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South Carolina: The Bare Essentials of Independent Contractors, Revisited

Friday, September 21st, 2012

Back in 2009 we blogged the fate of strippers at the ironically named King Arthur lounge in Chelsea MA. The club treated the women as independent contractors, but the court found that they were employees and ordered the lounge to pay back wages to the strippers. (I wonder if they were able to collect.) Today we examine a similar situation with a dramatically different outcome: the saga of LeAndra Lewis, a free-lance stripper in the Carolinas.
The 19 year old Lewis worked a network of strip clubs in North and South Carolina. She traveled from one club to another, bringing her own (skimpy) costumes and working on her own schedule. She would approach a given club, uninvited and unannounced, and ask for access to the stage. She would pay an enrollment fee (about $70) and then dance as she wished to dance, collecting tips from the customers. If a given customer really liked her work, he might “make it rain” with dollar bills. At the end of the evening, she would pay a portion of her tips to the club owner. Lewis grossed an estimated $82,000 a year, but no one knows for sure, as she did not bother filing a tax form.
In June of 2008 she found herself working in L.B. Dynasty, DBA Boom Boom Room Studio 54 – you have to love the Studio 54 tag, adding a touch of New York glamour – and some white powder? – to an otherwise marginal venue. A fight broke out while Lewis was in the club. A random bullet hit her in the stomach, causing severe internal injuries. She filed for workers comp benefits; the club did not carry insurance (surely no surprise), so the claim reverted to the South Carolina Uninsured Fund. Her claim was denied on the basis that she was an independent contractor, not an employee of the club.
The Usual Criteria in an Unusual Setting
In its ruling on Lewis’s claim, the South Carolina Appeals Court upheld the denial. They used the typical four pronged analysis for independent contractors to determine her work status:

1. The right or exercise of control: Lewis was free to come and go and free to dance as she chose; there were rules of behavior, but these did not constitute an employment relationship;
2. Furnishing of equipment: the court observed that the provision of a stage, a pole and music were practical matters, as a traveling stripper would not be able to bring these to each venue;
3. Method payment: the club did not actually pay Lewis anything, as she herself paid a fee to dance and a portion of her earnings to the club.
[NOTE: As we noted above, Lewis paid no taxes on her earnings, and it goes without saying the club paid no benefits on her behalf.]
4. The right to fire: the court determined that the right to throw Lewis out for violation of club rules did not make her an employee.

Judge Short dissented from the majority opinion, noting instances in other states where strippers were determined to be employees – he did not site the King Arthur Lounge case. But sad as Lewis’s story is, and tragic as the results for her have been, the court probably got this one right. Lewis worked as an itinerant stripper, with no real base of operations. She walked into clubs, offered her services, and was given a stage on which to perform. She moved on when she felt like it. Had she been a regular at the Boom Boom Room, she could have made a stronger case. But this 19 year old woman was very much on her own. The money was good while it lasted, but she now finds herself unable to have children and, due her scars, unable to perform her chosen work. Like all truly independent contractors, Lewis was on her own that fateful day in 2008 and she must live with the consequences for the rest of her life.

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Physician drug repackaging, front and center

