State battles staff leasing firm over workers comp; court to hear arguments on legality of coverage plan.

Two state agencies are scheduled to present arguments in federal court Nov. 19 over whether a discount-rate workers' compensation plan operated by a Torrance-based employee leasing company is legal.

At issue is whether the Torrance-based employee leasing company, Stafcor Inc., can provide workers' comp insurance through a plan that is not state-approved but which appears to meet federal guidelines.

Stafcor provides its employees with health insurance and workers' comp insurance together through a federal Employee Retirement Income Security Act (ERISA) plan.

The state argues that violates the state insurance code which mandates that workers' comp insurance be provided through a plan that is separate from other benefits plans.

Under federal law, employers are not permitted to provide only workers' compensation insurance through an ERISA plan, said Karen Ford, an attorney with the San Francisco law firm of Littler, Mendelson, Fastiff, Tichy & Mathiason, who is representing Stafcor.

But there is nothing in ERISA which states an employer cannot provide both health benefits and workers' compensation through an ERISA plan, which is what Stafcor is doing.

"There is no case (precedent) in the country on whether this works or not," she said.

If Stafcor wins the court battle, employers statewide may have a "meaningful alternative" to the costly and much-criticized state workers' compensation system, said Ford.

But Larry C. White, an attorney for the state Department of Insurance, which is joining with the Department of Industrial Relations in the court fight, labeled Stafcor's operation "a scam" and said any employer that buys into the plan could face severe penalties.

Stafcor provides workers' comp at about 50 percent of the cost of a state-approved plan, through an ERISA plan, said Stephen Kritt, president and chief executive officer of Stafcor.

Workers of an employer that signs up with Stafcor become employees of Stafcor but are "leased" back to the client to perform the same work as before, Kritt explained.

The employer/client pays Stafcor a leasing fee that is a percentage of gross payroll, from 3 to 6 percent, depending on the industry.

Currently, Stafcor has 6,000 employees, most of whom work in the Los Angeles area.

It pays for all the employees' health and workers' comp benefits.

Kritt said he pays half of what other employers do for a workers' comp plan because the self-insured plan is not state-approved.

Under his plan, Kritt said, he is able to save money because he has more leeway in dismissing suspected fraudulent claims.

Kritt said Stafcor's comp plan has re-insurance from a variety of insurance companies, including Lloyds of London, for catastrophic claims, he said.

He has two health maintenance organization plans, plus a preferred provider organization plan which provide health insurance. Both plans are part of the benefits package he provides which is registered at the office of the U.S. Department of Labor.

But the state Department of Industrial Relations contends the leasing company's plan does not provide workers' compensation coverage that meets state law requirements, said Richard Stephens, department spokesman.

The legal battle began Oct. 8 when officials from the state Department of Industrial Relations, who say Stafcor's plan is illegal, issued a stop work order against Stafcor to shut the operation down.

On Oct. 13, U.S. District Court Judge Stanley Weigel issued a temporary restraining order against the state, removing the stop work order.

He set a preliminary injunction hearing date for Nov. 19.

According to Stephens, the state's position is there are only two legal ways to provide workers' comp:

* an employer must either purchase workers' comp coverage from a state-approved insurance carrier;

* or operate a self-insurance plan, which is approved by the state.

Because Stafcor's plan meets neither of these requirements, the state contends it is not legal, according to Stephens.

However, he declined to answer specific legal questions about what Stafcor is doing, saying he did not know the answers.

Thomas Cadell, Department of Industrial Relations attorney who is handling the case for the state, declined to be interviewed.

But White, an attorney with the state Department of Insurance, called Stafcor's operation "a scam." The insurance department has filed a declaration on the side of the state Department of Industrial relations.

Kritt said his plan of providing health insurance and workers' comp insurance was designed for him by De Leon & Boggins, an Austin, Texas, law firm.

Hector De Leon, the Austin attorney, said he has set up the plan for two employee leasing companies in California and for about 15 companies nationwide.

Louis Reisman, an employee benefits attorney with the Century City law firm of Weinstock, Manion, Reisman, Shore & Neuman, said he thinks Stafcor "is stretching the law," but added it's possible that Stafcor will win the case.

Reisman explained that Stafcor is saying that federal ERISA law preempts state law, but ERISA law only preempts state law when there is a conflict.

"The state workers' comp law covers a lot of things which are not addressed by ERISA," so it is not necessarily a conflict, he explained.

Reisman added that a client of his who also runs an employee leasing company wanted to offer the same program as Stafcor and asked him to look into the law.

"I concluded that it was too risky for them to adopt for their clients at this time," he said.

Because the plan is not state-approved, the state cannot guarantee workers' comp claims will be paid, White said.

De Leon admitted that under the plan there is "nothing" to stop the employee leasing company from leaving the state or avoid having to pay catastrophic injury claims.

But he added that state-approved insurance companies have gone bankrupt in California and said that Stafcor is in California for the long haul.

State regulators don't like ERISA plans, De Leon said, because such plans do not pay state premium taxes, unlike state-approved insurers.

"All I know is they're ... doing something we consider to be wrong," White said.

He added that employers who buy into the plan may face severe penalties.

Employers can be shut down, White said. "The employer's house can be foreclosed on by the Department of Industrial Relations," White said.