NAFTA Does Not Protect Mexican Business from Workers' Comp Requirements

from: The Bugle
Jan 15, 2014

PHOENIX -- A Mexican firm cannot claim the North American Free Trade Agreement excuses it from having to provide workers' compensation coverage for its employees doing business in Arizona, the state Court of Appeals has ruled.


In a decision this week, the judges also rebuffed arguments by Porteadores del Noroeste S.A. de C.V. that Arizona's requirements to care for injured workers were preempted by provisions of the U.S. Constitution giving the federal government the exclusive right to regulate foreign commerce. Appellate Judge Michael Brown, writing for the unanimous court, said he and his colleagues found no evidence that anything in federal law or regulation intended to preempt state worker-protection laws.

The case involves Adan Valenzuela, a Mexican citizen and resident, who was injured in a rollover accident north of Nogales and suffered numerous injuries.

After being treated first at a Nogales hospital and then at Tucson's University Medical Center, he returned to Mexico where he requested a determination of disability and benefits from the Instituto Mexicano del Seguro Social. That agency provides coverage for lost wages for injured workers.

While IMSS provided benefits, it paid only some medical bills.

Valenzuela filed a claim with the Industrial Commission of Arizona. And because Porteadores had no valid Arizona workers' compensation insurance, the claim was paid by a special fund of the commission

The commission then sought to recover its costs from Porteadores.

Attorneys for the company argued that NAFTA controlled its corporate activities in the United States and therefore the commission lacked jurisdiction. They also said requiring a foreign employer to comply with Arizona's worker's compensation laws would violate federal law.

The appellate court did not see it that way.

"States have a strong interest in protecting employees working within their borders,' he wrote. And Brown said the state constitutional requirement for a workers' compensation system is designed to maintain a "just and humane' law to "relieve workers and their dependents from burdensome, expensive and litigious remedies.'

That latter part refers to the fact that workers' compensation in Arizona is a no-fault system: An employee injured in a work-related accident is entitled to have medical bills and part of lost wages covered without having to sue the employer to prove negligence.

Brown also noted that Arizona law makes any employee injured in the state eligible for benefits, even if the worker was not hired in the state.

Brown acknowledged that Congress approved NAFTA 1994 as an agreement setting out trade rules with Mexico and Canada.

But he said the federal law implementing NAFTA specifically spelled out that only the U.S. government can use the agreement to challenge any state law. And that, Brown said, did not occur here.

The judge acknowledged that the exclusive power of Congress to regulate foreign trade can curb state regulations if there is a "special need for federal uniformity.' But Brown said the court could find nothing in NAFTA or any other any trade agreement that suggested the federal government intended to preempt state laws protecting workers.

In fact, Brown wrote, there is nothing in NAFTA or other agreements mentioning workers' compensation at all.

Over again...

This is reminiscent of the California Tribal Staffing Companies around 2003. Read on about Tribal Staffing Companies...

Tribal warfare: a Native American tribe raises the hopes of compensation managers desperate for lower insurance premiums, but instead winds up incurring the wrath of California regulators.

Fast-food restaurant owner Safar Ghaffari, a foot soldier in the small-business community's war on steep workers' comp rate hikes, sought in late 2002 to secure affordable coverage for roughly 120 employees at four restaurants he owns in Humboldt County north of San Francisco near the Oregon border.

Ghaffari says he acted on the advice of his insurance broker who suggested he find coverage through an occupational-injury system run by the Blue Lake Rancheria, a tiny Native American tribe with just 53 members spread across 42 acres. "The coverage was better and it stayed within the spirit of the workers' comp law," says Ghaffari.

Insuring through the tribe meant that Ghaffari would be able to pay the cost of occupational-injury and medical indemnity benefits coverage at half the rates paid by scores of businesses--rates set by the state of California.

But before a deal could be finalized, California labor officials began questioning the carrier's integrity, eventually forcing Ghaffari to purchase coverage from a more expensive state fund.

Ghaffari wasn't pleased. "It costs twice as much, and they fight you tooth and nail over any claim," he fumes. The state demanded that he deposit 20 percent of his estimated annual premium, which was nearly $50,000.

