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Yesterday the New York Sunday Times ran a fascinating piece on the manufacturing of iPhones. The making of 200 million phones is taking place in the far east, mostly in China. When President Obama asked Steve Jobs "why can't that work come home?" Jobs replied: "Those jobs aren't coming back." The article, written by Charles Duhigg and Keith Bradsher, describes the reasons why this work will never come back home (and why we wouldn't want them anyway).

In the months prior to the release of the iPhone, Steve Jobs carried a prototype in his pocket. He discovered that the plastic screen was easily scratched by the keys and loose change that people often have in their pockets. He informed his engineers that this was not acceptable and insisted - at the last minute - that they redesign the phone with a scratch- and break-resistant glass. Corning Glass was able to do this.

Corning (made in America!) shipped the new parts to China, where they arrived around midnight. Supervisors at the assembly plant woke up some 8,000 workers sleeping in company dorms, gave them tea and a biscuit and set them to work in 12 hour shifts installing the glass into bevelled frames. The plant churned out 10,000 phones per day.

It is impossible to envision an American workforce positioned to perform this kind of work under these conditions. We do not house our workers in dorms (except migrant farm workers). We do not suddenly change work schedules to begin at midnight. Even in the Republican dream of a post-union workforce, it is inconceivable that American workers would accept this kind of pressure - and be paid $17 per day or less.

iPhones and Pyramids
Nearly seven years ago we blogged the emerging issue of worker rights in China. While there is a bare-bones structure of rights, these are arbitrarily enforced and easily avoided. China is a single party state, run with ruthless efficiency by the Communist Party. Opposition is not tolerated; dissent is brutally suppressed; and workers are at the mercy of their employers. To enforce rights, you need a constitution and an infrastructure of laws and regulations. And you need lawyers to argue on behalf of workers. China has none of these crucial elements and, truth be told, no real interest in developing them. And that is why everything is made in China: quality is high, working conditions are whatever management wants them to be, and labor costs are low.

While technically not slaves, production workers in China labor under appalling conditions that do not and cannot exist in most western cultures. They may be paid better than the slaves who built the pyramids, but they are paid less - while working harder - than any comparable workforce in developed countries.

So the late Steve Jobs was correct: the jobs involved in assembling essential electronic devices will remain off shore. These jobs are never coming home, unless, of course, the economy collapses totally and our workers are reduced to accepting virtually any working conditions. Which leads to questions beyond the scope of a workers comp blog: what manufacturing jobs will remain domestic? What will happen to the millions of production workers in America who no longer have jobs? As the American middle class declines, how will the economy function? Who will buy the goods that drive the engine of capitalism?

Epilogue
I drove my American assembled Japanese car to the Verizon store yesterday and picked up my black 16 gig iPhone, designed by indisputable geniuses in America and assembled by an underclass in China. It's awesome. I can't imagine life without it.

Raymond Letellier co-founded a steel fabrication company in New Hampshire called Steelelements. The company suffered a major fire in March of 2007. They rebuilt, although the cost of the rebuilding, managed by Letellier's partner, exceeded the budget. In October 2009 the company went out of business. Throughout the long, downward spiral, Letellier suffered from stress, hypertension and depression. Soon after the company's failure, he filed for personal and business bankruptcy. At the same time, he applied for workers comp benefits.

Letellier's claim was initially denied, then accepted for the medical costs only, and then denied again. Eventually the claim reached the New Hampshire Supreme Court, where a deeply divided court (3 to 2) ruled against Letellier. The court reasoned that the failure of the company was akin to a personnel action: workers comp does not cover such employer actions as discipline, termination and lay off. In closing the business, Letellier subjected himself - and everyone else - to a lay off. - a non-compensable personnel action.

Work-Related Stress?
Two dissenting judges pointed out that the majority focused almost exclusively on the ultimate failure of the company, the lay off itself. But the extraordinary and relentless stressors in Letellier's life began with the fire and continued throughout the struggle to keep the over-leveraged company in business. This is not the stress of a single event, but the cumulation of stress over months and years. The dissenters noted that Letellier's commute to the factory was 100 miles, so he often slept in his office, where ever-pending doom haunted his every waking moment and his troubled dreams. They opined that his multiple health issues were predominantly caused by work.

Letellier, once the proud owner of a successful business, finds himself in the same situation as laid off workers across America. He is on his own and out of luck.

We will set aside for the moment what may be Letellier's biggest mistake: instead of trying to make things that people can actually use, he should have pursued a career in finance, where he could have sold worthless mortgages, watched his company flounder, and then be rescued by tax-payer bailout, all the while preserving a superbly inflated salary. That's an All-American story of a different sort, albeit fodder for another day.

For 36 years Rodolfo Meza worked for Aerol Corporation in Rancho Diminguez CA as a metal worker making cast iron and aluminum molds. He was about 48 when he began working; he was about 84 when he was terminated while on medical leave for a knee operation. Rodolfo sued, claiming age discrimination, raising the question: how old is too old to work?

In the course of his trial and subsequent appeal, Rodolfo noted that his immediate supervisor commented frequently about his being "too old to work." Despite operations for a hernia and a knee replacement (the court rulings do not indicate whether these were covered by workers comp), Rodolfo had every intention of continuing to work. When his normal job became a bit difficult for him to perform, he requested a transfer to the engineering department, where he often had performed work. His supervisor responded "no, Rudy I can't [transfer you]. You are too old to move to engineering."

When he was terminated in 2009, his 24 year old son (conceived when Rodolfo was 60!) noted that he became sad and depressed.

Age Has Its Benefits
A jury awarded Rodolfo $100,000 for future economic loss: based upon his annual earnings, that's a little over three additional years of employment, bringing Rodolfo to age 87. In addition, they awarded $300,000 for past non-economic damages (presumably, the ongoing agist comments of his supervisor). That's a lot of money for an individual nearly 20 years past the conventional retirement age.

Aerol appealed and lost. The CA Court of Appeals found a pattern of discrimination, along with a legal technicality that prevented Aerol from contesting the award for the future earnings: Aerol failed to raise the issue in a timely manner during the initial the trial.

Expensive Lessons in Human Resource Management
Is the court saying that employers must continue to employ workers into their 80s, with no recourse available to force retirement? Can workers work as long as they like?

Not really.

Aerol - through the actions of Rodolfo's supervisor - made a number of critical mistakes in managing this situation. The supervisor made repeated comments about Rodolfo's age; the supervisor should have been warned to cease this behavior and disciplined if he continued. Rodolfo had an exemplary record of employment; there was no (written) indication that his performance had deteriorated. When Rodolfo felt less capable of doing his regular job and requested a transfer, he was denied the opportunity based solely upon his age. When he requested time off for the knee surgery, it was granted; there was no indication that his job would be eliminated during his absence, but that's exactly how Aerol proceeded.

A Word to the Wise on Aging
Savvy employers would do well to learn from Aerol's mistakes:
- Never assume that based solely upon age a worker is "too old"
- Focus on the essential job requirements: employees must be able to safely perform jobs as specified (some accommodation based upon age should be considered)
- Document any problems in performance
- Train supervisors in managing older workers (along with women, minorities, disabled workers and any other protected classes)
- Above all, keep lines of communication open.

