I-1082 Opens Workers’ Compensation to Private Insurers

July 17th, 2010

In mid-July, an initiative qualified for the November ballot that could have far-reaching effects for Washington workers, employers and taxpayers.  I-1082, which would effectively privatize the current state-run workers’ compensation program, is backed by the insurance industry and a conservative trade group called the Building Industry Association of Washington (BIAW).  If the initiative passes, these two groups will reap enormous benefits.

I-1082 would allow private insurers to offer workers’ compensation coverage in competition with the current public system, giving yet another lucrative handout to the taxpayer-bailed-out insurance industry.  After receiving billions of taxpayer dollars over the past few years, firms like AIG (the world’s largest workers’ compensation insurer) are now attempting to undermine Washington’s non-profit public system — a system that “is statutorily required to keep costs down,” says Nicholas Corning, former President of the Washington State Association for Justice. If the private insurance industry is successful, I-1082 will leave Washington businesses “to deal with out-of-state corporations [who are] only concerned about siphoning profits into their Wall Street war chests.”  And state employers can expect a costly outcome from this transfer; as Corning points out, the existing state-run workers’ compensation program, L&I, operates with only 18% administrative costs; the private industry average, on the other hand, is 68%.

Opposition to I-1082

Small business owners and community leaders feel that privatization would prove highly unfavorable to businesses, employees and taxpayers, and have organized opposition groups to I-1082.  The campaign No on I-1082 maintains that the highest priority of our existing public system is to ensure that injured workers receive the medical care and job retraining they need.  For-profit insurers are not likely to share this priority.  According to the opposition group’s communications director, Adrianne Williams, “Handing our public, non-profit system over to the private insurance industry is mostly [designed] to generate profits for the industry and less about getting injured workers back to work.”  Other prominent groups opposing I-1082 include the Washington State Labor Council AFL-CIO, the Washington State Association for Justice, and Democratic Underground,

Many Washington businesses are also concerned about the higher insurance premiums they can expect if 1082 passes.  Alex Fryer, the spokesman of “No on I-1082,” argues that private insurance companies will end up “cherry-picking businesses that have low claims, forcing the remaining higher-risk businesses to pay higher premiums under the state plan.”  To underscore the consequences of moving away from a non-profit workers’ compensation plan, he cites figures on states that have adopted a private insurance option, some of which experienced a 200 percent premium increase.

In addition, I-1082 proposes to abolish the existing state mandate requiring employees to pay a portion of the state’s premium costs, shifting the entire financial burden to employers.  Analysts predict that this would cause small business owners’ annual costs to go up by 25 percent.

I-1082 would have an unfavorable outcome for workers as well, eliminating any transparency from the claims management process.  Under the present Washington State workers’ compensation system, L&I is required to come to a final decision regarding treatment of a worker’s injury or illness, and must notify all parties of that decision.  If L&I does not comply with these obligations, it can be compelled to do so by a writ of mandamus.  But I-1082 includes a provision stating that insurers do not have to notify anyone if a claim is rejected; in fact, the workers’ compensation insurer would never have to come to a decision on an injury claim at all.  This puts the insurance companies at a tremendous advantage, allowing them to protect their profit margins by denying or delaying claims indefinitely, without ever facing the threat of enforcement.  Not only would this potentially prevent workers from returning to their jobs; it would also make it extremely difficult for employers to verify whether an employee is able to work.

Critics of the initiative are also alarmed that I-1082 would leave the insurance industry unregulated and free of L&I oversight.  Private insurers would be allowed to set their own rates with no approval from the Washington State Insurance Commissioner. Equally troubling is the fact that I-1082 would abolish the Insurance Guaranty Act, leaving Washington businesses and employees vulnerable to insurer insolvency.  Currently, all lines of private insurance in the state are protected against fraud or bankruptcy by the Insurance Guaranty Act.  But with that regulation removed, an insurance company could collect workers’ compensation premiums and then fail to pay benefits due to insolvency.  Because of these reasons, Washington Insurance Commissioner Mike Kreidler and State Auditor Brian Sonntag both oppose I-1082.

