STATE OF MICHIGAN DEPARTMENT OF LABOR & ECONOMIC GROWTH OFFICE OF FINANCIAL AND INSURANCE SERVICES

STATE OF MICHIGAN DEPARTMENT OF LABOR & ECONOMIC GROWTH OFFICE OF FINANCIAL AND INSURANCE SERVICES Before the Commissioner of Financial and Insurance Services Human Capital, LLC, Petitioner, v Case No. 03-381-WC Docket No. 2003-1410 Michigan Workers Compensation Placement Facility, Respondent. / Petitioner: For the Respondent: Seth T. Seidell (P53158) Lori M. McAllister (P39501) Human Capital LLC Dykema Gossett, PLLC 28777 Northwestern Hwy, Suite 125 800 Michigan National Tower Southfield, MI 48034 Lansing, MI 48933 (248) 353-3444 (517) 374-9150 FAX (248) 353-3829 FAX (517) 374-9191 seths@human-capital.com lmcallister@dykema.com Issued and entered this 24 th day of August 2004 by John R. Schoonmaker Special Deputy Commissioner FINAL DECISION I BACKGROUND

The Administrative Law Judge issued a Proposal for Decision dated July 22, 2004. She recommended that the Commissioner uphold the Facility s application of its rule respecting professional employer organizations. Neither party filed exceptions. The factual findings in the PFD are in accordance with the preponderance of the evidence and the conclusions of law are supported by reasoned opinion. The PFD is attached, adopted, and made part of this final decision. II ORDER Therefore, it is ORDERED that the Facility s ruling in this matter is upheld.

STATE OF MICHIGAN DEPARTMENT OF LABOR & ECONOMIC GROWTH BUREAU OF HEARINGS In the matter of Docket No. 2003-1410 Human Capital, LLC, Petitioner v Michigan Workers Compensation Placement Facility, Respondent / Agency No. Agency: Case Type: 03-381-WC Office of Financial & Insurance Services Appeal Workers' Compensation Issued and entered this 22 nd day of July, 2004 by Lauren G. Van Steel Administrative Law Judge PROPOSAL FOR DECISION PROCEDURAL HISTORY Appearances: Seth T. Seidell, Attorney at Law, appeared on behalf of Human Capital, LLC, Petitioner Lori McAllister, Attorney at Law, appeared on behalf of the Michigan Workers Compensation Placement Facility (hereafter Facility ), Respondent. This proceeding commenced with the filing in the Bureau of Hearings of an Order Referring Complaint for Hearing and Order to Respond, issued by John R. Schoonmaker, Special Deputy Commissioner for the Office of Financial and Insurance Services under the provisions of the Insurance Code of 1956, being 1956 PA 218, as amended [MCL 500.100 et seq.] (hereafter Insurance Code ). On November 6, 2003, the Bureau of Hearings issued a Notice of Hearing, which scheduled a hearing for December 11,

Page 4 2003. On December 5, 2003, Administrative Law Judge (ALJ) Renee Ozburn, then assigned to the matter, issued an Order Scheduling Telephonic Prehearing Conference. On December 11, 2003, a telephone prehearing conference was held. On December 17, 2003, ALJ Ozburn issued an Order Following Prehearing Conference, which scheduled a hearing for March 25, 2004. On March 19, 2004, this matter was assigned to the undersigned administrative law judge. On March 25, 2004, a hearing was held as scheduled. Gary Thompson, Cheryl Cornellier and William M. Williams were called to testify as witnesses for Petitioner. In addition, Petitioner offered the following exhibits that were admitted into the record as evidence: Petitioner s Exhibit A Petitioner s Exhibit B Minutes of the Appeals Committee Meeting Held on Tuesday, March 12, 2002 in the Office of the Facility Minutes of the Appeals Committee Meeting Held on Tuesday, June 11, 2002 in the Office of the Facility Neil I. Johnson was called to testify as a witness for Respondent. In addition, Respondent offered the following exhibits that were admitted into the record as evidence: Respondent s Exhibit 1 Respondent s Exhibit 2 Circular Letter No. 169 from Jerry J. Stage, Michigan Workers Compensation Placement Facility, dated May 4, 2001, and Plan of Operation Portion of Minutes of Meeting of the Board of Governors on April 29, 2003, Additional Business and Adjournment