Thursday, July 12th, 2012

The drum that our colleague Joe Paduda has been beating for several years – the outrageous cost of repackaged drugs in Florida – appears to be resonating. This esoteric little nook and cranny of workers comp that is costing employers millions across many states would normally not attract much attention in mainstream media – heck, even a lot of grizzled workers comp vets weren’t conversant with the practice or the potential adverse affect on costs. But yesterday, the issue made the business section of the New York Times in an article by Barry Meier and Katie Thomas, Insurers Pay Big Markups as Doctors Dispense Drugs. They sum up the crux of the matter: “At a time of soaring health care bills, experts say that doctors, middlemen and drug distributors are adding hundreds of millions of dollars annually to the costs borne by taxpayers, insurance companies and employers through the practice of physician dispensing.” The article goes on to note that, “The practice has become so profitable that private equity firms are buying stakes in the businesses, and political lobbying over the issue is fierce.”
Florida and the case of Automated HealthCare Solutions are used as examples in the article. We’ve leave you to follow the excellent job the reporters do in outlining the issue, tracking down connections, and showing how a recent legislative attempt to close this costly loophole was squelched. Alan Hays, the Republican state senator in Florida who introduced the defeated bill said that, “The strategy of the people that were opposed to this bill was to put the right amount of dollars in the right hands and get the bill blocked,” he said. “And they were successful in doing that.” That defeat is costing employers and taxpayers some $62 million, according to the state’s insurance commissioner.
Don’t miss the accompanying infographic, Paying Much More in the Doctor’s Office. Also note the 424 comments to the article, which we are still perusing at this time – it’s not often that a detailed workers’ comp issue garners that much attention in the so-called mainstream press.
We give a big tip of the hat to Paduda, who has posted on the Florida repackaging issue repeatedly. going back several years, despite some personal jeopardy in the form of a threatened lawsuit, later dismissed by a federal judge.
How Connecticut is dealing with Physician Drug Repackaging
In February, Paduda posted that physician dispensing was coming to Connecticut and urged his readers to contact regulators. At Evidence Based blog, Michael Gavin posts an update: Connecticut Gets Drug Repackaging Right: Removing the Financial Incentive. Interestingly, this was done via a rule change rather than a statutory change. Plus, it does not ban the practice of physician dispensing, and it even allows a reasonable administrative fee. Gavin suggests that these central tenants of an effective regulatory approach to repackaged drugs might serve as a model for other states. Florida, take note!

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Annals of Compensability: Sedentary Worker in the Garden

Wednesday, July 11th, 2012

Barton Rodr was a computer programmer for Yzer Inc, DBA Funnel Design Group in Oklahoma. When the yard crew taking care of Yzer’s property quit, the company asked for volunteers and Rodr stepped forward. He and his son mowed the lawn and manicured the yard on successive Saturdays, in preparation for the festivities at Automobile Alley, the historic district of downtown Oklahoma City. Barton, a salaried employee, was not paid for the work; his son received $40.
On July 18, 2009, Rodr was putting away the lawn mower when he suffered a heart attack. He was 36 at the time. A workers comp judge awarded him benefits, determining that the injury occurred in the course and scope of employment. A three-judge panel affirmed, but the OK Court of Civil Appeals reversed, opining that Rodr’s lawn work bore no relation to his primary job as a programmer.
The OK Supreme Court has ruled in favor of Rodr. Despite his performing volunteer work out of class and on the weekend, he was still an employee of Yzer, as the yard work met the primary test of employment: it furthered the interests of his employer.
In its defense, the company pointed out that the heart attack was caused by a pre-existing conditon: Rodr was overweight, a smoker, with a family history of heart problems. From the perspective of (very distant) consultants, we are tempted to ask: why did the company allow this employee to volunteer? Despite his relatively young age, he worked at a sedentary job and displayed risk factors that precluded his doing physical work. Speaking as a weekend mower, I can certify that the task is strenuous and noisy (less so for my neighbor who sits calmly on his riding mower, listening to music through noise-canceling headphones).
Volunteer vs. Employee
The court has ruled that an employee who volunteers is not a “volunteer.” OK law defines a volunteer as “any other person providing or performing voluntary service who receives no wages for the services other than meals, …therapy…or reimbursement for incidental expenses.” An employee is not “any other person.”
This is no small matter, for Rodr or for Yzer’s workers comp insurer. The unfortunate Rodr is permanently and totally disabled. He is unlikely to work again. He is currently surviving on a mechanical heart and will need a transplant soon. Given Rodr’s age and medical expenses of significant magnitude, this claim is likely to reach seven figures.
The lesson for employers is clear: saving a few bucks on physically demanding jobs is not worth the risk. An overweight smoker with a family history of heart problems does not belong within ten feet of a lawnmower. When your lawn crew quits, just go find another one.
Thanks to WorkCompCentral (subscription required) for the heads up on this case.