Rodolfo gave 36 years to Aerol. He deserved consideration as he grew older, but he was not guaranteed a job. If and when any issues of his job performance arose, his supervisor should have sat down with him to discuss them openly. Ironically, there are no real winners in this situation: Aerol (or its insurer) took a big hit economically. They also lost a loyal employee who was still capable of making a positive contribution to the company. Rodolfo lost the job he loved and lived for. To be sure, he now has a nice nest egg for retirement, but that is not what he wanted most. He was one older worker who just wanted to keep on working.

We have been tracking the fate of the FedEx business model in state courts as it collides with increasingly stringent definitions of "employee." FedEx operates under a sophisticated and ingenious contract designed to transform their drivers into "independent contractors." It's been a tough haul. For the most part, FedEx has been losing the argument in courts, state by state, and then delaying any ultimate resolution by filing appeals. Today we examine a similar business model: cleaning operations that are classified as franchises.

Coverall North America is one of the largest franchise cleaning operations in the world, with 9,000 franchise owners, 50 support centers and 50,000 customers. Franchise owners are trained by Coverall, wear Coverall uniforms, use Coverall mandated supplies and receive payment for their work through Coverall. Coverall bills customers and then pays the franchise owners, after deducting management and royalty fees plus any other incurred expenses.

The Massachusetts Standard
Unfortunately for Coverall, they have the burden of demonstrating franchisee "independence" in Massachusetts, which has a very tough, three-pronged standard for independent contracting [Ch. 149, Sec 148B]:
1. The contractor operates free from control or direction
2. The work of the contractor is fundamentally different from the work of the general contractor/owner
3. The contractor operates an independent business and is free to offer services to anyone

Under the MA requirements, independent contractors must meet all three criteria. Coverall first encountered the problem when out-of-work franchisees filed for unemployment benefits. The MA Division of Employment & Training focused on the third prong, determining that franchisees were indeed employees of Coverall, as their work was limited to that secured through Coverall.

In a case brought in Federal Court, franchise owners sought summary judgment against Coverall for the deceptive and unfair labor practice of calling them "independent contractors." U.S. District Court Judge William Young got the case. He focused on the second prong: Coverall had to demonstrate that they were in a fundamentally different business than their franchisees.

Coverall fashioned a clever but ultimately unsuccessful defense: Coverall corporate is not in the cleaning business, but in the franchising business. Coverall corporate trains people who clean offices and Coverall manages the finances of franchisees, but no one in Coverall actually cleans. Judge Young did not buy that argument. He determined that Coverall provides the administration for the franchisees, who provide the cleaning services. One cannot exist without the other. He granted summary judgment to the plaintiffs.

Who Works for Whom?
We are by no means at the end of this seemingly endless attempt to separate independent contractors from employees. What is at stake is pretty obvious: work performed by employees is a lot more expensive than that performed by independent contractors. The lives of most people working as "independent contractors" are difficult; the hours are long, the pay is marginal, the benefits non-existent. And if injured, these folks are usually on their own.

Listen to the names of some of the plaintiffs in this particular case: Aldivar Brandao, Denisse Peneda, Jai Prem, Pius Awuah, Benecira Cavalcante, Nilton Dos Santos. Can you hear exotic music in the names of people born in other lands? And can you hear something more ominous: the dissonence and dislocation of immigration, the struggle to survive in a new land that seemed full of promise from afar, but which has proven to be harsh, stingy and relentlessly demanding?

Welcome to America, employees of Coverall!

Kevin and Bob Pickell ran KDN Lanchester Insurance Agency in Sinking Spring PA. It's not just the spring that's sunk. The not-so-kissing cousins (bad day photos here) have been convicted of diverting workers comp premium payments from area school systems into their own pockets.

As fraud goes, agents pocketing premiums is pretty dreary stuff: it's not a matter of if, but when they get caught. In this case, the carrier notified one of the schools that premiums had not been paid. In jumps the state attorney general, with the result that the Pickells are going to prison for over a year, followed by restitution and 20 years of probation.

The cousins do not appear to be planning a return to the brokerage business. They have offered the domain site (kdnins.com) for sale. Let's see. Brokers in jail, a bit of bad press. Not exactly a once-in-a-lifetime business opportunity.

Many good folks testified to the character of the defendants. They were known for their generosity in the community, along with living the lavish life style that inevitably accompanies this type of crime: big houses, fancy cars, expensive wines...

Opportunities for Fraud
Agents are just one of a number of parties in the workers comp system who see opportunities for making money the fast and not-exactly-legal way. Along with agents we have:
Employees:
• Faking injuries
• Lying about health problems that impact their ability to perform jobs safely
• Exaggerating symptoms to prolong disability (malingering)
• Being injured away from work and claiming the injury is work related
• Working a second job (usually under the table) while still collecting indemnity
Employers:
• Under-reporting payroll
• Misclassifying employees as "independent contractors"
• Misclassifying employees into lower risk - and lower premium - job classes
• Failing to report injuries
• Threatening employees who do report injuries
Doctors:
• Billing insurance companies for treatments not provided
• Exaggerating the nature of services provided
• Performing unnecessary tests
• Selling drugs (pain killers) to injured workers
• Conspiring with attorneys by faking diagnoses of compensable injuries
Attorneys:
• Helping workers exaggerate medical symptoms to secure benefits (providing unnecessary neck braces, crutches, slings, etc.)
• Coaching injured workers on malingering
• Helping workers develop a false "injury narrative"
• Stealing settlement dollars (very rare)
Claims adjusters:
• Securing kick-backs on medical or indemnity payments
• Setting up phony claims and pocketing payments
Investment companies:
• Bribing public officials to secure dollars for investment (see the "Coingate" scandal in Ohio)
• Offering (illegal) perks to decision makers who manage public dollars

Despite the myriad opportunities for fraud in the comp system, outright fraud is still relatively rare. The vast majority of transactions within the system, involving all of the above players in every state across the nation, are carried out with integrity and good faith. Nonetheless, eternal vigilance is necessary to ensure that comp dollars are spent prudently, wisely and fairly.

Dr. Jean Zannoni, 77, runs a family practice in Parma, Ohio. It would be a mistake to assume that by specializing in families, she is not interested in treating injured workers. She treats them all right - to pill after pill after pill. She was recently sentenced to two years probation and ordered to pay more than $7,500 in fines and restitution after pleading guilty to theft, attempted workers' compensation fraud and telecommunications fraud.

According to authorities, two Ohio Bureau of Workers Compensation (BWC) undercover agents were provided narcotic medications without proper medical examinations and BWC was billed improperly for the office visit.

Dr. Zannoni instructed her staff (in writing!) to bill all injured workers under the same code and charge BWC $75, regardless of the circumstances of the visit. She also manipulated "pain" ratings to ensure that patients qualified for narcotics. And she continued to prescribe narcotics to patients who were known doctor shoppers, even after receiving warnings from pharmacies, parents, spouses, social service agencies and police departments. Some family, some practice.