Page 5 Respondent s Exhibit 3 Respondent s Exhibit 4 Respondent s Exhibit 5 Respondent s Exhibit 6 Respondent s Exhibit 7 Letter to Commissioner of Insurance from Gary Thompson, Michigan Workers Compensation Placement Facility, dated April 30, 2003 Letter to Commissioner of Insurance from Gary Thompson, Michigan Workers Compensation Placement Facility, dated April 30, 2003, datestamped filed May 1, 2003 Circular Letter No. 189 from Gary L. Thompson, Michigan Workers Compensation Placement Facility, dated July 7, 2003 Michigan Application for Workers Compensation Insurance, dated August 29, 2001 Letter to Seth Seidell from Gary Thompson, Michigan Workers Compensation Placement Facility, dated February 19, 2003 Following the hearing, the record was held open for the submission of written closing arguments. On April 13, 2004, the hearing transcript was filed. On May 7, 2004, Respondent filed its written closing argument. On May 10, 2004, Petitioner filed its written closing argument. On May 21, 2004, Respondent filed a Reply to Petitioner s Closing Argument. The record was then closed. ISSUES AND APPLICABLE LAW The issues presented in this matter are as follows: 1) Whether the factual allegations set forth in Petitioner s letter of Complaint, dated July 9, 2003, to the Commissioner of the Office of Financial and Insurance Services (hereafter Commissioner ) are true, specifically that the Facility has not properly adopted a rule which requires that if a professional employer organization (hereafter PEO ) is

Page 6 insured through the Facility, whichever entity (the PEO or its co-employer client) issues a W-2 tax statement to an employee will be considered an employer for purposes of collection of the workers compensation premium; and 2) Whether the determination made by Respondent relating to Petitioner s worker s compensation policies complies with the requirements of the law. Petitioner s appeal is procedurally based on Section 2350 of the Insurance Code, which provides as follows: FINDINGS OF FACT evidence in the record: Sec. 2350. (1) Any participating member, applicant, person, or business insured under a policy placed through the facility may request a formal hearing and ruling by the board of governors of the facility on any of the following: (a) An alleged violation of the plan of operation. (b) An alleged improper act or ruling of the facility affecting an assessment, premium, or coverage furnished. (2) Any formal ruling of the board of governors of the facility may be appealed to the commissioner by filing notice of appeal with the facility and the commissioner within 30 days after receipt of the written ruling. (3) The commissioner shall issue an order either upholding the board of governors ruling or reversing its ruling [MCL 500.2350]. The following facts are found as established by a preponderance of the

Page 7 1. The Facility is the option of last resort in Michigan for employers unable to obtain workers compensation insurance in the voluntary market. The Facility does not issue insurance policies, but appoints servicing carriers who then issue policies to employers based on underwriting rules and rates determined by the Facility and approved by the Commissioner [Tr, 42]. 2. The Board of Governors, appointed by the Commissioner, oversees the actions of the Facility [Tr, 40]. 3. The Board of Governors has an Appeals Committee which hears appeals of insurance policyholders and makes decisions concerning specific cases before it but does not set policy for the Facility [Tr, 32-33]. 4. Petitioner is a Michigan domiciled limited liability company doing business as a PEO in Michigan and other states. 5. Petitioner is a co-employer with client companies in Michigan through contractual relationship [Complaint, p 2]. 6. In the past, Petitioner and other PEO companies in Michigan have had different types of contractual arrangements with their client companies, in which the PEO may or may not agree to carry workers compensation insurance coverage for co-employees. PEO companies may issue W-2 tax statements to employees or their client companies may do so [Tr, 149-151]. 7. In August 2001, Petitioner sought workers compensation through the

Page 8 residual insurance market handled by the Facility. The effective date of the application was August 29, 2001 [Resp. Exh. 6]. 8. On March 12, 2002, the Board of Governors Appeals Committee decided in the matter of Workforce Services, a PEO, and its client company, Wolverine Steel, that it would be acceptable to allow a PEO s client company to carry the necessary workers compensation insurance coverage in an instance of employee leasing, such that the provision of [workers compensation] insurance has been met regardless if it is provided by the lessor or lessee... [Pet. Exh. A]. 9. On June 17, 2002, the Board of Governors Appeals Committee similarly decided to allow client companies to carry workers compensation coverage in a matter concerning the PEOs, Staff Pro II and Omega Solutions, LLC, and five client companies, provided that certain verification documentation was submitted to the Facility [Pet. Exh. B]. 10. The Facility conducted an audit of Petitioner s workers compensation coverage for the time period of 2001 to 2002. A dispute arose when the Accident Fund of Michigan apparently billed Petitioner for premiums for workers compensation coverage when their client companies maintained coverage outside the Facility. On February 19, 2003, the Facility notified Petitioner that as of January 1, 2003, it would require Petitioner to carry workers compensation insurance on any employee for whom it issued a W-2 tax statement [Resp. Exh. 7; Tr, 68].