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Risk Transfer as Three-Card Monte

Tuesday, May 22nd, 2012

When you’re looking for ethically-challenged business practices, Florida is usually a good place to begin. The latest kerfluffle involves a toxic combination of very high deductibles for workers comp insurance and employee leasing companies. Oklahoma based Park Avenue Property and Casualty Insurance sold policies with deductibles as high as $1 million to PEOs. Think about that for a moment: a million dollar deductible is virtually self-insurance, as very few claims break that formidable barrier. Park Avenue, along with its successor companies, sold these policies to employee leasing companies, who in turn passed the coverage through to their client companies. With such a huge deductible, the coverage must have been relatively inexpensive compared to standard market rates.
Under large deductible programs, the insurance company pays all the bills and then seeks reimbursement from the client company, up to the deductible amount. It’s not hard to figure out the flaw in this business model: client companies will welcome the discounted premiums, but when it comes time to pay back the insurer for paid losses, they will be unable to cut the checks. Given the complete absence of regulatory-mandated collateralization for the claims liability, there is no way the insurer will be reimbursed for large loss claims.
That’s where the three-card Monte comes in: the insurer wrote these policies knowing full well that the deductibles would never be paid. That’s why Park Avenue morphed into Pegasus Insurance, which morphed into Southern Eagle Insurance, which flies off into the pastel sunset of bankruptcy.
Gaming Risk Transfer
The cards have been moved around at blinding speed, but who ends up paying? Once again, those who played by the rules will have to pay for those who didn’t. (For a more egregious example of punishing the innocent, see our blogs on the New York Trusts.) Policy holders in Florida will be charged somewhere between 2% and 3.5% of premiums to cover the $100 million plus of losses.
In the WorkComp Central article by Jim Sams (subscription required), Paul Hughes, CEO of Risk Transfer Company, which markets insurance to PEOs, complains that singling out the PEO industry is unfair. The state should never have allowed Park Avenue and its winged successors to write insurance, as they were clearly incapable of assuming the risk. True enough, but even Hughes would have to admit that the PEO industry offered a ripe venue for the scam: individually, PEO clients would never have qualified for high deductible coverage, but somehow, under the collective umbrella of a PEO, they did.
Meanwhile, PEOs are being sued for failing to reimburse the claims payments of Park Avenue and its successors. After the PEOs lose these cases, they will seek payment from their clients, who are unlikely to have the ability to pay anywhere near what is owed. The litigation will go on for a long time, but the bottom line is simple: risk transfer cannot exist where none of the parties can cover the exposure. That isn’t risk transfer: it’s a shell game, where those who did not play are left holding the bag.
Follow Up – June 7, 2012
After posting this blog, I received a call from Paul Hughes, CEO of Risk Transfer in Florida, who is quoted above. While not contesting the premise that large deductibles are poorly managed in Florida (and elsewhere), he believes that I unfairly singled out PEOs in the blog. The fundamental issue is the failure of the state to adequately regulate and oversee large deductible programs. I agree.
Please take a few moments to read Paul’s response, which employs the useful metaphor of a casino for the risk transfer industry:

The core issue to me is the role of the regulator versus the business owner in the management of the “casino” (insurance marketplace). That is one of the parts of Jon’s article in Workers Comp Insider that blurs the line a bit on what the PEO’s role is within the casino and whose job it is to set the rules. The casino is the State as they certify the dealers to play workers’ compensation (Carriers, MGU’s, MGA’s, Agents and Brokers) and the State also certifies that the players are credible (not convicted of insurance fraud) and can pay/play by the rules of the house. The rules are set by the house and the games all require public filings – ability to write workers’ compensation (certificate of authority), ability to offer a large deductible plan (large deductible filings), agent license, agency license, adjusters license and any other deviation from usual business practices (like the allegations that one now defunct insurance carrier illegally charged surplus notes to desperate PEO’s in the hardest market the industry has ever seen). The “three-card monte” that Jon alludes to in this article is managed not by the dealers (carriers), but by the house (state). Would a real life casino consider it prudent to allow one of their dealers to expose 20% of their $5m in surplus through high deductibles sold to PEO’s with minimal financial underwriting and inadequate collateralization? Would any casino write harder to place (severity-driven) clients to include USL&H, roofers etc with the minimum amount of surplus needed to even operate a carrier…? Of course not. These “big boy” bets would never be allowed in Vegas without the pockets being deep enough to cover the losses.

