Self-Insurers Security Fund v. Esis, Inc.

POCHÉ, J.,

Concurring in result.—Unlike the majority, I cannot agree that Labor Code section 3700.5¹ does not create a statutory duty in those individuals who, on behalf of a corporate employer, fail “to secure payment” of workers’ compensation. As I read the statutory scheme, the Legislature has imposed such a duty on corporate officers or authorized employees, such as respondent, Mr. Gruber.

Section 3700.5 Applicability to Officers and Authorized Employees

Section 3700.5 provides that “[t]he failure to secure the payment of compensation as required by this article by one who knew, or because of his or her knowledge or experience should be reasonably expected to have known, of the obligation to secure the payment of compensation, is a misdemeanor.” (Italics in original.) Respondent urges us to read “one” as a generic reference to employers, self-insurers, and sureties. A close look at the legislative scheme and at the amendment of this section persuades me otherwise.

As an initial matter, when the Legislature has imposed criminal liability upon an employer and not those individuals acting on an employer’s behalf it has demonstrated the ability to articulate its desires. Thus, section 3751 makes it a misdemeanor for an “employer” to require his employees to pay their own workers’ compensation withholding.

In similar fashion when the statutes are directed to the conduct of corporations as well as to natural persons the Legislature has made that clear by speaking in terms of “persons.” Thus, section 3744 provides that “[t]he fund shall have the right to bring an action against any person to recover compensation paid and liability assumed by the fund, including, but not limited to, any excess insurance carrier of the self-insured employer, and any person whose negligence or breach of any obligation contributed to any underestimation of the self-insured employer’s total accrued liability as reported to the director.” (§ 3744, subd. (c), italics added.) Similarly section 3717 permits the fund to seek indemnity for the liability of an uninsured corporation both from the corporation itself and from “[a]//persons who are a parent” and from “\a\ll persons who are substantial shareholders.” (§ 3717, subds. (a)(1) and (a)(2), emphasis added.)

Not only this careful use of statutory language, but the history of section 3700.5 reinforces my view that the “one” in section 3700.5 has always been meant to apply to human actors. When the section was first enacted, it imposed the duty to secure compensation upon “one who knew, or because of his business knowledge or experience should be reasonably expected to have known, of the obligation to secure the payment . . . .” (Stats. 1981, ch. 894, § 1, p. 3408.) In 1986 “business knowledge or experience” was deleted and replaced with “or her.” (Stats. 1986, ch. 1128, § 3, p. 4052.) That is a very odd way of saying “employer.”

To adopt the view that the section’s use of “one” refers only to employers is to reach the absurd result that the owner of business A, a sole proprietorship, can be personally guilty of a misdemeanor if he fails to secure workers’ compensation payments for his employees. Meanwhile, his competitor B who has incorporated and behaves identically risks no personal criminal liability for the same conduct. Corporation B is guilty of a misdemeanor, but B, the officer who acted on its behalf, has committed no crime. This is not the result created by the legislative scheme as I read it.

Conduct Covered by Section 3700.5

The next question which section 3700.5 raises is whether or not filing a report which underestimates potential liability constitutes a “failure to secure the payment.” Section 3700 mandates that every employer “shall secure the payment of compensation” by insuring or by obtaining a certificate of consent to self-insure. There is apparently no dispute that the corporation, California Canners and Growers (CCG), obtained a certificate of consent to self-insure (§ 3700, subd. (b)) or that it failed to post the annual security deposit (§ 3701). What is alleged is that because Mr. Gruber acting on behalf of the corporation underestimated its potential workers’ compensation liability, the amount of CCG’s self-insurer deposit was insufficient to cover actual claims.

If “failure to secure the payment of compensation” is read as the majority does to mean only a failure to post the required security or a failure to obtain a consent to self-insure, then only the most flagrant misconduct will be punishable. Other sections provide sanctions for such conduct: failing to maintain a security deposit provides grounds to revoke the certificate of consent to self-insure (§ 3702) and failing to submit reports may result in penalty assessments (§ 3702.3). Given the existence of these sanctions, section 3700.5 under the majority’s view is merely redundant. As the majority points out, in the case of corporate misbehavior, it would permit nothing more than the levy of a $1,000 fine. (Maj. opn. ante at pp. 1157-1158.) I read section 3700.5 as having more teeth than that and for good reason.