"I can't print money fast enough to do that," says Ghaffari, who pleaded with the regional labor office in Eureka, but to no avail. So state officials shut down one of his three Denny's franchises and a steakhouse.

Ghaffari consoled crying employees after voluntarily closing the other two Denny's operations until less than a week later when he raised the necessary cash.

The trouble with California's workers' comp law is that the state doesn't simply issue a citation, Ghaffari gripes, "they just shut you down. That's unfair and it doesn't help the state or the employer. Many small businesses are going belly up."

The state of California doesn't see it that way. State officials say they worry that American Indian tribes may not always have the requisite capital to pay compensation claims, should the need arise.

"If they are not capable of paying their claims," says Rebecca Westmore, staff counsel for the California Department of Insurance, "then claimants are either out of luck or have to go to the California Guarantee Association."

In addition, advocates for workers' insurance rights say there's a reason the state has standards which private-sector employers must follow in the interest of their employees.

"The state regulates workers' comp insurance to assure workers and employers that the money will be there to pay claims and that insurance rates are fair," says Eric Oxfeld, president of the UWC-Strategic Services on Unemployment & Workers' Compensation, a watchdog group to ensure that workers are adequately protected on the job.

Battle Lines Harden
Ghaffari is not alone in his despair at finding affordable insurance for workers. Thousands of small-business owners are looking for ways to loosen the grip that insurance costs have on their bottom lines.

In fact, a billion-dollar staffing industry employing thousands of workers, permanent and temporary, is seeking to use tribal ordinances to lower the cost of insurance to client businesses, and a bill pending in the California Legislature would allow employers to bypass buying workers' comp coverage when covering employees through tribes.

Take the temporary-staffing agency Mainstay Business Solutions, for example. The agency, formed last June and owned entirely by the Blue Lake Rancheria, has placed more than 10,000 temporary workers with about 2,000 corporate clients. It self-insured all comp claims under tribal ordinance and until recently, the agency had made available a low-cost alternative to California's pricey worker' comp coverage as part of the bundled-services it offered to 350 employee-leasing company clients.

But last year the California Department of Industrial Relations issued a work-stop order to several International House of Pancakes restaurants and slapped Mainstay with a $100,000 fine. And last November, all of Mainstay's employee-leasing contracts were terminated after the agency agreed to indemnify its clients if the state tried to fine them.

The staffing company isn't alone. Michael Hansen, president and CEO of Mainstay, says he knows of three other "sovereign nation" staffing agencies--Labor Source, General Labor and ISS--operating in California, Oklahoma and Nebraska, that provide employee benefits through tribal ordinance. Eric Ramos, CFO of the Blue Lake Rancheria and a member of the tribe, says it's easy for people to overlook the benefits of Mainstay's business model and the advantages to it brings to non-tribal businesses located off the reservation.

He contends that city, county and state officials have marginalized tribal governments and their right to sovereignty. "It's easy for people in the outside world to beat up Indian tribes based on their tribal gaming operations," says Ramos, a founder of Mainstay.

For the tribes like Blue Lake Rancheria and their ancillary corporate interests like Mainstay, the time had come to act in the face of rising workers' comp rates. "The old adage in Indian country is whether to ask for permission now or beg for forgiveness later," says Ramos.

And so, the tribe and Mainstay acted first and began offering insurance coverage. They figured they would ask questions later.

But in the eyes of the state, the tribe had done so without permission. All of which means that the parties are squaring off in court.

To Court--Of Course

The California Insurance Department has filed several motions seeking to prevent licensed insurance agents and brokers from marketing, soliciting and selling insurance coverage offered by Mainstay.

Westmore says the state is not convinced the tribal council is qualified to adjudicate compensation claims cases that come before it. "We're not familiar with the make-up of that council or even if the tribe knows how it works," she says.

"If they are not capable of paying their claims, then employers have no recourse and claimants will be forced to seek assistance from the state," she also says. "The state then has the right to subrogate its claim against the employer, causing the employer to pay for the individual claim that normally would have been covered under a workers' comp policy."

Hansen says these fears are completely unfounded. Claimants have nothing to worry about. Insurance through the tribe offers the insured access to a 40,000-strong credentialed PPO network guaranteeing access to 70 percent of the state's physicians and hospitals, as well as vocational rehabilitation benefits and the use of mediation rather than litigation to resolve disputes.

