California’s Proposed Staffing Registration Law: Why PEOs Should Pay Attention
California lawmakers are once again attempting to tighten the regulatory framework around labor contractors through a newly introduced bill, SB 1032, also known as the Staffing Agency Fair Employment (“SAFE”) Act. The bill would require staffing agencies operating in California to provide proof of current workers’ compensation coverage as part of a mandatory registration process with the Labor Commissioner. Agencies without coverage could face stop-work orders, and businesses would be prohibited from using unregistered staffing firms with a list of those that are eligible available on a public website. This all makes perfect sense. What is extremely confusing is who it is supposed to apply to.
As there is no statutory definition within the overall term of “Labor Contractor” of models within the sector such as temporary staffing, staffing, employer of record, gig or employee leasing/coemployment/PEO, who this bill will apply to is at this point unknown. While I think the bill makes complete sense for single employer models, there should be a separate process for coemployers that recognizes the differences in models and register them accordingly.
What does the bill propose?
Under the Safe Act (CA SB 1032):
· Staffing agencies must show proof of an active workers’ compensation policy to register or renew registration.
· The Labor Commissioner would notify the Department of Industrial Relations (DIR) if an agency lacks coverage.
· The DIR would be required to issue stop-work orders to non-compliant agencies.
· A public list of registered staffing agencies would be posted on the DIR website.
· Businesses would be prohibited from engaging staffing agencies that are not registered.
· Registered agencies could pursue legal action against unregistered competitors.
· Prevailing parties may recover damages of up to $75,000 plus attorney fees.
In other words, this legislation introduces not only regulatory oversight but also competitive enforcement mechanisms that would allow litigation between those in the staffing sector for the equivalent of unfair competition. The governance/enforcement appears to be by the Department of Labor, but if insurance is at issue, it would perhaps make more sense that it be shared with the Workers’ Compensation Insurance Rating Board (WCIRB) and the California Department of Insurance. What it does not do though is define what staffing is and therefore could further confuse an already opaque issue.
“Madwashing 101”
At its core, The SAFE Act is welcomed and revolves around workers’ compensation coverage verification, which has been an absolute issue in this sector, but it misses the biggest fraud being committed in California, the avoidance of workers’ compensation experience modification factors. The concept known as “modwashing” is when an employer tries to escape the experience modification factor (aka “mod” or “emod”) of the primary/locational employer in some fashion. Mods are a mathematical formula which evaluates the expected workers’ compensation losses of a given business against the actual losses of that business. While the formula is more advanced and addresses size of risk and limits catastrophic single claims, in essence, if a business was expected over a three-year period to have $100k in loss and had $100k of losses, their mod would be a 1.0 or median. If the same risk had $120k in loss, mod would be a 1.2, and if $80k a .80.
Rule 4 of the California Rating Manual (below) provided the framework for what are known as Employee Leasing Companies in California (PEO’s/Coemployers) over 20 years ago in 2005 and its number one priority was to address modwashing. At the time the WCIRB was very concerned with the mod-washing issue, and this was the result of many “discussions” between the former California Association of Professional Employer Organizations (CAPEO), NAPEO and the WCIRB. It in essence provided the rule within the WCIRB Experience Rating Manual where each client of an Employee Leasing Company would be required to issue a separate policy for each specific client company of an Employee Leasing Company that used their mod, based on their experience mod (v that of the Employee Leasing Company) when building a rating algorithm that charges premiums, taxes, assessments and surcharges. Emphasis being the client company’s mod is to be used as they are the locational employer and most responsible for the safety of a given workplace, which is a huge driver of enforcing the mod. If you do not pay for safety, we are going to charge you more. If you do and losses show such, you pay less.
The problem with Rule 4 is that there is no definition between the single employer models of temporary staffing, staffing, payrolling, EOR etc., and Employee Leasing/coemployment/PEO, yet many times they provide the same exact services.
This is the rule with the authors key points of it bolded in parentheses -
“4. Application of Experience Modification to Policies Covering Employee Leasing Arrangements
As used in this Rule, “employee leasing arrangement” means any arrangement, under contract or otherwise, and whether or not terminology such as “lease” is used by the parties, whereby an entity utilizes the services of a third party to provide its workers for a fee or other compensation. The third party providing the workers shall be referred to as the “labor contractor”. (As noted above, there is no definition in CA statute on the generalized term of “Labor Contractor” and therefore who this applies to in question) The entity to which the workers are provided shall be referred to as the “client”. a. If a client enters into an employee leasing arrangement, other than as noted in d below, then: (1) a separate policy providing workers’ compensation benefits for the workers provided to the client by the labor contractor must be written; provided, however, that such policy may also provide workers’ compensation benefits for the client’s employees; (2) the experience modification of the client shall apply to the separate policy; (3) the experience reported in connection with the separate policy shall be used in the future experience ratings of the client and shall not be used in the future experience ratings of the labor contractor; and (4) the separate policy shall name either the labor contractor or the client as the named insured. (a) If the labor contractor is the named insured, the separate policy may not provide coverage for the client’s employees. (b) If the client is the named insured, the separate policy shall be endorsed with the labor contractor’s name, address, and an indication that the policy covers the workers provided to the client by the labor contractor. In addition, the labor contractor shall be endorsed as an additional insured on the separate policy. b. If a policy names a labor contractor, who has entered into one or more employee leasing arrangements subject to this Rule, as the named insured, the policy must be limited and restricted as follows: (1) If the policy provides coverage for workers provided to a client by the labor contractor, the policy must be limited and restricted to provide coverage only for the workers provided to the client by the labor contractor. (2) If the policy provides coverage for employees of a labor contractor, other than those employees provided as workers to clients pursuant to one or more employee leasing arrangements subject to this Rule, the policy must be limited and restricted to exclude coverage for all workers provided to clients pursuant to one or more employee leasing arrangements subject to this Rule. c. If a policy names the client of a labor contractor as the named insured with respect to those employees of the labor contractor provided as workers to the client, and such policy does not also provide coverage for the client’s employees, the policy must be limited and restricted to provide coverage only for the employees of the labor contractor provided as workers to the client. California Workers’ Compensation Experience Rating Plan—1995 Effective September 1, 2025 Section V – Application of Experience Modification 12 d. This Rule does not apply to an employee leasing arrangement whereby workers are provided by the labor contractor solely to assist the client in meeting temporary staffing needs such as employee absences, skill shortages, or seasonal workloads.” (What is temporary and what is a labor contractor? I would argue a labor contractor transfers labor and that is not what an employee leasing/PEO company does. This is the loophole being exploited).