A Microcosm
In the scheme of things, Dr. Zannoni is a bit player. But when you try to figure out how narcotics became such a major cost driver in workers comp, you have to take into account doctors like Zannoni, who parlay a little pain into big profits.

Given the scale of her crimes - she overbilled WBC by $65,000 - the penalties in this case (small fine plus probation) seem a bit modest. On the other hand, the (Feel)Good doctor, at 77, is probably nearing the end of her practice, which may well have played into the decision to let her off relatively lightly.

Ironically, if you Google her name, Zannoni's patient ratings are uniformly high (pun intended). One anonymous patient even commented on an article describing her conviction as follows:

This is one of the sweetest most nieve (sic) people on ths planet. I know her personally and she has no idea what goes on. All she knows is how to do is practice medicine and nothing about finances at all. God bless her and I hope everything works out for her sake.

We'll let that stand as written. And one thing is certain: those seeking pills in Parma may not be able to count on Dr. Zannoni any longer, but surely they will find other sources to make their pain go away, to get a little buzzed, and, who knows, make a little money on the side.

DeWayne Sutton worked for Tomco Machining in Dayton, Ohio. When he hurt his back while dismantling some equipment, he followed "best practices" and reported the injury immediately to company owner Jim Tomasiak. The boss pulled a "Trump" - deviating 180 degrees from "best practices" by firing Sutton immediately. No reason was given for the termination. As you would expect, Sutton was able to collect comp benefits (termination is no bar to eligibility), but could he also sue for wrongful termination? In other words, was the termination retaliation for reporting the claim?

Under the Ohio statute, employers are prohibited from firing, demoting or taking punitive action against an employee who files a workers comp claim. The question at issue is one of timing: the claim had been reported to the employer, but not yet filed with the insurer. So did Tomasiak violate the law by firing Sutton in the interval between the injury and the report to the insurer?

Begging to Differ
In a sharply divided opinion (4-3), the Supreme Court of Ohio found in Sutton's favor, sending the case back to the lower court for reconsideration. Chief Justice Maureen O'Connor, writing for the majority, notes:

We find that the General Assembly did not intend to leave a gap in protection during which time employers are permitted to retaliate against employees who might pursue workers' compensation benefits.

The alternative interpretation - that the legislature intentionally left the gap - is at odds with the basic purpose of the anti-retaliation provision, which is "to enable employees to freely exercise their rights without fear of retribution from their employers."

The court minority noted that Sutton was able to collect comp benefits - kind of "no harm, no foul." Then, as Justice Terrence O'Donnell notes:

The majority has today expanded the public policy behind the provisions of (state law) to apply to those persons discharged before filing, instituting or pursuing a workers' compensation claim. This allowance is a legislative prerogative, and in my view, we should follow the law as written and defer to the General Assembly, instead of stretching the extent of protection to fit situations not addressed by the statute.

This is familiar territory in the world of law: liberal interpretation (the majority) versus strict construction (the minority). One vote determined the outcome.

The Biggest Loser
Business owner Tomasiak comes away with a double whammy: he is liable for the comp claim through the experience rating process; having fired Sutton, he is unable to lower the cost of the claim by bringing Sutton back to work on modified duty. Then he faces a wrongful termination lawsuit, which he is probably going to lose. The timing of his action, along with the absence of any stated rationale, reak of retaliation.

Tomasiak's impulsive response to Sutton's injury violated Rule Number One for employers: if employees are not working out, fire them before they get hurt. Once they are injured, comp laws pretty much assume that any firing would be retaliation. For Tomasiak, just trying to run his machine shop in Dayton, Ohio, this is a tough - and expensive - lesson in best practices.

As we noted in a blog earlier this year, the number of fatalities in grain bins reached record levels in 2010. There were 51 grain bin accidents last year, up from 38 in 2009 and the most since tracking began in 1978. Twenty-five people died, and five of them were children under age 16. The previous record for grain bin accidents was 42 in 1993. In response, OSHA has developed an explicit program to improve safety in grain bins. In doing so, they have increased the pressure on bin operators to operate safely. The stakes have been raised beyond even the robust fines that OSHA routinely hands out for violations.

As an example of the new program in action, OSHA has cited Lakeland Feed and Supply in Hamilton, Montana, for exposing workers to grain bin machine guarding and fall hazards, along with other safety and health hazards. At this point the fines total $122,500, but this might change after corrective actions and negotiations.

In detailing the serious violations, OSHA paints the picture of a hazard-filled environment that may well reflect the day-to-day operations of many grain bins across the country:

...Platforms missing guarding; no landing platform on a ladder; unguarded shafts, pulleys, chains and sprockets; the lack of an emergency evacuation plan and no fire alarm system; employees walking on grain in the bins; high levels of potentially explosive dust; the lack of a housekeeping program; not locking out augers when employees enter the bins; exposed live electrical lines; improper electrical wiring for high dust areas; and employees not trained on the hazards and chemicals associated with their work.

Not Exactly Junk Mail
As part of the grain bin initiative, OSHA has written to operators across the country, detailing specific steps to be taken to prevent accidents when workers enter storage bins. These steps include:

Turn off and lock out all powered equipment associated with the bin, including augers used to help move the grain, so that the grain is not being emptied or moving out or into the bin. Standing on moving grain is deadly; the grain can act like 'quicksand' and bury a worker in seconds. Moving grain out of a bin while a worker is in the bin creates a suction that can pull the workers into the grain in seconds.

Prohibit walking down grain and similar practices where an employee walks on grain to make it flow.

Provide all employees a body harness with a lifeline, or a boatswains chair, and ensure that it is secured prior to the employee entering the bin.

Provide an observer stationed outside the bin or silo being entered by an employee. Ensure the observer is equipped to provide assistance and that their only task is to continuously track the employee in the bin. Prohibit workers from entry into bins or silos underneath a bridging condition, or where a build-up of grain products on the sides could fall and bury them.

Test the air within a bin or silo prior to entry for the presence of combustible and toxic gases, and to determine if there is sufficient oxygen.

Ensure a permit is issued for each instance a worker enters a bin or silo, certifying that the precautions listed above have been implemented.

On Notice
Bin operators are on notice that the above safety procedures must be in place. By providing this unambiguous and highly detailed list, OSHA is saying, in effect, "these are the standards. Nothing less is acceptable."

Why does this matter? Attorneys for workers injured in storage bins will review the details of any and all accidents. Where the above standards have not been met - and they are not easy to meet! - these attorneys may aggressively pursue increased sanctions against employers. In many states, injuries due to the "wilful intent" of the employer result in higher indemnity payments. In the event of serious injuries or fatalities, attorneys may attempt to pierce the "exclusive remedy" shield of workers comp and secure substantially higher benefits due to employer "negligence".

In other words, OSHA may have raised the stakes for grain bin operators above the traditional "no fault" level. While there is nothing radically new in the required safety procedures, the fact that OSHA has presented a definitive list means that employers are accountable for each and every one of these procedures. As is customary, violations will result in heavy fines. But in addition to the fines, bin operators may be at risk for exposures well beyond the "usual and customary" comp benefits.

