the assessment is not unconstitutional.

The employer, Starving Students, is a moving company with approximately 300 employees in the State of California. The employer obtained its workers’ compensation insurance from a company that was not an authorized California insurer. The employer’s premiums were $75,000 per month. In March of 2003, the deputy labor commissioner issued a Stop-Order Penalty Assessment, ordering the employer to cease using employee labor until the employer obtained insurance from an authorized insurer and to pay a penalty of $100,000. The employer did not procure such insurance right away, though the employer ultimately obtained insurance from an authorized insurer for $175,000 a month. The DLSE would not withdraw the penalty.

The employer filed a petition for writ of mandate to set aside the penalty. The employer argued that the DLSE had discretion to withdraw the penalty under Labor Code § 3727.1. The trial court concluded that the penalty statute was mandatory. The trial court also concluded that Labor Code § 3727.1 did not apply and that the penalty was not unconstitutional. The Court of Appeal affirmed.

Labor Code § 3710.1 authorizes the issuance of a stop order in the event that an employer fails to secure the payment of compensation insurance as required by § 3700. Labor Code § 3722 states that the director "shall" issue and serve a penalty at the time that the stop order is issued. The penalty assessed is $1,000 per employee, with a maximum penalty of $100,000.

Labor Code § 3727.1 states that "The director may withdraw a stop order or a penalty assessment order where investigation reveals the employer had secured the payment of compensation as required by Section 3700 on the date and at the time of service of such order. The director also may withdraw a penalty assessment order where investigation discloses that the employer was insured on the date and at the time of an injury or claimed injury, or where an insured employer responded in writing to a request to furnish the status of his workers' compensation coverage within the time prescribed."

The Court found that the latter two provisions were inapplicable in this case. There was no issue regarding injured employees. The only applicable provision for relief would be if the employer had "had secured the payment of compensation as required by Section 3700 on the date and at the time of service of such order." The record was uncontradicted that the employer had failed to secure such insurance at the time the stop order was issued.

With respect to the question of the constitutionality of the assessment, the Court found that the statute is neither unconstitutional on its face or as applied. The Court found that the statute was not unconstitutional on its face as the penalty is limited to $100,000 and tailored to the size of the employer. Furthermore, the penalties are not assessed equally regardless of culpability - an employer whose conduct is more culpable may be found guilty of a misdemeanor.

The penalty is also not constitutionally excessive as applied. The employer saved more than $200,000 in premiums by obtaining insurance from an unauthorized carrier. The penalty assessed is less than half of what the employer saved. Furthermore, the employer was a large and sophisticated employer in need of workers’ compensation insurance.

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Employer Required to Provide Employee with Copies of Public Records Uncovered in an Investigation

In Moran v. Murtaugh, Miller, Meyer & Nelson LLP, 2005 DJDAR 1305 (Cal. App. 4th Dist., filed January 31, 2005), the Court held that "where an employer conducts an investigation on suspicion of employee wrongdoing or misconduct, pursuant to Civil Code § 1786.53 the employer must furnish to the employee copies of any public records uncovered by a background check within a reasonable time after the investigation concludes, rather than a fixed period."

Plaintiff Moran was a paralegal for defendant law firm. An associate at the firm conducted a computerized search which revealed that Moran was a party in three civil cases. This information also revealed that Moran had several felony convictions, including grand theft and burglary. The associate anonymously gave this information to two partners. The next day, the partners asked Moran if he had any felony convictions. When he responded in the affirmative, Moran was terminated. Several weeks later, Moran requested a copy of the public records upon which the decision to terminate was made, citing the Investigative Consumer Reporting Agencies Act. This information was mailed to him within a few days.

Civil Code § 1786.3 governs disclosure of background checks conducted by employers. Essentially, any information obtained in a background check must be provided to the "consumer." The employer must provide the public records so that the consumer may prevent or correct an adverse employment action, if that information is attributable to identity theft or is otherwise erroneous.

The defendant firm attempted to argue that this statute did not apply as the decision to terminate Moran was based on Moran's admission that he had been convicted of a felony, not on the uncovering of the civil cases. The Court rejected this argument. Section 1786.53 was amended to prevent employers from making such a claim. "(T)he information in ‘an investigative consumer report' must generally be disclosed whenever there is adverse employment action and ‘a report regarding the consumer was obtained from an investigative consumer reporting agency.'"

The Court disagreed with Moran. The Court noted that "subdivisions (b)(3) and (b)(4) of the statute suspend the seven day requirement when the employer is investigating ‘suspicion of wrongdoing or misconduct' by the employee." The Court also noted that the information must be provided even if the results of the investigation are favorable to the employee.

The Court found that it was reasonable to provide Moran with the information on the background check within eight business days.

1. This discussion only addresses the portion of the case dealing with Civil Code § 1786.3.

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