Ultimately, I-1082 would establish an unregulated and largely independent playing field for private insurers to reap profits by squeezing Washington businesses and undermining worker safety.  Before voters cast their ballots in November, they should be aware that I-1082’s success would be a huge win for special interests, and a loss for the wellbeing of small businesses and injured workers.

Read more about I-1082:

Impact of Recession Felt Throughout Workers’ Compensation

June 5th, 2010

This article by Timothy W. Emery, Esq., a partner with Emery Reddy, PLLC, Attorneys at Law.

While analysts continue to debate whether or not the U.S. economy is on the road to recovery, the recession clearly lingers for those involved in the workers’ compensation system (read reports on the recession published by the National Bureau of Economic Research)

Workers’ compensation claims generally tend to drop during tough economic times, and this pattern is holding true in the current recession. This trend generally arises from psychological factors in the workplace rather than an actual drop in worker injuries.  Employees concerned with job security are more reluctant to report legitimate injuries and seek workers’ compensation, fearing that if they file a claim, management could target them for dismissal in an upcoming round of layoffs.  In their efforts to protect their jobs and be seen by management as a “valuable” part of the workforce, many employees silently endure injuries at work and decline to file workers’ compensation claims.

The psychological impact of our recession is also evident among workers who cannot avoid reporting their claims because of the severity or obviousness of their injuries. Facing the same fears about job security, these employees chose to continue coming into work when they would normally stay home to recover. What would otherwise be a workers’ compensation indemnity claim now becomes a workers’ compensation medical only claim.

The recession’s impact also extends to those who are already out on disability benefits.   Many in this situation fear that staying out of work too long will jeopardize their jobs. These workers often try to convince their doctor that they are able to return to work even when injuries persist.

In addition to these impacts, the recession has also caused employers and workers’ compensation insurers to change business practices in ways that adversely affect workers. Since workers’ compensation premiums are based on a company’s payroll, employers looking to cut costs often lay off workers to reduce their insurance premiums.  Employers use this tactic to their advantage on more than one level: not only do fewer employees translate into lower premiums, but employees that are retained also tend to be more experienced and have fewer accidents and injuries than their less experienced counterparts.  Over time, the experience modification factor improves for a company, producing yet lower workers’ compensation premiums.

With increased layoffs in the current economic climate, fewer premiums are being paid to workers’ compensation insurers.  Insurers, in turn, have compensated for falling revenue by raising the workers’ compensation premiums they charge to employers.  However, this has not yet translated into a full recovery of losses: according to reports in the Insurance Journal, the loss ratio for workers’ compensation insurers has been steadily on the rise throughout 2008 and 2009. The National Council on Compensation Insurance (NCCI) reports that the economic downturn caused net workers’ compensation insurance premiums to drop by 23% from 2007 to 2009.  While there are multiple factors accounting for these losses, downturns in construction and manufacturing have had a significant impact on the bottom line for insurers. Both of these sectors have higher than average workers’ compensation premiums, yet they have been among the hardest hit by the recession.

A steadily growing number of economists are beginning to argue that the recession is coming to a close.  Hopefully the next round of assessments by the National Bureau of Economic Research will yield more consensus that we’ve fully entered a recovery stage. Yet even after it officially ends, the impact of the recession may not quickly dissipate among those involved in the workers’ compensation system.

Learn more about workers’ compensation in Washington State:

Washington Workers’ Compensation Legal Library

Washington State Department of Labor & Industries

Emery Reddy Files Class Action Lawsuit Against Safeway

May 24th, 2010

The attorneys at Emery Reddy recently filed a class action lawsuit against Safeway for failing to pay overtime wages and illegally preventing employees from taking meal and rest breaks.

Emery Reddy is committed to ensuring that workers receive the full compensation and benefits to which they are entitled under state and federal law.  To follow the developments of this and other overtime and wage violation cases, please check back regularly for updates.