The self-insurance scheme is founded upon a system of self-reporting of liability. After reporting estimates of future liability, self-insuring employers must deposit a minimum of 125 percent of their estimated future liability or at least $220,000. (§ 3701, subd. (b).) Although the Director of Industrial Relations audits self-insurers, these audits need only occur in a three-year cycle. (§ 3702.6.) A self-insurer who deliberately seeks to avoid the expense of adequate coverage, but who wants to preserve the appearance of compliance, can merely underestimate its potential liability. Underreporting raises no red flags announcing its noncompliance and conceals the true scope of liability, unless or until the true dimension of the underreporting is uncovered by an audit. Such misconduct creates the gravest risk to the system— potential insolvency. It is only sensible to read “failure to secure the payment of compensation” broadly, as language encompassing the duty to accurately report potential claims liability. Otherwise the least easily detected, but most injurious misconduct, will subject a corporation to no criminal sanction more severe than a $1,000 fine. Not a bite worthy of worry by those contemplating cheating.

Accordingly, I conclude that section 3700.5 makes it a misdemeanor for an officer or authorized employee of a corporation to underreport potential workers’ compensation liability.

Civil Liability

When a statute is intended to protect a certain class of persons of which the victims are members from a risk of harm, violation of the statute is a per se breach of duty, in the absence of excuse or justification for the violation. (Vesely v. Sager (1971) 5 Cal.3d 153, 164-165 [95 Cal.Rptr. 623, 486 P.2d 151]; Haft v. Lone Palm Hotel (1970) 3 Cal.3d 756, 763 [91 Cal.Rptr. 745, 478 P.2d 465]; City of Los Angeles v. Shpegel-Dimsey, Inc. (1988) 198 Cal.App.3d 1009, 1021 [244 Cal.Rptr. 507].)

As I have noted section 3700.5 imposes a statutory duty upon officers and authorized employees of corporations to accurately report potential workers’ compensation liability. Failing to make such reports may be the proximate cause of injury to workers who cannot be compensated by a self-insured employer who has set aside inadequate security. Such injury is the sort of injury which section 3700.5 is designed to prevent. The principle underlying the state workers’ compensation system is to compensate employees for job-related injuries. (Cal. Const., art. XIV, § 4; Union Iron Works, et al. v. Industrial Accident Commission, etc., et al. (1922) 190 Cal. 33, 39 [210 P. 410].) Statutes and regulations designed to require adequate security are necessary to ensure the financial soundness of the Self-Insurers’ Security Fund (Fund) so that its monies will be available to injured workers. Injured employees are the class of persons to whom the duty to secure compensation is owed.

Because the duty created by section 3700.5 is a duty owed to the former employees of CCG, the Fund as subrogee of those employees may pursue the claim. (See § 3744, subd. (c).)

Prospectivity

Despite the foregoing analysis of the legislative scheme, or more accurately because of its very intricacy, I do not believe it appropriate to allow civil liability to be imposed upon Mr. Gruber. The statute is insufficiently clear about what conduct it proscribes to have put him on notice that he was committing a misdemeanor and risking civil liability by underreporting claims liability. “It is the policy of this state to construe a penal statute as favorably to the defendant as its language and the circumstances of its application may reasonably permit. . . .” (Keeler v. Superior Court (1970) 2 Cal.3d 619, 631 [87 Cal.Rptr. 481, 470 P.2d 617, 40 A.L.R.3d 420].) It would offend due process to expose Mr. Gruber to criminal liability for conduct which I conclude, only after conducting an extensive judicial exegesis, violates section 3700.5. (Keeler v. Superior Court, supra, at p. 634.) If Mr. Gruber should not be held to answer for a criminal violation of the section, then in all fairness he should not be exposed to civil liability either.

I would have no such difficulties, however, in prospectively applying section 3700.5 to the conduct of corporate officers and authorized employers. Thus I would hold that such officers and employees are henceforth on notice that underreporting of a self-insurer’s claim liability in violation of section 3700.5 may subject them personally to criminal sanctions and civil liability for negligence.

I concur in the result reached by the majority that the demurrer was properly sustained as to the Fund’s cause of action for negligence based upon breach of a statutory duty by Mr. Gruber.

1 All statutory references are to the Labor Code.