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Posted in Business, fraud, Insurance & Insurers, State News | 1 Comment »

Cavalcade of Risk Plus Frisky Risk Management

Wednesday, May 16th, 2012

The latest edition of Cavalcade of Risk, hosted by Dennis Wall at Insurance Claims and Issues, is up. It’s the risk-free option for checking out a potpourri of interesting posts related to risk.
And while we are on the topic of risk, let’s give a Bronx cheer for Jamie Dimon, CEO of JP Morgan Chase, for the work of his risk management team. The bank’s $2 billion plus loss was the result of “sloppy” and “stupid” trading, a “mistake” which involved “bad judgment,” and which caused losses that are “very unfortunate” and that come at an “inopportune time,” but which in any case are not “life threatening.” The risk management team is supposed to prevent such problems, not perpetrate them. Oh, well, that’s just the risk you take when your frisky risk managers manage risk.

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New York: Busted Trusts and the Law of Small Numbers

Wednesday, April 18th, 2012

We have been following the fate of self insurance groups (SIGs) in New York, where the innocent pay for the sins of the guilty and where what is legal is by no means fair. We read in WorkCompCentral (subscription required) that an appeal to over-rule the onerous assessments imposed on the trusts who played by the rules, to cover the liabilities of trusts who did not, has been rejected by the U.S. Supreme Court. [The Insider is quoted at length in the article.] Had employers known just how expansive the risks of SIG participation were, they would likely have chosen to purchase conventional insurance.
The appellate court wrote that “a fair reading of [comp law] within the context of the related provisions and the legislative history, leads to the conclusion that group self insurers were intended to be included among those to be assessed to provide the funds to cover the defaults of all private self-insurers, including groups.”
The court went on to say that the liability of individual employers “is proportional to their role as self-insurers within the workers’ compensation system.”
The New York appellate court has expanded the concept of joint and several liability way beyond the members of a given trust, including not only all those who participate in self insurance groups, but virtually every self insurer in the state. There is no way a company can reasonably assess the scope of this risk. Why would anyone put their trust in trusts?
The Law of Small Numbers
The problem for the dwindling number of employers who participate in New York SIGs is the inverse of the law of large numbers: because their numbers are relatively small (compared to the total number of employers and comp premium in the state), they own a disproportionately large share of the open-ended liabilities generated by the failed trusts. Given the now-established legality of the assessments, and given the impossibility of verifying the viability of every self-insured risk, New York has basically eliminated self insurance as an option. That’s too bad, especially in the context of the state’s relatively high costs for comp.
Perhaps the state’s 800,000 employers could push for fundamental changes in the way workers compensation is managed: they could argue that the system is too complex and too costly for employers, even as the benefits for injured workers are way too low. As a group, they would have the law of large numbers in their favor, which is certainly more than can be said for the hapless remnants of the state’s self insurance groups.
NOTE: For access to the Insider’s numerous blogs in this issue, enter “New York trusts” in the search box.

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A Window Into Fraud

Monday, February 13th, 2012

A couple of years ago we blogged the performance incentive program at Smurfit-Stone Container Corporation in California. The performance numbers were stellar, but not necessarily because the work was performed safely. Instead, the company conspired with local medical providers to secure limited treatment outside of the workers comp system. Two supervisors pled no contest in conspiring to deny comp benefits to injured workers.
With the recent conviction of chiropractor Robert Schreiner, we see into the black box of the conspiracy. Workers complaining of work-related problems were referred to doctors like Schreiner – giving rise, alas, to a new and ominous definition of provider network. In one instance a worker complained about a neck and shoulder injury. Schreiner denied that the problem was work related, saying that it was caused by carrying a back pack as a child. He provided a handful of treatments and then encouraged the worker to file the claim under his health plan to continue treatments. When the worker persisted and filed a comp claim, he was fired.
Schreiner is headed to jail to serve a mostly symbolic sentence of 30 days, to be followed by three years of probation. Perhaps he can provide some adjustments to his fellow inmates. Confined spaces sure can mess up the spine.
Faking Safety
Smurfit-Stone was bought out last year by RockTenn. You can still read about the company in Wikipedia. Here is the (unattributed) description of the company’s safety program:

Smurfit-Stone has been an industry leader in safety performance since 2001 [NOTE: the conspiracy to under-report claims began in 1999!]. In 2007, Smurfit-Stone’s U.S. operations had an OSHA recordable case rate of 1.05, the best in company and industry history. This represents an 84 percent improvement in the company’s recordable case rate since the implementation of Smurfit-Stone’s SAFE process in 1995.The SAFE process, which stands for Smurfit-Stone Accident-Free Environment, promotes five core beliefs:
1.All injuries are preventable
2.Safety is everyone’s responsibility
3.Working safely is a condition of employment
4.Training employees to work safely is essential
5.Safety is good business

As litigation has proven, Smurfit-Stone’s low OSHA case rate has less to do with safety than with a conspiracy to under-report claims. Perhaps the SAFE program stood for something else: Screw All Forsaken Employees. Aggressive safety goals are a good business practice; circumventing the workers comp system is not just a bad practice, it’s illegal. Just ask Robert Schreiber.