Page 9 11. Petitioner appealed the Facility decision of February 19, 2003, to the Appeals Committee. 12. On April 29, 2003, a Board of Governors meeting was held at which a quorum was present. Petitioner and other PEO companies were not notified in advance that an issue concerning their workers compensation insurance coverage would be discussed or acted upon by the Board of Governors [Tr, 41]. 13. At the meeting, representatives of the Accident Fund of Michigan, a servicing provider for the Facility, addressed the Board of Governors concerning auditing problems it had encountered with PEOs and their client companies. The Accident Fund of Michigan is the largest carrier in the voluntary workers compensation insurance market in Michigan [Tr, 41, 120-122, 135]. 14. The auditing problems cited at the meeting included PEOs not having employee records on hand for inspection, an inability to require submission of records from a PEO directly, and verification of information submitted by a PEO, when the client company, rather than the PEO, is the insured entity [Tr, 122-123, 138, 142].

Page 10 15. The information provided to the Board of Governors indicated that if PEOs are not considered employers for purposes of workers compensation insurance coverage, the ability of insurers to assess and track risk in order to set rates is negatively affected. The insurers auditing process includes the need to assess the number and risk factors of employees in insured companies, whether the companies are PEOs or not [Tr, 127, 129, 131]. 16. The Accident Fund of Michigan recommended that the Board of Governors adopt a rule to consider PEOs as employers for purposes of workers compensation insurance coverage through the Facility s servicing providers [Tr, 135]. 17. The Liberty Mutual Insurance Company had also recommended action by the Facility concerning workers compensation insurance coverage by PEOs because of similar auditing difficulties it had encountered in assessing risk in co-employment situations. It proposed that the Facility utilize employee W-2 tax statements as the simplest method of establishing the employer entity, as is done by the Internal Revenue Service [151]. 18. The Liberty Mutual Insurance Company has also found that client companies use PEOs to essentially cleanse their experience modification factor, and thereby misrepresent their true risk to the insurer. Some PEOs have been used to launder money by organized

Page 11 crime. The Federal Bureau of Investigation, U.S. Department of Justice, the Internal Revenue Service, and the U.S. Department of Labor s Racketeering and Corruption Division have investigated some PEOs for such reasons [Tr, 148, 151, 153-155, 157, 159]. 19. Insurers also have difficulty with PEOs who contract with their client companies to have the client carry workers compensation insurance, because the insurer has no contract with the client company to enforce [Tr, 156]. 20. On April 29, 2003, the Board unanimously voted on its own motion to adopt a new policy rule addressing workers compensation insurance coverage by PEOs, which was different than the Appeals Committee s decisions in the specific matters addressed in March and June of 2002, above. The Board of Governors voted as follows: Direct the Facility to file a Basic Manual rule stating that if a Professional Employer Organization is insured in the Facility whoever (the PEO or the client) is the issuer of the W-2 form will be considered the employer for purposes of collection of the workers compensation premium [Tr, 26, 39-40; Resp. Exh. 2; emphasis supplied]. 21. On April 30, 2003, the Board of Governors new policy rule was sent to the Commissioner for final approval before implementation by the Facility [Resp. Exh. 3]. 22. On May 1, 2003, the proposed rule was stamped as filed with the Commissioner s office and returned to the Facility [Resp. Exh. 4].

Page 12 23. In the past, the Facility has received approval from the Commissioner s office for proposed policy rules or actions in a variety of ways, including receiving a letter back, receiving a copy of its own letter back or receiving approval over the telephone [Tr, 60]. 24. Through a telephone call by Gary Thompson of the Compensation Advisory Organization to the Commissioner s office, the Facility confirmed that the Commissioner had approved the new policy rule with an effective date of January 1, 2004 [Tr, 61, 69-70]. 25. The Facility did not obtain the signature of the Commissioner to show that the new policy rule was approved, but its receipt of the letter back with a filed stamp is consistent with past practice of the Commissioner in approving Board of Governors actions [Tr, 60-61, 69]. 26. On June 3, 2003, Petitioner addressed the Appeals Committee on its appeal of the February 19, 2003, decision by the Facility to require it to carry workers compensation insurance coverage in co-employment situations. 27. On June 10, 2003, the Appeals Committee decided against Petitioner s appeal. 28. Petitioner was subsequently notified that it would become subject to the new policy rule on its renewal date of August 29, 2004. The Facility has allowed Petitioner the time until August 29, 2004, for transition to the new coverage requirement [Tr, 43-44, 64]. The new rule will cover