The working conditions in grain bins are extremely challenging. There are critical time pressures, complex mechanical issues, weather concerns and at times, a shortage of trained labor. Teenagers -all too frequently the victims in bin accidents - may or may not take safety precautions seriously. If life on the farm is difficult, life in the bins may be even harder. When it comes to safety and the protection of the people doing the work, OSHA's sympathies are with the workers. In this environment, when serious accidents occur, employers will be judged by a single criteria: did they follow the OSHA book on grain bin safety? If not, bin operators are likely to pay, pay and pay again.

With yesterday's catastrophic tornadoes in Joplin, Missouri, the most recent in a long line of 2011 disasters, the cost of re-insurance is going up. Prior to yesterday, the reinsurance bill for 2011 stood in the vicinity of $50 billion, leaving virtually no room for additional losses through the end of the year. Alas, we now have Missouri, and the year is not even half over, with hurricane season yet to begin.

Risk & Insurance magazine highlights the problems facing reinsurers:

Yvette Essen, an analyst for A.M. Best, said that the catastrophic first quarter means that many reinsurers will struggle to record any full-year underwriting profit for 2011.

"The industry faces further challenges in achieving profitability as the hurricane season approaches and investment yields remain low," she commented.

"While reinsurers continue to maintain sound capital positions, the excess capacity that existed at the prior year-end has clearly been diminished," he said.

Richard Ward, CEO Of Lloyd's of London, warns that the relatively inexpensive cost of insurance is really an illusion: "Prices are dangerously low at present," he told an industry conference. "Clients may think they are getting a bargain. But the fact is that they are buying security. The insurers who write unprofitable business are inevitably the first to collapse when disaster strikes."

Beyond Risk Transfer
It appears we are entering a period of steadily increasing instability in nature. Ferocious storms and floods in the US, the Japan earthquake and tsunami, the volcano in Iceland, the fires in Australia - all flitter across our computer screens and raise the specter of inconceivable loss. Insurance - where it's available - merely provides capital for rebuilding. Much of what is lost cannot be insured and even where there is insurance, what is lost on a personal, family-to-family level cannot be replaced. Yet we see selfless efforts to help survivors, most of whom will demonstrate a remarkable ability to endure. So much of what is precious to these people has been lost, but they will move on. That's human nature at its best.

Meanwhile, the reinsurance market, long in the soft-market doldrums, will finally begin to harden. We will all pay a little more for insurance - and we will complain about it. That, too, is human nature, not at its best, perhaps, but a reflection of these tumultuous times.

Last year 29 coal miners died in an explosion at Massey Energy's Upper Big Branch Mine in West Virginia. Don Blankenship, Massey CEO, blamed the explosion on federal interference and a gigantic methane bubble that percolated up from below the mine shafts. The bubble has burst, but not in the way Blankenship would have you believe.

An independent team appointed by the former West Virginia governor, Joe Manchin, and led by the former federal mine safety chief Davitt McAteer, has issued its findings, which are both unambiguous and scathing. There was no methane bubble. There was, instead, a pattern of negligence by management that led directly to the deaths of the miners.

As summarized in the New York Times, the report is a searing indictment of Massey's management style:

"The story of Upper Big Branch is a cautionary tale of hubris," the report concluded. "A company that was a towering presence in the Appalachian coalfields operated its mines in a profoundly reckless manner, and 29 coal miners paid with their lives for the corporate risk-taking."

The report goes on to say that a "perfect storm" was brewing inside the mine, combining poor ventilation, equipment whose safety mechanisms were not functioning and coal dust, which, contrary to industry rules, had been allowed to accumulate, "behaving like a line of gunpowder carrying the blast forward in multiple directions."

Given the uncompromising language of the report, Massey management may not enjoy the "exclusive remedy" protections of the workers comp statute. They are now vulnerable to charges of criminal negligence. I suspect that attorneys for the widows and children of the miners will look rather closely at the assets of Massey's (now former) CEO.

Farewell, My Ugly
Don Blankenship resigned from his CEO post in December of last year. Don't bother putting up a collection to buy this ethically-challenged titan of business a gold watch. In 2009 he earned $17.8 million, which does not include deferred compensation of an additional $27.2 million. There is no question that Blankenship's leadership created profits for the company. Unfortunately, these profits came at the expense of the environment and of the men who extracted the coal from the West Virginia mountains.

The anecdote that tells you a lot about Blankenship involves his personal water supply. When Massey Energy activity poisoned the water reaching his own home, Blankenship ran a private pipeline to the next town, where clean water was readily available. His neighbors, lacking Blankenship's resources, have to make do with the local, polluted water.

It will be interesting to see what happens next. In a just world, Blankenship would be held accountable for his actions as Massey's CEO. But we do not live in a world where justice prevails very often. Blankenship will likely continue to enjoy his retirement years, drinking clean mountain waters, railing about government interference, buying a few politicians and generally living the good life. We can only hope that each and every night his dreams are haunted by visions of the 29 miners and their struggling families. That would be one form of justice indeed.

A couple of days ago my colleague Julie Ferguson blogged OSHA's new focus on farm safety. We all share the concern for the safety of farm workers. But OSHA is upping the ante in a way that requires the immediate attention of both insurance companies and their clients. As part of their investigation into the deaths of two teenage workers in a silo operated by Haasbach LLC, OSHA issued subpoenas for documents from Haasbach's insurer, Grinnell Mutual Reinsurance Co. OSHA wanted to review safety inspection reports and any follow up documentation from Haasbach. The insurer refused, arguing that the subpoena would discourage businesses from allowing insurers to conduct safety inspections if the material contained in the inspection reports can be used against a business during later litigation or OSHA enforcement proceedings.

The U.S. district court has ordered that the records be given to OSHA.OSHA Assistant Secretary Dr. David Michaels praised the decision. "The court affirmed OSHA's authority to obtain relevant information from an employer's workers' compensation insurance company. This is not surprising legally, but it does illustrate that workers' compensation and OSHA are not separate worlds divorced from each other," he said. "Workers' compensation loss control activities overlap with OSHA's efforts to bring about safe and healthful workplaces, and in order to achieve a safe and healthful working environment for all Americans, all efforts of business, insurance, labor and government must move forward together."

The court ruled that OSHA has jurisdiction to investigate the workplace fatalities, and further has the authority to require the production of relevant evidence and the ability to issue a subpoena to obtain that evidence. The requested documents, which included copies of site safety inspections, applications for insurance coverage for the site, and correspondence between Grinnell and Haasbach concerning the site, were found to "reasonably relate to the investigation of the incident and the question of OSHA jurisdiction," according to the decision.

A Tighter Safety Net
The court's ruling has important implications for both insurers and their clients.

Insurers are required to provide safety services, including site inspections with the findings documented in written reports. Usually, the safety inspector asks for a written response within a set time period. With OSHA potentially accessing these reports, there is liability for insurers: did they identify safety problems? Did they follow up to ensure that the problems were fixed within a reasonable period of time? It's another version of the great liability question: what did you know and when did you know it?

Similarly, the documents put insureds at risk. Safety issues have been identified. How did the business respond? Did they fix the problem? Did they perform the necessary training? Did they document their activities to show good faith in correcting identified concerns?

