First of all let me say, there is nothing wrong with outsourcing SOME employees through a friendly competitor. But that practice for some has turned into a complete avoidance of workers’ compensation coverage.
As clients, employees, insureds, Piggybackers, insurers all have a stake in these schemes and as a result can be harmed differently. It’s a complex issue that requires a broad understanding of insurance and the labor code.
Piggybacking is when an employer (many times a staffing company) abandons their workers compensation insurance and uses another company’s policy. It’s as simple as running the payroll under the company with more attractive rates.
Typical Piggybacking Scenario
The “Piggybacker” shifts 100% of their employees to another company the “Piggebackee”. The operative words are “shift” and “100%” (actually more than 50% can also be an issue). Sometimes they will use a DBA designation to make it look like both companies are covered.
- The Piggybacker has no workers compensation coverage directly in their corporate name.
- When two staffing companies are involved, many times the worksite client has no contractual relationship with the real insured staffing company (Piggybackee).
- The worker’s compensation insurance company is often unaware of the transaction.
- The employees are unaware that they are being recruited by a staffing company that is without workers compensation coverage.
Client Rates Soft + Staffing Rates Hard + No Enforcement = Piggybacking
The California Market for Workers’ Compensation is actually very soft right now. As a result, the rates for many businesses are falling, except for Temporary Staffing Agencies. There are still very few Insurance Carriers that will even quote a Staffing Risk. In addition, the WCIRB has changed the Experience Modification (XMod) formula penalizing staffing companies for higher payroll volume. Higher Xmods mean higher rates in an already tiny supply of carriers.
In order to compete in the marketplace Staffing Agency Owners are desperately looking for relief on their rates. Their desperation and lack of sophistication allow for black market brokers to pray on them with these unregulated schemes that offer high commissions and easy placement.
Meanwhile, until just recently there has been little to no government enforcement against Piggybacking. Staffing Agencies have become convinced that nothing is wrong with not having their own policy because no one gets in trouble. As a result, 30% to 40% of agencies in some regions, including companies with over $100 million in revenues take a walk on the wild side and abandon their coverage.
Labor Code 3700
California labor code 3700 says if you are an employer you must have your own policy. While some may debate whether a Piggybacker has employees any longer, California has a very liberal position as to what makes an employer.
Sole or Exclusive Remedy Protection
Workers’ Compensation provides immunity from tort claims. Piggybackers typically give up their coverage and therefore may be subject to a third party tort claim.
Clients are on the hook if their staffing company doesn’t pay their workers’ compensation claims and other employment liabilities. Contracting with a staffing company that doesn’t have a policy creates a potentially disastrous scenario. Generally speaking, the worksite client may not be aware of the unpaid claims till years down the road.
General – Special Employer
Piggybackers do employer like functions by taking applications, running ads for jobs, etc. California has a doctrine that allows for a second or third employer to be named. The Piggybacker may be deemed a special employer even though they are not running payroll under their tax id number.
What could possibly go wrong?
Piggybacking leaves holes. For the most part, these schemes may go on for many years without notice. However, at some point, it’s inevitable benefits stop being paid to injured employees. Employees who are left trying to figure out how to get benefits almost surely will obtain a lawyer. The lawyer will go to the uninsured fund, which will ultimately come after the Piggybacker and their worksite client.
Without the worksite client’s acceptance of these schemes, they would go away. However more and more clients today are accepting the piggybacked certs because so many companies are doing it. The allure of the low cost of a Piggybacker and the lack of government enforcement can give the client a false sense of confidence and can allow them to claim ignorance if they are caught. However, when the party is over and the pyramid behind a Piggybacker crashes, the long arm of the law (CIGA or the uninsured fund) will ultimately find its way back to the work site and ask the client to reimburse them for losses they paid as a result of faulty coverage. By this time the claims are usually dramatically higher because of a lack of diligent claims management either by someone part of the pyramid or the TPA assigned to the claims, once CIGA takes over.
The Piggybackee has real insurance and may have invested collateral in their program. When the policy tanks because of unforeseen losses, the Piggybackee loses all their collateral and probably the value of their business.
Piggybacking creates an almost impossible scenario for an insurance company to correctly price and audit their risk. Any insurance company that doesn’t monitor this type of practice can be devastated by unforeseen claims. Without their knowledge, these schemes make it easy for piggybackers to not report all their payroll and pay claims under the table. In addition to the underwriting risk, insurers also may become subject to penalties from the WCIRB and Dept. of Insurance for not issuing Rule 4 policies and unpaid premium taxes on unreported or underreported premiums.
While the allure of cheaper rates can be tempting, consider the fact that once you go to the dark side it’s very difficult to come back. By moving 100% of their employees to another company’s payroll, they lose the ability to generate credible loss runs. Without loss runs it is highly unlikely that they will be able to obtain a competitive quote in the future when they want to legitimize their company. This also dramatically affects the ability to sell their company for a competitive price. Many worksite clients still rightfully refuse to accept a certificate of insurance that looks like a piggybacking scheme. Finally, a company without valid coverage might not be protected under Exclusive Remedy, which means injured employees can sue in a Tort Claim. If the government does enforce the laws on the uninsured employer, there are fines, penalties, and potentially criminal charges.
Piggybacking will always be around because of the outrageous cost of workers compensation in California. The risk vs. reward scenario in today’s market is pushing more staffing companies than ever before into rolling the dice on this dangerous practice. Its complex set of laws that are potentially being broken under the many variations of schemes that fall under Piggybacking. I am afraid that if this practice continues to grow without some pushback we are headed for a very large crash that will hurt Insurers, the Staffing Industry, and their clients.
For more information please contact me.
For the purposes of this article, I use the word Piggybacking to be synonymous with Staffing on Staffing and Employer of Record (EOR) scenarios in the California market. Also, I discuss insurance and legal concepts based from my 29 years of experience as an owner of multiple California based staffing companies, workers compensation TPA owner, and PEO consultant for Temporary Staffing clients. The concept of Piggybacking is complex and difficult to assess without licensed professionals. Please consult your attorney and your insurance agent to get specific advice on your situation before you make any decisions.