Wage, hour, and benefit violations of this kind are unacceptably common in today’s workplace. Employers violate the law and their workers’ rights when they refuse to pay overtime wages, do not meet a state’s legally established minimum wages, fail to comply with the Equal Pay Act, coerce an employee to work off the clock, refuse to allow workers their mandatory breaks, or withhold commission payments, final wages or any other portion of a worker’s earned wages without that employee’s written consent.  For more information on wage disputes and workers’ rights, visit Emery Reddy’s Employment Law information center or the websites for the Washington State Department of Labor and Industries (L&I) and the US Department of Labor.

Federal Court Ruling Opens Way for FMLA Claims Against Individuals

April 18th, 2010

This article by Timothy W. Emery, Esq., a partner with Emery Reddy, PLLC, Attorneys at Law.

A federal district court recently ruled in favor of an employee suing several human resources executives after he was allegedly fired for requesting time off under the Family and Medical Leave Act (FMLA).  The ruling may set a precedent in which individuals can be held personally liable for damages allowed through FMLA, including financial loss from a denial of benefits, compensation for back pay, lost wages and attorney fees.

The suit was brought against Cardone Industries and five of its senior HR executives by Dmitry Narodetsky, a tool designer who worked for the company for nearly twelve years before his termination.  His case includes a three-count complaint for violation of the Family Medical Leave Act, the Consolidated Omnibus Budget Reconciliation Act (COBRA), and the Employee Retirement Income Security Act (ERISA).

Several weeks prior to his termination, Narodetsky was diagnosed with a leg injury requiring surgery.  His wife promptly notified Narodetsky’s managers that her husband would need time off for the upcoming operation, and requested that they provide short-term disability for his medical leave.  Following the conversation, three of the company’s HR executives and another manager conducted a forensic examination of Narodetsky’s work computer, uncovering evidence of a pornographic email he allegedly forwarded to a coworker over a year earlier.  Before scheduling the surgery, Narodetsky was called into a meeting attended by the defendants, shown the email he had allegedly forwarded, and fired.

Narodetsky alleges that his employers conducted the computer search solely to find a pretext for terminating his employment so they could avoid granting him leave. He filed a suit alleging that not only the company, but also the five individual defendants interfered with his rights under FMLA and the Employee Retirement Income Security Act.

Attorneys for the defense argued that none of the individual claims were warranted because Narodetsky’s suit did “little more than simply list each such defendant’s title,” and because it failed to include “any facts showing how each defendant was involved in plaintiff’s alleged request for medical leave or the decision to terminate.”

Yet U.S. District Judge Thomas N. O’Neill of the Eastern District of Pennsylvania refused to dismiss Narodetsky’s claim, noting that it went well beyond the narrow characterization of the defense by alleging that each of the individual defendants “participated in the forensic search of [the plaintiff’s] computer with the goal of finding a reason to justify his termination because he had requested FMLA leave.”  O’Neill also maintained that the executives and manager were properly named as defendants since each possessed the authority to fire and played a role in the decision to terminate Narodetsky. “The allegations support an inference that each of the defendants exercised control over the plaintiff in the decision to terminate him,” O’Neill wrote.  The judge also stated that “Given the timing of his termination–falling right on the heels of his request for medical leave–I find that it is reasonable to infer that the defendants terminated his employment for the purpose of interfering with his plan benefits.”

Both the individual defendants and Cardone Industries, Inc. have declined to comment publicly on the ruling.  The case is now proceeding to adjudication in a new trial. See O’Neill’s full opinion in Narodetsky v. Cardone Industries Inc. (pdf)

Citation: Narodetsky v. Cardone Industries et al., Case #09-4734; February 24, 2010, U.S. District Court, Eastern District of Pennsylvania.

Companies Evade Taxes by Misclassifying Workers as Independent Contractors

February 28th, 2010

This article by Timothy W. Emery, Esq., a partner with Emery Reddy, PLLC, Attorneys at Law.