In all of this activity, candor is essential. The last thing anyone wants - and that anyone certainly includes OSHA - is for this court's ruling to have a chilling effect on the routine inspections performed by insurance companies. The concern is that inspectors, sensing OSHA reading over their shoulders, might hedge the findings just a bit - enough, perhaps, to create an ambiguity in the finding that results in an ineffective and unfocused response by the insured, which, in turn, perpetuates the hazard and leads, perhaps, to a serious injury or even death. That would be an unintended consequence of tragic dimension.

Focus on Safety
As always when OSHA becomes involved, there is a lot of money on the table. Following the fatalities, Haasbach was issued 25 citations with a penalty of $555,000. This was in response to the situation where three (untrained) workers became entrapped in corn more than 30 feet deep. At the time of the incident, the workers were "walking down the corn" to make it flow while machinery used for evacuating the grain was running: all in a day's work on the farm, and extremely hazardous.

It is certainly not in the best interests of insurance companies and their clients to build defenses against potential OSHA involvement. If we all share a commitment to safety - and we must - then an open and candid dialogue is essential. To be sure, both insurers and their clients are "on the hook" once problems have been identified. But surely it is in their combined interests to fix those problems as quickly as possible. Insurers and their clients must keep the focus where it belongs: not on OSHA, but on the moment-to-moment, day-to-day safety of workers on farms, in factories and in every American workplace.

NCCI has released two reports that are essential reading for risk managers and anyone else who enjoys the Big - albeit somewhat gloomy - Picture.

The first report is a summary of workers comp performance through 2010: while many indicators are positive or at least neutral, the major concern is overall performance. The combined ratio for insurers (losses plus expense) is creeping steadily upward: 101 percent in 2008, 110 percent in 2009, 115 percent in 2010. In other words, in 2010 carriers spent 15 percent more than they earned through premiums. Even with improved returns on investments, insurers are caught in the zone where many are losing money, especially those whose combined ratios have drifted above the average.

The troubled economy has complicated matters: as payrolls go down, premiums go down with them. Comp premium peaked in 2005 at $47.8B; in 2010, premium totaled $33.8B. To be sure, fewer people are working, but that often results in increased stresses - and risks - for those who still have jobs.

Finally, there is the highly politicized issue of rates for comp insurance. No state wants to be the first raise the rates, as this increases the cost of doing business and makes the state less competitive in attracting new business. So states hold the line or even force reductions, making all businesses - except insurance related - happy.

The Really Big Picture
For those of you who seek perspectives beyond comp, into the broadest possible, world-wide view of risk transfer, Robert Hartwig of the Insurance Information Institute offers slides that are compelling viewing. He examines the dual specters of terrorism and natural catastrophe. Bin Laden's unlamented death may increase the risk of attack in the coming months, resulting in open-ended exposures for workers comp and property insurance. As for natural disasters, with the spate of earthquakes, tsunamis, and tornadoes, any actuary who is paying attention is having trouble sleeping these days.

Japan's earthquake, tsunami and nuclear plant meltdown appears to be the most expensive natural disaster in history. The total losses are expected to run between $100-300B, of which only a relatively small portion ($45B) is insured. (Government will bear the brunt.)

Tornadoes tearing through mid-America thus far have avoided major population areas, but the recent event at the St. Louis airport raises the specter of urban disaster.

Who Pays?
When calamity strikes, the impact is greatest on reinsurance, which kicks in when limits are reached in-front line policies. With the unprecedented scale of recent events, the cost of reinsurance must go up, and as it does, the cost of insurance for the consumer (business and personal) goes up with it. We live in risky times and the increasing costs of risk transfer reflect our darkening world.

One final note: Hartwig reveals that the 9/11 attacks added 1.9 percent to the combined ratio for 2001, which totaled a robust 121.7 percent. That's a sobering thought for this beautiful spring morning. My advice? Slap on some sunscreen and get out for a stroll. There's no better cure for gloomy data than a walk in the sunshine.

In the ever-useful Oregon rankings, Montana has the dubious distinction of being the second most expensive state for workers compensation. Alaska, with its vast spaces and compelling views of the former Soviet Union, is number one. Gov. Brian Schweitzer recently signed HB 334, a bill designed to lower the mountainous rates. Only time will tell...

It's always interesting to see how a state legislature tackles high comp costs. In Montana, they set out to take a balanced approach, narrowing eligibility but enhancing benefits. While the legislators are patting themselves on the back for achieving their goals, unions have complained that too much of the cost reduction comes at the expense of workers. It usually does.

Here's a glimpse of the bill in action, trying to reduce employer liability for specific exposures:

(2) An injury does not arise out of and in the course of employment when the employee is:

(a) on a paid or unpaid break, is not at a worksite of the employer, and is not performing any specific tasks for the employer during the break; or

(b) engaged in a social or recreational activity, regardless of whether the employer pays for any portion of the activity. The exclusion from coverage of this subsection (2)(b) does not apply to an employee who, at the time of injury, is on paid time while participating in a social or recreational activity or whose presence at the activity is required or requested by the employer. For the purposes of this subsection (2)(b), "requested" means the employer asked the employee to assume duties for the activity so that the employee's presence is not completely voluntary and optional and the injury occurred in the performance of those duties.

At times the revised law reads like a monologue, with legislators trying to anticipate the circumstances of an injury and limiting the comp system in its ability to award benefits.

Rate Pain
The Oregon study illustrates some of the exorbitant (2008) rates paid by Montana employers. For a point of reference, we compare these rates (per $100 of payroll) to those in Massachusetts. (The MA rates are in brackets):

Carpentry shop (2802) $17.85 [$4.53]
Plumbing NOC (5183) $10.44 [$4.10]
Carpentry NOC (5403) $26.91 [$11.80]
Clerical (8810) $0.85 [$0.13]

Massachusetts employers, in a state with six times the population of Montana, spend about $650 million for comp premiums. Montana's current tab - $400 million - is expected to drop about 25 percent as a result of the new law. Even if you reduce the above Montana rates by 25 percent, employers are still confronted with big premium bills. Mount Comp might be substantially lower than it was, but it's still a grueling climb.

We are now a week and a half into the Japanese disaster, which encompassed a terrible trio of catastrophic events: an earthquake, a tsunami, and a near-nuclear meltdown that looked to be vying for a top spot in the record books. The death toll tops 9,000, with another 13,000 still missing. And today at the Fukushima Nuclear Plant, although a large scale meltdown looks to have been narrowly averted, the extent of the radiation leaks and the related damage are still yet to be fully assessed.

The heroes of the past week, those credited with keeping events at the nuclear plant from spiraling irretrievably out of control, are being hailed as "the Fukushima 50." In actual numbers, they are more like 200 courageous souls, taking turns in 50-person shifts while the world watched from outside the 20 kilometer evacuation zone.

When the full extent of the crisis at the Fukushima plant became apparent in the wee hours of March 15, TEPCO wanted to remove all staff. Prime Minister Kan summoned TEPCO President Masataka Shimizu to his Office and told him that leaving was was not an option. "This is not a matter of TEPCO going under; it's about what will become of Japan," he said.