This last part of the rule is where temporary staffing is undefined and the confusion between single employer models and coemployer models begins. How can Employee Leasing be temporary and what is difference between that and Temporary Staffing? They are each “Employers’ of Record”, yet that is another labor model altogether? The confusion allows the fraud.
How does modwashing work?
In a single employer model, a client can escape their mod by firing their employees, allowing the staffing company to hire the same employees and then transferring them back to the client. If the mod of the client was 2.0 based on past experience, or should be charged double based on poor loss/potentially unsafe working conditions, this concept allow their mod to be “washed” as they are no longer the employer of record (staffing company is) and they can charge whatever they deem fit based on their mod and not that of the locational employer. Regardless of the safety and loss history of the locational employer, the mod of the staffing company is used in the consideration of premiums charged and taxes, fees and assessments levied. The mod used is not indicative of the safety of the client and certainly not what the WCIRB envisioned when establishing a fair and sound environment for coemployers. So, almost twenty-one years have gone by since Rule 4 was adopted and it has never been edited. The below I see as the road map to fix this without taking anything away from the provisions and rationale behind the SAFE ACT. I just do not feel it does enough and does not focus on the core issue in California; Statute, the California Basic Manual and the California Experience Rating Manual are not properly integrated.
The California Basic Manual
Every State in the union has a workers’ compensation "Basic Manual" in addition to the “Experience Rating Manual” which provides all the rules and regulations of that given State’s workers’ compensation system. The National Council on Compensation Insurance (“NCCI”) controls this in their states (38) and provides a national Basic Manual but then allows States to amend it with “State Specials”. In California, it is the WCIRB that is in charge of both California Basic and Experience Rating Manuals. We discussed how Employee Leasing is defined in the California Experience Rating Manual and will bring focus to how that is different than the California Basic Manual, each governed by WCIRB.
https://www.wcirb.com/sites/default/files/documents/2023-09_bum-final.pdf
Please note pages 33-34 "Labor Contractors"...
“7. Labor Contractors
The classification of workers provided to a client under any type of employee leasing arrangement (temporary or otherwise) shall be determined as though the workers are employees of the client. The limitations and conditions of the classification(s) so assigned and all Standard Classification System rules pertaining thereto shall be applicable. Clerical office staff retained by the labor contractor to conduct its own clerical functions shall be assigned to Classification 8810, Clerical Office Employees, or 8871¸ Clerical Telecommuter Employees, subject to the Standard Exceptions rule, notwithstanding that temporary or leased California Basic Underwriting Manual Effective September 1, 2023 Part 3 – Standard Classification System 34 workers are assigned to classifications that specifically include Clerical Office Employees or Clerical Telecommuter Employees. Examples A labor contractor provides a shipping clerk to a client that operates a woodworking shop that produces furniture and cabinets. The woodworking shop operations are assigned to Classifications 2883, Furniture Mfg. – wood, and 2812, Cabinet Mfg. – wood. The shipping clerk works exclusively in the cabinet department (2812) preparing cabinets for shipment. The shipping clerk is assigned to Classification 2812. A labor contractor staffs an administrative office for a client operating a hospital. The hospital operations are assigned to Classification 9043, Hospitals – all employees – including Clerical Office Employees, Clerical Telecommuter Employees and Outside Salespersons. Normally, an administrative office would be assigned to Classification 8810, Clerical Office Employees; however, the phraseology of Classification 9043 includes Clerical Office Employees. Therefore, the administrative office staff provided to the hospital is assigned to Classification 9043
As you will not the language and example is more in line for a single employer model, yet refers to Employee Leasing. It also does not reference back to rule 4.
The Path
While I have nothing negative to say about the attributes of the SAFE Act, I do not believe it addresses the core flaws in the California system when it comes to workers’ compensation insurance for labor contractors, which appears to be its primary objective. Until the insurance rules are proper, layering more legislature into statute that does not further define what are the various single and coemployer labor models, it will work toward making sure staffing companies have coverage, but who that is will continue to be cloudy and those that should be targeted may continue to fly under the radar. Lack of statutory definition of the different Labor Contractor models and confusion between single employer coemployer models are what drive the ability for the frauds to be perpetrated that the Act is meant to address. The WCIRB appears motivated to fix this confusion and has been very active in trying to understand their path in doing such. This author’s ask is that they work with the National Association of Professional Employer Organizations to establish definition and criteria for who should be registered as an Employee Leasing Company and refine Rule 4 as a result of such so that it speaks more to addressing coemployers versus single employers so the line does not continue to be blurred. Rule 4 language should then be integrated with the definition in the CA basic manual so there is no differences of note between who is employee leasing, staffing or other.