Page 13 Petitioner s Michigan personnel only, not other-state employees [Tr, 45]. 29. Under the new policy rule, the Facility determines whether an individual is an employee of an employer by looking at W-2 tax statements, regardless of whether the employer is a PEO [Tr, 62]. 30. It is the position of the Workers Compensation Agency within the Michigan Department of Labor & Economic Growth that both a PEO and its client company are required to have workers compensation insurance on an employee in a co-employment arrangement. A PEO may be allowed to carry a minimum premium policy, but it is still required to carry the insurance on all Michigan employees in a co-employment arrangement. The PEO cannot contract with its client to be excused from carrying workers compensation insurance coverage [Tr, 93, 98, 101, 102]. 31. It is also the position of the Agency that both a PEO and its client company are entitled to the exclusive remedy provisions of the Workers Compensation Act [Tr, 93-94]. 32. In determining whether an employment relationship exists, the Agency uses the payment of wages as reflected in a W-2 tax statement as one factor, but also an economic reality test [Tr, 94, 97]. 33. Voluntary insurers in the workers compensation insurance market have generally treated PEOs as employers when in a co-employment arrangement with client companies [Tr, 134-136, 141, 152].

Page 14 34. In the voluntary market, it is discretionary for an insurer to exclude subcontractor employers in an owner controlled insurance program or OCIP [Tr, 163]. In that limited instance, the payment of wages is considered only one factor in the economic reality test [Tr, 97]. Otherwise, the employer and subcontractor are still both required to have workers compensation insurance coverage [Tr, 102-103]. 35. The Board of Governors new policy rule does not generally create a disparate impact for PEOs with workers compensation insurance coverage through the Facility s involuntary or residual market, as opposed to the voluntary market [Tr, 134]. CONCLUSIONS OF LAW The principles that govern judicial proceedings also apply to administrative hearings [8 Callaghan s Michigan Pleading and Practice, 60.48, at 230 (2d ed. 1994)]. The burden of proof in this matter is upon Petitioner as appellant to prove, by a preponderance of the evidence, the allegations set forth in the Complaint. Further, Petitioner must show that the determination made by Respondent relating to its workers compensation policies does not comply with the requirements of the law. Petitioner has not met its burden of proof.

Page 15 Code, as follows: The Facility was created by the Legislature in Section 2301 of the Insurance Sec. 2301. Each insurer authorized to write worker's compensation insurance in this state shall participate in the Michigan worker's compensation placement facility for the purpose of doing all of the following: (a) Providing worker's compensation insurance to any person who is unable to procure the insurance through ordinary methods. (b) Preserving to the public the benefits of price competition by encouraging maximum use of the normal private insurance system [MCL 500.2301]. Petitioner has acknowledged that it is a co-employer with its client companies [Complaint, p 2]. PEOs are in a co-employer arrangement under the economic reality test stated by the Michigan Supreme Court in Kidder v Miller-Davis Company, 455 Mich 25; 564 NW2d 872 (1997). Factors to be considered include control of the employee, payment of wages, hiring and firing and responsibility for the maintenance of discipline. Id. at 35. The contractual arrangement between two entities is neither dispositive nor controlling in determining the economic reality of an employment relationship. Id. at 46. In this matter, there is no question that Petitioner is an employer. Pursuant to MCL 500.2318(1), the Facility and a designated advisory organization, the Compensation Advisory Organization of Michigan, are authorized to determine the rating system of the Facility, subject to the Insurance Code and approval by the Commissioner. Under MCL 500.2402(1)(d), a rating system includes rules used by an insurer in the determination of premiums. The Facility is therefore statutorily empowered to