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Building Pyramids, Building iPhones

Monday, January 23rd, 2012

Yesterday the New York Sunday Times ran a fascinating piece on the manufacturing of iPhones. The making of 200 million phones is taking place in the far east, mostly in China. When President Obama asked Steve Jobs “why can’t that work come home?” Jobs replied: “Those jobs aren’t coming back.” The article, written by Charles Duhigg and Keith Bradsher, describes the reasons why this work will never come back home (and why we wouldn’t want them anyway).
In the months prior to the release of the iPhone, Steve Jobs carried a prototype in his pocket. He discovered that the plastic screen was easily scratched by the keys and loose change that people often have in their pockets. He informed his engineers that this was not acceptable and insisted – at the last minute – that they redesign the phone with a scratch- and break-resistant glass. Corning Glass was able to do this.
Corning (made in America!) shipped the new parts to China, where they arrived around midnight. Supervisors at the assembly plant woke up some 8,000 workers sleeping in company dorms, gave them tea and a biscuit and set them to work in 12 hour shifts installing the glass into bevelled frames. The plant churned out 10,000 phones per day.
It is impossible to envision an American workforce positioned to perform this kind of work under these conditions. We do not house our workers in dorms (except migrant farm workers). We do not suddenly change work schedules to begin at midnight. Even in the Republican dream of a post-union workforce, it is inconceivable that American workers would accept this kind of pressure – and be paid $17 per day or less.
iPhones and Pyramids
Nearly seven years ago we blogged the emerging issue of worker rights in China. While there is a bare-bones structure of rights, these are arbitrarily enforced and easily avoided. China is a single party state, run with ruthless efficiency by the Communist Party. Opposition is not tolerated; dissent is brutally suppressed; and workers are at the mercy of their employers. To enforce rights, you need a constitution and an infrastructure of laws and regulations. And you need lawyers to argue on behalf of workers. China has none of these crucial elements and, truth be told, no real interest in developing them. And that is why everything is made in China: quality is high, working conditions are whatever management wants them to be, and labor costs are low.
While technically not slaves, production workers in China labor under appalling conditions that do not and cannot exist in most western cultures. They may be paid better than the slaves who built the pyramids, but they are paid less – while working harder – than any comparable workforce in developed countries.
So the late Steve Jobs was correct: the jobs involved in assembling essential electronic devices will remain off shore. These jobs are never coming home, unless, of course, the economy collapses totally and our workers are reduced to accepting virtually any working conditions. Which leads to questions beyond the scope of a workers comp blog: what manufacturing jobs will remain domestic? What will happen to the millions of production workers in America who no longer have jobs? As the American middle class declines, how will the economy function? Who will buy the goods that drive the engine of capitalism?
Epilogue
I drove my American assembled Japanese car to the Verizon store yesterday and picked up my black 16 gig iPhone, designed by indisputable geniuses in America and assembled by an underclass in China. It’s awesome. I can’t imagine life without it.

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New Hampshire: Stressed-out Owner on his Own