Consequently, Mainstay can offer a cheaper alternative to the expensive rates levied by the California compensation system, which critics say is broken and dysfunctional.

"California has 2,000 permanent partial disability awards for every 100,000 workers," he says. "The next-highest state is New Jersey at 900. You're telling me it's twice as dangerous to work in California as New Jersey? Absolutely not. The difference is it's easier in California to settle a claim than fight it."

The tribe's appeal process is grounded in mediation, not litigation, and that lowers the insurance premiums for policyholders.

Mainstay, thanks to the economic backing of the Blue Lake tribe and its profitable casino operation, has more than $12 million in surplus to fund $1.7 million in reserves for future claims liability on 401 claims. A total of $462,000 in payments have been made to injured workers on these claims. "We're very well funded relative to our claims liability," Hansen says.

Revenue from the Blue Lake tribe's casino provides a safety net for injured workers if the loss fund contributions set aside in trust fall short of covering the entire cost of claims.

In short, Mainstay and the tribe say they have a case against the state of California. As a result, Mainstay has filed suit in Superior Court seeking to regulate its own licensed agents and brokers. A verdict is expected to take at least two years.

California Insurance Commissioner John Garamendi remains unconvinced. He says insuring workers through tribal ordinances amounts to back-door scheming.

"Because the schemes fail to comply with the licensing requirements of California law, the arguments about providing sufficient benefits, claims adjustment and mediation are irrelevant," he says. Injured workers with so-called "coverage" under one of these tribal insurance programs would miss out on the full protections afforded under California law.

"There is no assurance that the Indian tribe or any other entity offering this product will have sufficient financial reserves to pay claims due over the extended life of a workers' compensation benefit," says Garamendi. Agents or brokers who sell illegal insurance products will have their licenses revoked, he says.

A Question of Precedent

The question before the litigants is whether the tribe has a right to be in the occupational-injury business off an Indian reservation. Both sides point to case law arguments to support their case.

Among the cases Mainstay cites that grant tribes sovereign immunity from state regulation in several areas of employment: Worchester vs. Georgia, which dates back to 1832, California vs. Cabazon and Segundo vs. City of Rancho Mirage, both of which were decided in 1987.

Moreover, Mainstay notes that case law affirming the sovereign right of tribes to govern their own workers' compensation claims both on and off reservation land can be found in Oneida Indian Nation vs. Oneida County from 1972 and Sac & Fox Nation vs. Hanson from 1995.

Late last year, Mainstay hired a lobbyist and political consulting firm to cajole the state legislature about the importance of enabling all employers to choose their own exclusive network of providers with a certain percentage of access to doctors and hospitals and pursue claims mediation rather than litigation.

California Indian tribes have successfully argued that they're exempt from regulation governing the state workers' comp system, notes Scott Rubel, an attorney with Rose, Klein & Marias in Ontario, Calif., citing a recent California Supreme Court case (Middletown Rancheria of Pomo Indians vs. Workers' Compensation Appeals Board et al.).

But at the same time, Rubel questions how the Blue Lake Rancheria Indian tribe can make available to non-tribal entities tribal-governed insurance without subjecting itself to California's insurance benefits regulation.

"The law is clear: You cannot sell insurance in the state of California unless you're licensed to do so," he says. "The tribe doesn't have a snowball's chance in hell of winning this issue because they're trying to expand their sovereignty into the United States. And if another nation like Mexico or Canada tried to do this, we could consider this an act of war."

Applying tribal law to non-tribal employers through an employee leaseback agreement just will not fly, says Rubel. Most workers have no idea they are subject to tribal law and not entitled to rights guaranteed by California law.

Westmore says the California Insurance Department views the tribes' chance of success as a long shot. "It's an issue that will have to be resolved at the state or federal Supreme Court level," she says.

Since the California Department of Insurance is bound by the McCarran-Ferguson Act of 1945, she says, "some would say it does not comport with the sovereign immunity Congress granted to the Indian tribes, which does not let them engage in business off the reservation affecting the citizens of California."

Humor:

This also reminded me of a parody of the tribal staffing companies, it was an advertisement for Amish Staffing Services. They claimed a workers' comp exemption based on religious beliefs.

Thank you for reading.