Wednesday, November 7, 2012

Another Lesson in Tax Law vs. Work Comp

Staffing companies are among the most "creative" when it comes to trimming their workers' compensation costs. Their margins are so thin that every penny saved in work comp premium is a penny of profit.

So it comes as no surprise that a recent California appellate case penalized a staffing agency for underreporting wages because an "unreasonable" amount was classified as "per diem" expense reimbursement.

ReadyLink Healthcare Inc. sued the Department of Insurance (DOI) and the Workers' Compensation Insurance Rating Bureau (WCIRB) after an administrative law judge ordered that it pay State Compensation Insurance Fund (SCIF) an additional $555,327.53 in premium.

ReadyLink was insured by SCIF from 2000 until 2007. State Fund conducted a final audit of ReadyLink in 2007 for its September 2005 through September 2006 policy period. A senior auditor noted that ReadyLink was paying its nurses $6.75 an hour, plus a much higher "per diem" amount. 

The auditor had experience with other nurse staffing agencies insured by State Fund and knew of none where traveling nurses received more than half their reimbursement as per diem payments.
The auditor asked ReadyLink to provide documentation showing that the per diem payments represented the actual living expenses of the traveling nurses. ReadyLink did not respond, and State Fund billed the company the additional premium.

An administrative law judge ruled that ReadyLink had failed to prove that its per diem payments were reasonable, noting that the company was paying far below the market rate in hourly wages and had not produced any documentation that its per diem payments were related to actual living expenses of the traveling nurses.

ReadyLink sought review by the Los Angeles County Superior Court, which denied the petition. The company then appealed to the 2nd District Court of Appeal.

ReadyLink argued that its per diem payments comply with federal tax law and that State Fund had imposed onerous documentation requirements that federal law does not require.

The 2nd DCA didn't care, distinguishing between the federal tax system and the WCIRB's Uniform Statistical Rating Plan (USRP):

"The IRS collects tax revenue from employers and employees to fund a variety of federal programs, whereas the purpose of the USRP is to accurately recognize the amount of an employee’s real wages to ensure that the SCIF has sufficient reserves to pay a worker his or her wages if injured on the job."

  1. Don't mess with wage reporting. If you're an employer, pay market wages. If there is a per diem involved make sure that the payments can be supported as reasonably related to actual expenses.
  2. Don't ignore audits. When the auditor requests supporting documentation at least make a good faith, reasonable attempt to comply. If you can't - big time red flag goes up!
  3. Workers' compensation has NOTHING TO DO with tax law. This has been restated so many times since the beginning of work comp that it is unbelievable that any employer would attempt to raise this argument. Usually the attempt to relating tax law to work comp is in relation to employee classification - independent contractor vs. employee. Been there, done that so many times it still puzzles me that any attorney representing an employer would even attempt that argument; likely a professional that is not versed in the special character of work comp law.

ReadyLink also sued in federal court, which is pending. I'm sure there will be a similar outcome.

To read the decision, click here.

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