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Readylink Healthcare, Inc v. Dave Jones

November 6, 2012

READYLINK HEALTHCARE, INC., PLAINTIFF AND APPELLANT,
v.
DAVE JONES, AS INSURANCE COMMISSIONER, ETC., DEFENDANT AND RESPONDENT; WORKERS' COMPENSATION INSURANCE RATING BUREAU ET AL., REAL PARTIES IN INTEREST AND RESPONDENTS.



APPEAL from a judgment of the Superior Court of Los Angeles County. Ann I. Jones, Judge. (Los Angeles County Super. Ct. No. BS124590)

The opinion of the court was delivered by: J. Doi Todd

CERTIFIED FOR PUBLICATION

Affirmed.

This case arises from a dispute over a year-end audit by respondent State Compensation Insurance Fund (SCIF) of appellant ReadyLink HealthCare, Inc.'s (ReadyLink) payroll to determine its 2005 premium for its workers' compensation insurance policy.*fn1 The SCIF assessed an additional premium of $555,327.53 based on its determination that ReadyLink's per diem payments to traveling nurses counted as payroll. The Insurance Commissioner upheld the assessment, finding that ReadyLink's per diem payments were not "reasonable" and therefore not exempt from payroll because they could not be substantiated and were designed to camouflage the assignment of income. ReadyLink petitioned the trial court for a peremptory writ of administrative mandamus, which the court denied.

On appeal, ReadyLink contends: (1) the trial court incorrectly applied the substantial evidence standard of review rather than its independent judgment; (2) the Commissioner's decision is preempted by federal tax law; (3) the Commissioner's decision improperly created a new regulation without public hearing, comment and notice; and (4) equity dictates that the Commissioner's decision should not apply retroactively. We find no merit to these contentions and affirm.

FACTUAL AND PROCEDURAL BACKGROUND

ReadyLink is a private healthcare staffing agency that provides temporary traveling nursing personnel to hospitals and other acute care centers throughout California and other states. Nurses register with ReadyLink, which verifies the nurses' credentials, notifies them when shifts are available and pays their wages. The SCIF is a quasi-public company created by the Legislature to ensure that mandatory workers' compensation insurance will be available to California employers. (Ins. Code, § 11770 et seq.) Workers' compensation is intended to provide wage replacement for employees who are injured on the job. (Department of Rehabilitation v. Workers' Comp. Appeals Bd. (2003) 30 Cal.4th 1281, 1289.)

In September 2000, the SCIF issued a workers' compensation insurance policy to ReadyLink. The policy was renewed annually until ReadyLink cancelled it in March 2007. At the end of each policy year the SCIF reviewed ReadyLink's payroll records to determine the amount of wages paid that year to ReadyLink's employees, because premium rates are largely based on the employer's payroll. The results of each employer's audit are reported to the WCIRB, which uses the data to arrive at classification and rating systems.

The SCIF conducted its final audit of ReadyLink in 2007 for the policy period of September 2005 through September 2006. While reviewing ReadyLink's payroll registers, the SCIF's senior auditor in the special risk division discovered that ReadyLink was paying nurses a minimum wage of approximately $6.75 per hour plus a much higher stipulated per diem amount. The auditor had conducted dozens of audits of nurse staffing agencies and registries during her employment with the SCIF and had never seen such an agency pay more than 50 percent of wages in the form of per diem payments or pay hourly wages that were significantly below the average hourly rate typically paid to trained, licensed, registered nurses in California. She questioned ReadyLink about its per diem payments and requested documentation to substantiate these payments. ReadyLink responded that it had been audited by the Internal Revenue Service (IRS) in 2008 for the premium year in question and the IRS found that ReadyLink was in compliance with the federal per diem tax rules. ReadyLink did not provide any additional documents to the SCIF. Based on the lack of supporting documentation, the SCIF determined that the per diem amounts should be included as payroll. This increased payroll had the effect of increasing ReadyLink's workers' compensation insurance premium by $555,327.53, for a total annual premium of $800,106.00.

ReadyLink disputed the SCIF's determination and requested a review. The SCIF referred the dispute to its internal customer assistance program (CAP), which requested that ReadyLink provide "verifiable documentation" of the per diem payments, in the form of "invoices, receipts and other third-party paperwork" showing reimbursement for "travel expenses, lodging, food expenses, and the like." ReadyLink did not provide any documentation. In a decision letter dated February 28, 2008, CAP explained that "the per diem expenses cannot be deemed 'reasonable' without an analysis of the component costs associated with ReadyLink's temporary staff employees relative to location," and concluded that the premium assessment was correct.

ReadyLink appealed the SCIF's decision to the Administrative Hearing Bureau of the California Department of Insurance. Following extensive discovery, numerous telephonic status conferences, a three-day evidentiary hearing and post-hearing briefing, the administrative law judge issued a 40-page proposed decision on August 6, 2009 upholding the SCIF's determination to include ReadyLink's per diem payments as payroll in calculating its final premium. On September 30, 2009, California Insurance Commissioner Steve Poizner adopted the proposed decision and designated it as "precedential," rendering it citable in subsequent matters (Commissioner's Decision). (Gov. Code, § 11425.60.)

The Commissioner's Decision phrased the issue presented as follows: "For policy year 2005, did SCIF properly include per diem payments made to registry nurses as 'payroll' or 'remuneration' pursuant to USRP, Part 3, Section V?"*fn2 The Commissioner noted this was "a matter of first impression." As used by the USRP, payroll and remuneration are synonymous and mean the monetary value at which service is recompensed. (USRP, Part 3, Section V, Subsection 1.) Appendix III of the USRP defines the various types of compensation that shall be considered payroll for statistical reporting purposes. With respect to per diem payments, Appendix III of the USRP provides that "Subsistence Payments are considered to be reimbursement for additional living expense by virtue of job location." (USRP, Appendix III, p. 219.) Pursuant to the USRP, stipulated per diem amounts are not considered payroll if the "amount is reasonable and the employer's records show that the employee worked at a job location that would have required the employee to incur additional expenses not normally assumed by the employee." (USRP, Appendix III, p. 213.)

The USRP does not define "reasonable." After a lengthy analysis, including review of federal tax law, the Commissioner determined that a per diem payment is reasonable "if it comports with common sense, is not lavish or extravagant, and is not made for the purpose of circumventing per diem regulations." The Commissioner also determined that an employer must provide records proving that each employee receiving per diem reimbursement worked at a location that required the employee to incur "additional duplicate living expenses and that such expenses were mitigated by per diem reimbursement."

The Commissioner concluded that ReadyLink failed to prove that its per diem payments were reasonable under the USRP because it paid "a below-market hourly wage for the type of work being performed" and then used the per diem payments to "increase[] its nurses' income while avoiding payroll tax liabilities for itself." The Commissioner expressly rejected ReadyLink's contention that its per diem payments were reasonable because they comported with the federal per diem amounts for the Continental United States listed in 41 Code of Federal Regulations, Chapter 301, Appendix A (CONUS). Instead, the Commissioner found that ReadyLink failed to prove the per diem payments reflected the traveling nurses' anticipated living expenses, failed to show that its nurses worked at locations that required ...


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