Tuesday, December 20th, 2011

Raymond Letellier co-founded a steel fabrication company in New Hampshire called Steelelements. The company suffered a major fire in March of 2007. They rebuilt, although the cost of the rebuilding, managed by Letellier’s partner, exceeded the budget. In October 2009 the company went out of business. Throughout the long, downward spiral, Letellier suffered from stress, hypertension and depression. Soon after the company’s failure, he filed for personal and business bankruptcy. At the same time, he applied for workers comp benefits.
Letellier’s claim was initially denied, then accepted for the medical costs only, and then denied again. Eventually the claim reached the New Hampshire Supreme Court, where a deeply divided court (3 to 2) ruled against Letellier. The court reasoned that the failure of the company was akin to a personnel action: workers comp does not cover such employer actions as discipline, termination and lay off. In closing the business, Letellier subjected himself – and everyone else – to a lay off. – a non-compensable personnel action.
Work-Related Stress?
Two dissenting judges pointed out that the majority focused almost exclusively on the ultimate failure of the company, the lay off itself. But the extraordinary and relentless stressors in Letellier’s life began with the fire and continued throughout the struggle to keep the over-leveraged company in business. This is not the stress of a single event, but the cumulation of stress over months and years. The dissenters noted that Letellier’s commute to the factory was 100 miles, so he often slept in his office, where ever-pending doom haunted his every waking moment and his troubled dreams. They opined that his multiple health issues were predominantly caused by work.
Letellier, once the proud owner of a successful business, finds himself in the same situation as laid off workers across America. He is on his own and out of luck.
We will set aside for the moment what may be Letellier’s biggest mistake: instead of trying to make things that people can actually use, he should have pursued a career in finance, where he could have sold worthless mortgages, watched his company flounder, and then be rescued by tax-payer bailout, all the while preserving a superbly inflated salary. That’s an All-American story of a different sort, albeit fodder for another day.

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Older Workers: How Old is Too Old?

Tuesday, October 11th, 2011

For 36 years Rodolfo Meza worked for Aerol Corporation in Rancho Diminguez CA as a metal worker making cast iron and aluminum molds. He was about 48 when he began working; he was about 84 when he was terminated while on medical leave for a knee operation. Rodolfo sued, claiming age discrimination, raising the question: how old is too old to work?
In the course of his trial and subsequent appeal, Rodolfo noted that his immediate supervisor commented frequently about his being “too old to work.” Despite operations for a hernia and a knee replacement (the court rulings do not indicate whether these were covered by workers comp), Rodolfo had every intention of continuing to work. When his normal job became a bit difficult for him to perform, he requested a transfer to the engineering department, where he often had performed work. His supervisor responded “no, Rudy I can’t [transfer you]. You are too old to move to engineering.”
When he was terminated in 2009, his 24 year old son (conceived when Rodolfo was 60!) noted that he became sad and depressed.
Age Has Its Benefits
A jury awarded Rodolfo $100,000 for future economic loss: based upon his annual earnings, that’s a little over three additional years of employment, bringing Rodolfo to age 87. In addition, they awarded $300,000 for past non-economic damages (presumably, the ongoing agist comments of his supervisor). That’s a lot of money for an individual nearly 20 years past the conventional retirement age.
Aerol appealed and lost. The CA Court of Appeals found a pattern of discrimination, along with a legal technicality that prevented Aerol from contesting the award for the future earnings: Aerol failed to raise the issue in a timely manner during the initial the trial.
Expensive Lessons in Human Resource Management
Is the court saying that employers must continue to employ workers into their 80s, with no recourse available to force retirement? Can workers work as long as they like?
Not really.
Aerol – through the actions of Rodolfo’s supervisor – made a number of critical mistakes in managing this situation. The supervisor made repeated comments about Rodolfo’s age; the supervisor should have been warned to cease this behavior and disciplined if he continued. Rodolfo had an exemplary record of employment; there was no (written) indication that his performance had deteriorated. When Rodolfo felt less capable of doing his regular job and requested a transfer, he was denied the opportunity based solely upon his age. When he requested time off for the knee surgery, it was granted; there was no indication that his job would be eliminated during his absence, but that’s exactly how Aerol proceeded.
A Word to the Wise on Aging
Savvy employers would do well to learn from Aerol’s mistakes:
– Never assume that based solely upon age a worker is “too old”
– Focus on the essential job requirements: employees must be able to safely perform jobs as specified (some accommodation based upon age should be considered)
– Document any problems in performance
– Train supervisors in managing older workers (along with women, minorities, disabled workers and any other protected classes)
– Above all, keep lines of communication open.
Rodolfo gave 36 years to Aerol. He deserved consideration as he grew older, but he was not guaranteed a job. If and when any issues of his job performance arose, his supervisor should have sat down with him to discuss them openly. Ironically, there are no real winners in this situation: Aerol (or its insurer) took a big hit economically. They also lost a loyal employee who was still capable of making a positive contribution to the company. Rodolfo lost the job he loved and lived for. To be sure, he now has a nice nest egg for retirement, but that is not what he wanted most. He was one older worker who just wanted to keep on working.

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