Peos: How to Prosecute and Defend Cases Involving Employee Leasing Agreements
| Publication year | 2022 |
| Author | THE HON. ROBERT G. RASSP |
THE HON. ROBERT G. RASSP
LOS ANGELES, CALIFORNIA
Disclaimer: The opinions expressed in this article are those of the author and are not those of the California Department of Industrial Relations, the Division of Workers' Compensation or the Workers' Compensation Appeals Board. This article is not intended to serve as a legal brief or to provide legal advice, and counsel are advised to consult with their own resources in researching specific issues that may arise in cases involving employee leasing.
What are professional employer organizations, or PEOs? Are employee leasing agreements valid in California? How does workers' compensation insurance coverage work in employee leasing agreements? Who pays when a leased employee gets injured on the job? Are these organizations like a shell game, with ever-shifting information, or like peeling an onion, with layers within layers? How does an attorney conduct discovery in PEO cases? Can employment be created by contract, and not just under the Borello test?1
This article is a journey through the creation of PEOs, how they are used in industry and the discovery attorneys need to conduct in order to prosecute and defend cases involving PEOs. Before continuing with this article, you might want to read the case of Miceli v. Jacuzzi (2006) 71 Cal.Comp.Cases 599 (WCAB en banc decision). This case, originally referred to as the "Remedy-Temp" case, was one of the earliest cases involving leased employees. If you read this case and the earlier decisions regarding leased employees, your head will spin. This article will help you understand what happened in that case. Twenty years ago, Miceli was a difficult case for workers' compensation practitioners to interpret and apply. PEO cases continue to vex the workers' compensation legal community, with everyone pointing fingers at each other. The intent of this article is to shed some light on the issues involved.
A professional employer organization, or PEO, is an employee leasing company; it hires out employees to specific companies or clients of the PEO to perform work at the customer's or client's location. Think in terms of one company leasing its employees to another company. Employee leasing occurs in many industries where the number of employees fluctuates based on operational demand within those industries. PEOs got their start in the entertainment industry—in movie and television production.
It is not unusual, for example, for a movie production to ramp up the number of employees during the filming of scenes at a studio and on location. Many movie or television productions by Disney, Universal Studios, Sony Pictures and even independent production companies hire a set of core employees, from actors to camera operators to set builders to production assistants, and so on, who work in the various production fields. Some of these employees might work on a movie or TV production side by side with temporary employees who receive payroll from Entertainment Partners (EP) or Cast & Crew (C&C).
The employees working under EP or C&C would not be the employees of the production company, but they would work out of the same union shop that the production company employees work from, with the same pay, retirement benefits, hours and other employee benefits. The difference is that the EP and C&C employees, at the conclusion of the TV or movie production, end their relationship with that production
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and move on to entertainment production projects by other production companies. It is not unusual for hair and make-up artists, set makers, production assistants, gaffers, camera operators and the like to have 30 or 40 employers during a 30-year career in the entertainment industry, due to the outsourcing of skilled workers from major production companies as a result of employee leasing agreements. Employee leasing agreements allow a company to contract out the services of an employee to a third party while retaining control over certain aspects of the employee's employment terms, such as pay or work schedule.
The practice of employee leasing has expanded over the last 30 years to include such industries as agriculture (farm labor agreements), logistics, construction trades, warehousing/distribution centers, the garment industry and manufacturing. In California, there are many PEOs serving the ports of San Pedro and Long Beach, where, annually, thousands of loads from ships are placed on trucks, sent to the Inland Empire (the counties of Riverside and San Bernadino) for placement on trains and sent to other interstate trucking distribution centers. The number of employees along the logistics supply chain varies and is amenable to the proliferation of PEOs. (See Lab. Code §2810.)
There are numerous PEOs within specific trades of the construction trades as well, such as Roto Rooter plumbing franchises and other companies, where there are both union and nonunion shops within certain trades.
Many PEOs have a high-deductible workers' compensation insurance policy. This becomes a problem if the PEO declares bankruptcy. Bear in mind that workers' compensation insurance is one of the most highly regulated forms of insurance in California.
To fully understand PEOs, familiarize yourself with the statutory mandate for employers to have coverage for workers' compensation liability. Labor Code section 3700 provides three ways for an employer to have coverage for workers' compensation:
- Have an insurance policy of workers' compensation an insurance company has issued pursuant to the Insurance Code and Title 10 of the California Code of Regulations.
- Obtain a certificate of self-insurance approved by the Director of the Department of Industrial Relations (DIR).
- For public entities and joint powers authorities, obtain permission from the DIR Director to self-insure.
A fourth way to be covered for workers' compensation liability is to be legally uninsured. The only employers allowed to be legally uninsured for workers' compensation liability are the State of California and its subagencies.
Labor Code section 3701.9 prohibits, as of January 1, 2013, PEOs and other employee leasing organizations from being self-insured. A certificate of consent to self-insure that had been issued to a PEO would have been revoked as of January 1, 2015. This legislation was enacted because many PEOs did not have sufficient funds to pay for workers' compensation claims, even though they had obtained a certificate of self-insurance under Labor Code section 3700(b).
What is the legal basis for the use of PEOs and other employee leasing companies? The answer lies in Labor Code section 3602(d)(1), which governs general and special employees:
For the purposes of this division, including Sections 3700 and 3706, an employer may secure the payment of compensation on employees provided to it by agreement by another employer by entering into a valid and enforceable agreement with that other employer under which the other employer agrees to obtain, and has, in fact, obtained workers' compensation coverage for those employees. In those cases, both employers shall be considered to have secured the payment of compensation within the meaning of this section and Sections 3700 and 3706 if there is a valid and enforceable agreement between the employers to obtain that coverage, and that coverage, as specified in subdivision (a) or (b) of Section 3700, has been in fact obtained, and the coverage remains in effect for the duration of the employment providing legally sufficient coverage to the employee or employees who form the subject matter of the coverage. That agreement
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shall not be made for the purpose of avoiding an employer's appropriate experience rating as defined in subdivision (c) of Section 11730 of the Insurance Code.
Labor Code section 3706 states, in essence, that if an employer is illegally uninsured and has not complied with the mandate for coverage for workers' compensation liability under Labor Code section 3700, any injured employee may elect to sue the employer for damages in tort under the theory of negligence per se.
It is important to read Labor Code section 3602(d)(1) along with Insurance Code section 11663, which states:
As between insurers of general and special employers, one which insures the liability of the general employer is liable for the entire cost of compensation payable on account of injury occurring in the course of and arising out of general and special employments unless the special employer had the employee on his or her payroll at the time of injury, in which...
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