Companies that cut costs by misclassifying regular employees as “independent contractors” will face tighter regulations and stricter penalties in 2010. The Obama administration has already begun to crack down on companies that misrepresent worker status, recently hiring one hundred additional enforcement agents to effect compliance with the law. Meanwhile, auditors at the IRS have launched an intensified campaign to determine if over 6,000 major companies are using misclassification as a way to cheat on taxes.

Business experts have shown that a growing number of companies wrongfully classify regular workers as “independent contractors” to avoid paying unemployment insurance premiums and Social Security and Medicare taxes on the wages of their employees. Since taxes are not generally paid on the compensation of independent contractors, employers reduce business costs by improperly applying this designation to individuals who should be regarded as regular employees (some of these “contractors” even have company office space and work the same hours as employees).

In a recent New York Times article, Steven Greenhouse indicated that companies wrongfully classify about 3.4 million workers as contractors; the Department of Labor largely corroborates these figures, and estimates that up to 30% of U.S. companies participate in worker misclassification at some level.

The practice has enormous economic repercussions. In Ohio, for example, close to 100,000 misclassified workers have cost the state an estimated $35 million a year in unemployment insurance taxes, and over $100 million in worker’s compensation premiums. With federal and state governments currently struggling under record deficits, businesses can expect a significant increase in penalties for misclassification in the near future. Steven Greenhouse reports that the attorney general of California is currently seeking $4.3 million from a single construction company accused of misclassifying its workers. When implemented on a comprehensive, nation-wide scale, these measures could yield significant results. According to the Obama administration’s 2010 budget estimates, tightened enforcement could translate into $7 billion in revenue over 10 years.

Yet wrongful classification of workers is not merely a matter of concern for government officials; the practice has implications on a more personal level as well, denying basic employment rights to workers. Employers often misrepresent regular W-2 employees as contractors to circumvent minimum wage, overtime and antidiscrimination laws. If workers are designated as contractors and then laid off, they are ineligible for unemployment insurance. Those who are injured on the job cannot receive workers’ compensation benefits.

Prominent members of the business community have responded to the impending crackdown with alarm. When the IRS or state tax authorities identify instances of wrongfully misclassifying workers, companies often face fines and penalties, and can be liable for back-taxes on the reclassified employee. Most employers maintain that worker misclassification is unintentional, resulting from confusion and ambiguity in the legal distinctions between independent contractors and regular employees.

While current developments demonstrate a growing political will to enforce compliance with the law, cases of misclassifying workers have repeatedly emerged in the national spotlight in recent years. Last year the attorneys general of several states threatened to sue FedEx Ground for wrongfully classifying its drivers.  According to allegations by the Teamsters, FedEx has used misclassification to prevent drivers from unionizing (since independent contractors, unlike traditional employees, cannot form unions).

Yet perhaps the most prominent case of misclassification surfaced in 2007, when the private security firm Blackwater USA came under investigation for evading payment of millions of dollars in taxes by classifying workers in Iraq as “independent contractors.” Henry Waxman, chairman of the House Committee on Oversight and Government Reform, accused Blackwater of engaging in an “illegal tax scheme” that allowed it to avoid an estimated $31 million in employment-related taxes in the last year of its contract alone. The company also attempted to prevent one of its guards from contacting members of Congress after the worker discovered this illegal practice. In a letter to Blackwater’s CEO, Waxman wrote that “it is deplorable that a company that depends on federal tax dollars for over 90 percent of its business would even contemplate forbidding an employee to report corporate wrongdoing to Congress and federal law enforcement officials.” Despite the fact that it routinely misclassifies workers as contractors, Blackwater has been awarded more than $1 billion in government contracts since 2001.

According to guidelines established by the IRS, an employee is defined as anyone who works for an employer when that employer controls what will be done on the job and how those services will be performed. Independent contractors, on the other hand, are defined in a such as way that the payer or employer can only control the result of the work performed, but not the means of accomplishing that result. This distinction is codified in revenue ruling 87-41 (generally referred to as “the twenty factor test”). For a more extensive discussion on properly classifying employees and contractors, see the official guidelines as detailed on the IRS website.