California: The Latest Word on Professional Employer Organizations

California’s workers’ compensation system is predicated on the existence of an employer-employee relationship: the employee provides services to the employer and the employer has the right to control the manner and means of achieving the desired result. When California’s workers’ compensation act was first adopted, the roles of employee and employer were a lot easier to identify. Fast forward to the present and that is no longer the case. Take, for example, a Professional Employer Organization, or “PEO,” as they have come to be known. Is it an employer? Does the fact that a PEO is contractually responsible for securing workers’ compensation insurance coverage for the employees of another entity make it an employer? Clarity and guidance on that perplexing question was recently provided by the unanimous panel in Rodriguez v. Fairway Staffing; Solvis Staffing, etc. et al, (April 19, 2019) 2019 Cal Wrk. Comp. P.D. LEXIS —-.

For those practitioners unfamiliar with the concept of a PEO, a brief review of the facts in Rodriguez is provided. Fairway Staffing Services (Fairway) is a temporary staffing agency. It entered into contractual agreement with Solvis Staffing (Solvis), whereby Solvis agreed to pay payroll taxes, insurance, and to provide workers’ compensation coverage for Fairway’s employees. Solvis is a PEO. When the contract between Fairway and Solvis was in effect, Fairway hired Rodriguez and sent her to work at Fresh Grill Foods, LLC (Fresh Grill). Rodriguez claims to have sustained industrial injury while working at Fresh Grill and also claims to have sustained a second industrial injury while performing modified work at Fairway after the alleged injury at Fresh Grill.

Fairway claimed that Solvis should be considered Rodriguez’ employer for payroll and workers’ compensation purposes, and Solvis agreed. Solvis’ workers’ compensation carrier, however, did not.

A trial was held on the sole issue of employment, and a decision issued in which it was found that Rodriguez was employed by Fairway, Solvis and Fresh Grill with regard to the first claimed injury, and was employed by Fairway and Solvis with regard to the alleged second injury. Solvis’ insurer sought reconsideration, and the WCJ rescinded the decision and conducted further proceedings regarding the contractual PEO agreement between Fairway and Solvis.

Following those proceedings, a new decision issued in which it was found that Rodriguez was the employee of Fairway and Fresh Grill with regard to the first claimed injury, and was the employee of Fairway only at the time of the alleged second injury. Fresh Grill sought reconsideration. The Appeals Board granted reconsideration, rescinded the decision, and returned the matter to the trial level for development of the record.

After further proceedings the WCJ issued a new decision in which he found that Fairway and Fresh Grill were Rodriguez’ employee at the time of her alleged first injury, and that Fairway only was Rodriguez’ employer at the time of her alleged second injury. Fairway sought reconsideration, contending that Solvis was Rodriguez’ employer.

The Appeals Board panel affirmed the WCJ’s decision, adopting his rationale that the evidentiary record does not provide any basis for finding the existence of an employment relationship between Rodriguez and Solvis. Solvis did not control any aspect of Rodriguez’ job and duties. Control was exercised by Fairway and/or Fresh Grill, and Fairway paid Rodriguez’ net pay directly to her. Solvis, on the other hand, functioned more as a payroll service by paying payroll taxes, disability insurance, and other items on Fairway’s behalf, and also secured workers’ compensation insurance for Fairway’s employees.

Of import, the panel endorsed the WCJ’s reliance on Serrano v. Exact Staff (2016) 81 Cal. Comp. Cases 777; 2016 Cal. Wrk. Comp. P.D. LEXIS 221 (Appeals Bd. panel) and his explanation that while the PEO contract between Fairway and Solvis creates an employment relationship for workers’ compensation insurance purposes, that relationship does not require a finding that Solvis was Rodriguez’ actual employer.

Serrano, an insurance coverage arbitration, presented remarkably similar facts to those in Rodriguez. It involved an employee leasing company that entered into a contractual agreement with a PEO under which the employee leasing company paid net payroll to employees and the PEO paid payroll deductions and secured workers’ compensation coverage for those employees. Such contract, the arbitrator concluded, does not fall squarely within Labor Code section 3602(d)(1) because the PEO did not act as a general or special employer. He characterized the contract as a “bizarre hybrid of a general-special employment agreement” that placed the employee leasing company and its PEO as “joint and several employers” of the injured worker “for the sole purpose of insurance coverage, legally bound together by their written contract and the mandate of Insurance Code section 11663 that clearly and unequivocally mandates that liability for workers’ compensation benefits follows payroll.” (Serrano, supra, 81 Cal. Comp. Cases at p. 783.)

It is true that Rodriguez and Serrano as panel decisions are not binding as precedent on WCJs and the appeals board. No doubt they are not the final word on the status of PEOs, which reportedly are becoming more prevalent. But their import cannot be ignored or dismissed. Even in the face of a PEO contract that purports to create an employment relationship, there is distinction between the right to control the manner and elements of an employee’s job duties and liability for workers’ compensation insurance benefits. That is, there can be an employment relationship created by contract solely for workers’ compensation coverage and liability purposes, even when there is not an actual employer-employee relationship between the PEO and the injured worker.

The PDF for the Rodriguez case is at the end of this post.

Practitioners should check the subsequent history of any cases before citing to them.

Any information or opinions contained in this commentary are not necessarily endorsed by LexisNexis® or its affiliates.

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