ABC news sheds a bit more light on the team who struggled to restore order to the crippled plant. The crews are though to be hands-on workers, technicians, rather than managers.

"The crews are not necessarily made up of strong young men. Emergency nuclear scenarios suggest asking older retirees to volunteer, not because they're more expendable, or even because they're more skilled, but because even if they're exposed to massive amounts of radiation, history has shown they would die of old age before they die of radiation induced cancers, which can take decades to develop."

"While radiation-induced cancers are a serious worry for those exposed to high doses of radiation, they usually take at least a few years to set in.

"You may see an incidence of cancer 30 years down the road. Cataracts can set in in 30 to 40 years," said Jenkins. "Leukemia showed up within a few years in the atomic bomb survivors, but solid cancers did not appear until 10 years and continue [to show up] to this day," said Hall."

Wikipedia's page on the Fukushima 50 offers more detail about the radiation exposure these workers faced in comparison to that of other nuclear workers.

"The international limit for radiation exposure for nuclear workers is 20 millisievert (20 mSv) per year, averaged over five years, with a limit of 50 mSv in any one year, however for workers performing emergency services EPA guidance on dose limits is 100 mSv when "protecting valuable property" and 250 mSv when the activity is "life saving or protection of large populations."

Prior to the accident, the maximum permissible dose for Japanese nuclear workers was 100 mSv in any one year, but on 15 March 2011, the Japanese Health and Labor Ministry enforced the permitted 250 mSv limit, in light of the situation at the Fukushima Nuclear Power Plant."

Between 1986 and 1992, it is thought between 600,000 and one million people participated in works around Chernobyl and their health was endangered due to radiation. Because of the dissolution of the USSR in the 1990s, evaluations about liquidators' health are difficult, since they come from various countries (mostly Ukraine, Belarus and Russia, but also other former Soviet republics). Furthermore, the government of Russia has never been keen on giving the true figures for the disaster, or even on making serious estimates. However, according to a study by Belarusian physicians, rate of cancers among this population is about four times greater than the rest of the population. (Wikipedia notes that "All the figures quoted by various agencies are controversial.")

Insurance issues related to Japan's disaster
According to the Insurance Information Institute, Japan's earthquake could cost $15 billion to $35 billion, one of the costliest ever. This would be a tough enough kick in the shins for the insurance industry, but III notes that, "... four of the five costliest earthquakes and tsunamis in the past 30 years have occurred within the past 13 months."

See more from III at their excellent resource page on the Japan earthquake and Pacific Tsunamis

Here are some other insurance-related articles that shed light on one or another aspect of this mammoth event.

We aren't up our international compensation law, but our Googling turned up this overview of Workers Accident Compensation in Japan.

Joanne Wojcik tackled the nuclear topic in Business Insurance in her article Coverage restrictions expected to limit nuclear claims (subscription required). We offer this excerpt:

Under Japan's 1961 Law on Compensation for Nuclear Damage, which was amended in 2010, power plant operators' liability for accidents such as those after the earthquake and tsunami is limited to 120 billion yen (about $1.5 billion), with the Japanese government assuming responsibility for any third-party damage or bodily injury claims beyond that amount.

To meet the requirements of the law, Japanese nuclear power plant operators buy property and liability insurance from the Japan Atomic Energy Insurance Pool. JAEIP provides nuclear property, nuclear liability, general liability and terrorism coverage to nuclear power plant operators. However, JAEIP does not sell the utilities coverage for earthquake damage, tsunami damage or business interruption, leaving the Japanese government responsible for those costs.

If a nuclear incident similar to that occurring in Japan were to happen in the United States, the U.S. Price-Anderson Act limits liability for nuclear power plant operators to $12.6 billion.

At Risk Management Monitor, Emily Holbrooke looks at the issue of business interruption and its effects on global corporations. Many think the real story is one of good engineering saving thousands of lives - Jared Wade discusses this in his posting about how Japan's bulding codes prevented casualties.

Also in Business Insurance, Judy Greenwwald looks at the complicated claims process ahead:

Corporate policyholders that do business with companies in Japan face a complicated process when they attempt to tap their contingent business interruption coverage because of the intertwining nature of the disasters that have struck the nation, observers say.

"This is going to be one of the most complicated catastrophes that I've seen," said William Okelson, Chicago-based director of property claims for Lockton Cos. L.L.C. There are "so many variables," including the original quake, the tsunami, resulting fires, nuclear power plant dangers and the government rationing of electricity.

At LexisNexis, Julius Young examines a "what if " scenario: What If? Workers' Comp and Earthquakes. Jon Gelman puts the events in some historical context relative to other large-scale disasters and nuclear events: A Nuclear Workers' Compensation Disaster.

Our thoughts and prayers are with the people in Asia who are suffering through a disaster of unprecedented scale. The digital age allows us to watch the apocalyptic images: entire neighborhoods being swept to sea; burning houses borne upon the dark tide of water and debris; hundreds of vehicles swept along as if they were rudderless boats; the boats themselves powerless against the sheer force of the waters. We engineer our buildings, our infrastructure, our vehicles, our very lives on the assumption that the odds are always with us, that destructive forces of this magnitude are very unlikely to rise up from the depths of the ocean. And yet, on occasion, arise they do.

It will take months to sort out the damages. Indeed, the damage has not even run its brutal and indifferent course. But we cannot allow this horrific moment to pass without at least a glance at the implications for the subject of this blog, the insurance industry. Insurance is all about risk and risk transfer. Individuals and most businesses are too small to absorb the risk of loss that surrounds us. We purchase insurance as a hedge against disaster: loss of life, property, assets, physical ability, etc. The law of large numbers works in favor of the insurer: sell enough policies, expand your markets far and wide, and the risk of loss is spread out over an immense area. A catastrophe in one place is absorbed by the absence of losses elsewhere.

In the scale of what is happening in Japan, there is no elsewhere. No actuarial calculation can take into account the implications of losses on this scale. And even if the actuaries could come up with a number, the cost of the insurance would preclude anyone from buying it.

Here's one relatively minor insurance issue emerging from the rubble in Japan: the quake hit at 2:30 in the afternoon. Many of the people being swept away by the surging waters were working. Their deaths will be compensable under whatever form of workers comp exists in Japan.

Our modern lifestyles do not recognize risk and disruption on this scale. We somehow think ourselves immune from disaster. It brings to mind a poem by Percy Bysshe Shelley about another powerful and confident civilization that could not foresee an end to its dominion:

Ozymandias

I met a traveler from an antique land
Who said: Two vast and trunkless legs of stone
Stand in the desert. Near them, on the sand,
Half sunk, a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them, and the heart that fed;
And on the pedestal these words appear:
"My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!"
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.

A century of horrific wars and occasional natural disasters have taught us that our arrogance and presumed mastery of the world are illusions. The lesson is clear: Ozymandias and his ilk (Muammar Gaddafi comes to mind) rule with arrogance and contempt. By contrast, our actions must be as full of generosity and compassion as possible. The risks that lurk in our lives may be beyond calculation, but what truly matters is our ability to embrace the time given to us and help those whose lives have been devastated by chance.

