Santa Barbara-based Select Staffing plans to appeal a $50 million decision against it in a lawsuit that alleged the firm underpaid its workers compensation insurance premiums by $30 million and underreported its payroll to state officials.
The lawsuit was filed in state court in San Francisco by the State Compensation Insurance Fund, a quasi-public nonprofit that sells workers compensation insurance to California businesses. In a lengthy and complex case, the state fund alleged that a subsidiary of Select partnered with another staffing firm, Onvoi Business Solutions, to improperly obtain lower premium payments during the early 2000s.
In an interview with the Business Times, Select CEO Steve Sorensen said his company played by the rules, that the Onvoi-Select arrangement lasted only 14 months and that state fund officials knew about it at the time. He said he doesn’t expect a business disruption at Select, which is the largest privately held company in the Tri-Counties with $1.8 billion in revenue in 2010.
“We’re obviously very disappointed with the way it’s come down and very concerned,” Sorensen said. “We’re working hard to overcome it both through legal channels and with our own internal staff in terms of staying the course with our customers and all of our constituents.”
A spokeswoman for the state fund said the organization could not comment on open litigation.
The jury in the case was asked to enter the byzantine world of calculating workers compensation insurance premiums. Premiums are based on three main factors: the size of the employer’s payroll, the job classifications of the employees covered, and the employer’s history of paying premiums and losses. This “experience modification” score is somewhat like a driving record, Sorensen said in an interview. The lower the number, the lower the premium. Sorensen said Select was “perceived as having a poor driving record.”
At the same time, workers compensation premiums for all California employers were exploding during the early 2000s after legislation in the 1990s drove many insurers out of the state. Many businesses were forced to buy expensive coverage from the state fund, an insurer of last resort.
“You literally couldn’t buy workers compensation insurance,” Sorensen said. “When we did find a carrier, we were able to secure insurance, but it was at a horrific cost. We found ourselves in a position where we couldn’t muster the capital to cover the whole payroll.”
For about 14 months, Select partnered with Onvoi, which had a better driving record and was therefore able to obtain better premiums. Sorensen said that the arrangement ended up costing Select more money in the end but presented a cash-flow advantage because it didn’t require such heavy upfront payments.
In a press release, Select said that it paid nearly $6 million in workers compensation premiums on $80 million of payroll, or about $7.50 per $100. “We paid a fair and full price,” Sorensen said in the release.
Select and Onvoi parted ways in 2003. Onvoi declared a Chapter 7 liquidation bankruptcy in 2010 after struggling with back taxes and other financial problems. The state fund’s initial lawsuit named Onvoi as a defendant. Select was added as defendant later. In an interview, Sorensen said the state fund staff knew about the Select-Onvoi arrangement, and Sorensen flatly denied the allegation that Select ever misrepresented its payroll to the state fund.
“We were dismissed from the lawsuit, and the only way they got us back on was through the allegation of fraud,” Sorensen said. “We reported our payroll accurately to the employee leasing firm [Onvoi]. We were not the employee leasing firm’s only customer. We did not have a contract with the state fund. We were never responsible for reporting anything to the state fund.”
The state fund had the option to ask the state court for a $300 million remedy. It instead asked for $50 million — $30 million owed in unpaid premiums, $18 million in pre-judgment interest and $2 million in punitive damages.
In an internal email to Select employees, Sorensen said the firm’s legal team would vigorously appeal the judgment.
“The opposing attorneys skillfully prevented key evidence from being presented, and then used inflammatory rhetoric to confuse and then sway the jury, notwithstanding directions from the judge to refrain from doing so,” Sorensen wrote in the email. “ … [A]s you well know, there are numerous examples of cases where a ‘runaway’ jury’s verdict is overturned on appeal. We are confident that our case will be added to that list!”