Page 16 adopt a rule that covers such determination of premiums. The record in the instant matter makes clear that the setting of premiums includes determining the number of employees on a particular company s payroll, thus whether an insured is an employer in a given instance. The Board of Governor s rule adopted on April 29, 2003, is therefore within the Facility s statutory authorization. Further, the Michigan Worker s Compensation Act (Act), 1969 PA 317, as amended, covers all employers who regularly employ three or more employees at one time. MCL 418.111 states as follows: Every employer, public and private, and every employee, unless herein otherwise specifically provided, shall be subject to the provisions of this act and shall be bound thereby. MCL 418.115(a) states that the Act covers [a]ll private employers, other than agricultural employers, who regularly employ 3 or more employees at 1 time. Individuals are employees for purposes of the Act if under any contract of hire, express or implied.... MCL 418.161(1)(l). Petitioner has not shown that the rule in question alters these statutory requirements or that it can avoid the provisions of the Act, simply because it is a PEO employer in a co-employment relationship with client companies. Petitioner has not shown that it is not an employer under the provisions of the Act. In its Complaint, Petitioner asserts that [t]he Workers Compensation Bureau has indicated verbally as well that either PEO or Client coverage on co-employees would suffice for statutory purposes. This is plainly contradicted by the undisputed testimony from Cheryl Cornellier, a Departmental Analyst with the Workers Compensation Agency that the

Page 17 Agency has routinely required PEOs in co-employment arrangements to carry at least minimum premium coverage [Tr, 93, 98]. As discussed above, Petitioner has acknowledged that it is a co-employer with its client companies. Based on the above findings of fact, it is concluded that Petitioner has not shown by a preponderance of evidence the truth and/or relevance of the factual allegations set forth in its Complaint, page 3, as follows: a) Exclusive remedy is maintained if the client companies have the coverage, not PEOs. With the Board of Governors new policy rule in place, either a PEO or its client company can be the employer for purposes of the exclusive remedy of the Act, depending upon which company issues the W-2 tax statement; b) Keeps consistent with the policy in the voluntary market. The record rather shows that insurers in the voluntary market generally require PEOs to carry workers compensation coverage; c) Audits are easily manageable due to the nature of sophisticated PEO computer and accounting systems. Petitioner has not shown evidence to support this assertion; a preponderance of the evidence shows rather that audits are made much more difficult in the absence of the new policy rule; d) Payroll records by PEOs are maintained in bundled (PEO combined) or can be unbundled (by Client). The record evidence shows that while this statement may be true, the unbundling of payroll records does not

Page 18 necessarily assist auditing for purposes of workers compensation insurance coverage. e) PEOs can easily determine coverage on PEO or Client policy thus eliminating any confusion as to claims or audit management. The record evidence shows that the pertinent question is not PEOs determining coverage, but rather the insurers who have audit management difficulties because they lack their own contractual relationship with client companies. Here, Petitioner has not shown that there is any discriminatory or disparate impact for employers in the voluntary or involuntary insurance market. Petitioner has not shown that it is being treated differently than other employers similarly situated. The record shows that insurers in the voluntary market generally require PEOs to carry workers compensation insurance coverage on their employees. Further, a preponderance of the evidence shows that the rule adopted was for reasons consistent with the Facility s legislatively created mandate, specifically the need of servicing providers to legally enforce contracts with employers to carry workers compensation insurance coverage and to conduct necessary audits for the purpose of setting rates. The rule may also assist criminal law enforcement purposes in specific instances, although that is apparently not its primary objective. Nor has Petitioner shown a due process violation in the Board of Governors actions. Petitioner was afforded an appeal of the Facility decision to the Appeals Committee. The fact that the Board of Governors chose to act on its own motion on the same policy issue

Page 19 as raised in Petitioner s appeal does not constitute a violation of MCL 500.2350. In addition, Petitioner has not shown any statutory or administrative rule requiring advance notice by the Board of Governors prior to consideration of new policy rules. Petitioner was afforded the opportunity to appeal the Board of Governors rule under MCL 500.2350(2). Therefore, it is concluded that the Facility s Board of Governors has properly adopted the new rule to require reliance upon W-2 statements for purposes of determining workers compensation coverage between PEOs and their clients. Petitioner s appeal should be therefore denied. RECOMMENDATIONS Based upon the above findings of fact and conclusions of law, the following recommendation is made by the undersigned to the Commissioner: 1) The above findings of fact and conclusions of law be adopted in the Commissioner s final decision and order; 2) The Commissioner deny Petitioner s appeal and affirm the Facility application of the rule in question to Petitioner s workers compensation insurance coverage. EXCEPTIONS Any Exceptions to this Proposal for Decision should be filed in writing with the Office of Financial and Insurance Services, Division of Insurance - Attn. Dawn Kobus, P.O. Box 30220, Lansing, Michigan, within twenty (20) days of issuance of this Proposal for Decision.

Page 20 Lauren G. Van Steel Administrative Law Judge