Dave Duerson was a star safety in the NFL. He used his head in the way that aggressive defensive backs often do - as a battering ram to bring an opponent down, maybe even jar the ball loose. He was articulate, generous and in his post-football life, successful. So it saddened many of his friends and colleagues to learn that he had committed suicide last month. But even in this last, desperate act there was a method to the madness: he shot himself in the chest, so that his brain would be left intact. He was convinced that the downward spiral of his life over the past few years was due to football-related brain damage - chronic traumatic encephalopathy. He texted his ex-wife just before he shot himself, requesting that his brain be given to the NFL brain bank. Just in case she did not get the message, he left a written note with the same instructions.

We have blogged the issue of concussions in the NFL and their potential for long-term brain damage. As this prior blog pointed out, a changing of the NFL's medical guard indicates that the league finally appears willing to confront the issue head on (so to speak). They no longer systematically deny a connection between concussions on the field and severe cognitive problems after football careers come to an end.

Over the past few years, Duerson was in a downward spiral. He lost his business to bankruptcy. He (uncharacteristically) assaulted his wife, who soon felt compelled to end their marriage. While his friends did not see major changes in his behavior, he talked openly of his fears of dementia. He suffered short-term memory loss, blurred vision and pain on the left side of his brain. He looked into the future and despaired at what he saw coming. At the time of his death, Duerson was only 50.

Suicide as Political Act
Duerson's last gesture was an explicitly political act. He was convinced that his life problems - and the rapidly diminishing quality of that life - were directly connected to his years as a football player. So he not only decided to end his life, he made sure that suicide would leave his brain intact for research. The NFL has been (belatedly) collecting the brains of deceased players willing to donate them, to try and determine the impact of repeated violent collisions on aging. At this point, there is not much doubt of the causal connection - not in every individual who played the game, but surely in a significant percentage who suffered from multiple concussions.

With this connection medically proven, the burden falls on the NFL to improve player safety. That will not be easy. This past season, a number of players - most notably the Steelers linebacker James Harrison- complained about the newly implemented fines for helmut to helmut hits, defined as:

"using any part of a players helmet (including the top/crown and forehead/hairline parts) or facemask to butt, spear, or ram an opponent violently or unnecessarily; although such violent or unnecessary use of the helmet is impermissible against any opponent, game officials will give special attention in administering this rule to protect those players who are in virtually defenseless postures..."

Duerson the player would have agreed with Harrison about the rule. Duerson the retiree would have supported it. Experience is an exacting and often cruel teacher. As Duerson's sad demise demonstrates, what we choose to ignore in the prime of life may give birth to demons that haunt us as we age.

If Missouri is the "Show me" state, Pennsylvania is in the running for the "show me the documents" state. They have a way of over-engineering solutions to what may or may not be problems. (See our prior post ["Blood on the Forms"] on requiring injured workers to sign 2 forms at the time of injury.) Now the Keystone state weighs in on the independent contractor conundrum through the recently implemented Construction Workplace Misclassification Act, also known as Act 72.

In tackling the problem of misclassification, Pennsylvania has done something smart: they have limited the scope of the law to the construction industry, where the worst abuses abide. (Massachusetts kicked a hornets nest with an expansive definition of independent contractor that extends well beyond construction.) The statute contains the usual and customary language requiring independent contractors to control the work, work for others and provide their own tools. But in its relentless need for documentation, Pennsylvania requires general contractors and subs to get out the pens and archive some paper. Independent contractors must:
- Have a written contract for every job
- Carry at least $50,000 in general liability coverage for the duration of the job (this requires a certificate of insurance from the agent)
- Document a proprietary interest in their business (how would a sole proprietor do this - tax forms?)
- Realize a profit or suffer a loss for the project (an interesting and potentially problemmatic issue for craftsmen whose spouses are not accountants)

Act 72 prohibits general contractors from forcing subs to sign any contract that results in misclassification. It also forbids retaliation against any person who files a complaint under the law.

The Amish Exception
As we pointed out in a previous blog, Pennsylvania's Amish population (roughly 51,000 total) is generally exempt from insurance requirements. Amish employers are not required to provide social security or workers compensation coverage, and it appears likely that the Amish will be exempt from the new health insurance standards. When a need arises, they pass the (rather old fashioned) hat throughout their community.

So what happens when an Amish (or non-Amish) general contractor hires an Amish sub? Which of Act 72's requirements apply to the Amish? Certainly not the general liability insurance. Perhaps not the "profit and loss" and "proprietary interest" documentation. While we are not suggesting that employers seek out Amish subs to avoid Act 72, it might simplify matters. For everyone else in PA, it's time to focus on the paperwork.

NCCI has published an interesting study on the relationship between obesity and the cost of workers compensation claims. To no one's surprise, the study concludes that medical costs for the same injury are 3 times higher among obese claimants in the first year, rising to five times higher at 60 months. In addition, claims for the non-obese are much more likely to be medical only; obese workers, when injured, tend to lose time and collect indemnity. For the same injury and all else being equal, the range of medical treatment, the costs and the duration of the claim are consistently greater for obese employees.

The study cites CDC data on the incidence of obesity in the general population. In 1990 10 states had incidence rates of obesity under 10% and none were above 15%. By 2009, 33 states had incidence rates equal to or above 25% and nine (mostly deep south) states had rates at 30% or higher.

The study is based upon 27,000 claims, of which 7,000 carried a specific diagnosis for obesity as a co-morbidity. Data wonks will duly note that there must have been a significant number of obese claimants outside the "obese" group, due to the fact that treating doctors would not consistently list obesity under the diagnosis.

Underwriting the Overweight
I feel a great deal of sympathy these days for the challenges facing comp underwriters and actuaries. Their customary approach of using the rear view mirror as the major indicator of future risk is increasingly ineffective. Now you can add the issue of obesity to mostly hidden factors that can seriously skew loss ratios.

The CDC data clearly indicates an alarming upward trend in obesity. Many of the obese are in the workforce. Indeed, companies might hire a person within the normal weight range and then see this individual gain substantial weight during the course of employment. Many of these burgeoning employees are performing physically demanding tasks. When they suffer from back strains, for example, the medical costs associated with treatment are more than double those of the non-obese. (On the other hand, the cost for the medical treatment of carpal tunnel injuries is virtually the same for the obese and non-obese.)

Fire the Big People?
With this data in hand, it may be tempting for employers to avoid hiring the obese and find ways of terminating current employees who tip the scale in the wrong direction. This would eliminate some very productive people. In addition, it raises the specter of discrimination. The Americans with Disabilities Act protects those with disabilities that impact "one or more major life activities." That might - but does necessarily - include the morbidly obese.

The NCCI study raises the issue of higher costs for injuries involving the obese. There is a more proactive way to look at the issue. Employers could focus on incentives to promote wellness. Employees who stay fit could receive enhanced benefits. We have drug-free and smoke-free workplaces. Perhaps it's time for snack-free workplaces - or healthy snacks. Out with soda machines and in with the vitamin water.

It's interesting to note that when opening comp claims, insurers generally do not collect data on height and weight . They really should. Where the data indicates that weight will be a significant factor in recovery, steps could be taken to encourage weight loss as part of the treatment plan. (For an example of court-ordered weight reduction, see our blog on the obese pizza maker here.)

Ultimately, the effort of employers to control losses will come up against the freedom of people to act as they choose. It's one thing to provide incentives for losing weight, it's quite another - especially in the deep south - to take away the Coca Colas. For many strong advocates of the American way, them's fighting words, indeed.

This is a very busy time for delivery companies.Whether it's the post office, UPS or FedEx, there are more packages moving around than people to handle them. The UPS solution is the hiring of 37,500 (!) temporary workers. These folks have been working for a few weeks and will continue working right up until Christmas Eve, when they will all be laid off. Due to the struggling economy, UPS had no trouble filling temporary jobs. This year, many laid off white-collar workers donned the drab brown uniforms and hopped on board delivery trucks, occupying the "jumper" seat next to the regular driver.

The Wall Street Journal has a nice article about this war-scaled ramp up (subscription required). As you can imagine, there is not a whole lot of time for training the new employees: a few tips on lifting "in the power zone," a caution about getting into the truck ("three point contact") and then off you go. The job is a frenzy of lifting, bending, carrying and climbing. These are physically demanding jobs, with relentless exertion required.

Risk Management Nightmare
Which leads to a loaded question for the risk managers at UPS: what percentage of this temporary workforce will be injured on the job? Even if it's only one half of one percent, that would be nearly 200 people. In all likelihood, they will have been laid off before the claim has been filed. And once laid off, these temps will have no loyalty and no commitment to UPS. They will have already handed in their brown uniforms.

More troubling from a risk perspective, the types of injuries may be the most open-ended and expensive claims in the comp system: back, shoulder and knee injuries, slips and falls on ice (for most of the country it is, after all, a rather tough winter). Statistically, you can expect an occasional robbery or animal bite.

All business entails some risk. Hiring strangers is always risky, no matter how thorough the vetting process - and in this case, that process is foreshortened, to say the least. Placing thousands of temporary employees into physically demanding jobs increases risk exponentially.

So when you go home tonight and look for the packages you are expecting, think for a moment on the harried temporary employees who brought them to your door. And say a little prayer, that the New Year brings these former white-collar workers health, happiness...and a job once again suited to their hard-earned skills.

You may recall the New York saga of Compensation Risk Managers (CRM), who single-handedly brought down the entire workers comp self-insurance group (SIG) industry in the empire state. Well, CRM is back in the news, this time in California, where their dubious business practices have collapsed a self-insurance group for the construction industry. The name of the failed SIG is "Contractors Access Program - get it? "CAP." As in, "your exposure is capped; you have nothing to worry about." To paraphrase a legendary President, "we have nothing to fear except fear itself" - to which we must add, unfortunately, the legitimate fear of predatory insurance administrators.

New York regulators took a very hard line in their response to the insolvency of a dozen SIGs operated by CRM. Someone had to make up the deficit created by CRM's mismanagement, so they decided to penalize all the SIGs operating by the rules. This harsh and rather expansive definition of "joint and several liability" led the well-managed SIGs to abandon the state.

At this point, it's not clear how California is going to pursue the $38 million shortfall. They will probably go after the actual participants in CAP, but it's highly unlikely they will find anywhere near the cash to cover the insurance deficit. Meanwhile, eleven of the SIG members are suing CRM, the agent who sold the product and the SIG's board of directors (some of whom are SIG members). If you total up the premiums paid by those filing the lawsuit, you only come up with $5.2 million. So the scale of the losses - $38 million - appears large enough to put every one of the SIG members out of business.

Promises, Promises
One of the interesting aspects of the lawsuit is the way the plaintiffs have quoted the marketing spiel right back at the defendents. They were promised "superior underwriting, claims oversight, loss control and administration." The "rigorous underwriting" would provide savings "while preserving the integrity of the program." Potential clients were assured that their exposure was limited to the premiums paid (a complete misrepresentation of the nature of SIGs) and that reinsurance kicked in on any claim above $500,000. (In reality, there was no reinsurance.) The agent who sold this dubious product promised to function as "much more than a broker." They brought "particular expertise" to the program and would serve as the clients's "partners in risk management functions." Some partner!

What apparently was not disclosed to members and prospects was the fact that the SIG was losing money almost from the very beginning. CRM had a fall out with the original broker, which resulted in $6 million of SIG funds being used to pay him off.

The CRM website is still up, where you can read about "the CRM advantage." They have an advantage, all right: they take advantage of naive and trusting companies seeking a little edge in the competitive comp market. It's a killer edge, to be sure.

Thanks to Work Comp Central (subscription required) for the heads up on this case.

On a recent drive through rural Ohio, I was startled by an unusual image: a horse and buggy crossing over the interstate on a bridge. Later, at a rest stop, a long line of Amish folks, dressed as if from central casting, stood patiently in line at the Burger King. When they departed, I went up to the counter and asked what they had ordered. "Burgers and biscuits, mostly." The Amish get biscuits from Burger King?

This memory came to mind when reading at Philly.com of a clash involving roofers in the western suburbs of Philadelphia. It seems that the Amish have an unfair advantage when bidding for roofing jobs against non-Amish contractors. The latter must factor in the costs of social security and workers compensation when bidding for work - and as comp practitioners know, the cost of comp for roofers is, well, through the roof. Under federal law, the Amish are exempt from social security; their religion rejects any form of insurance other than Divine. Under Pennsylvania law, they may opt out of workers compensation as well (though some Amish contractors do not). When you factor the costs of these coverages into the work, it's no surprise that Amish bids are routinely 30% or more lower than non-exempt contractors.

In the good times (remember those?), these differences did not matter much, as there was plenty of work for everyone. Today, however, there is a hard-scrabble search for work. Non-Amish contractors complain that the Amish have an unfair competitive advantage.

Lifestyles of the Not-So-Rich and Famous
The Amish also have a lifestyle advantage. They reject many aspects of modern culture. Many, though not all, refuse to operate machinery. Most do not use electricity. They do not have to worry about flat screened TVs, cable, iPods, iPads, cell phones, etc. They cling to a simple lifestyle that explicitly turns its back on what most people think is essential and necessary.

This brings to mind one more image during my brief encounter with the Amish in Ohio. As I was entering the rest stop, an Amish family was exiting. The father, with his wife a few steps behind, led his six children (their families tend to be large). One of the daughters held the hand of the youngest, a sweet blond 4 year old, who was blind. Bringing up the rear came another daughter, about 16, in a long, plain cotton dress that covered her from neck to ankles, over which she wore big, clunky work boots, laced half way up. Her gaze was indefinite, as if she were oblivious to the prosaic surroundings. She was strikingly beautiful.

I could not help but wonder whether she would remain with the culture that nurtured her, or whether she would yield as most of us do to the temptations of the beckoning world, a world full of greed and gadgets, where insurance is an absolutely necessity ...and by no means divine.

On February 19, 2008, Rachel Moltner, a 76 year old New Yorker, went into the Starbucks at 80th Street and York Avenue and ordered a "venti'-sized" tea. Her tea was served to her double-cupped and lidded. She took it back to a table and tried to remove the lid to add sugar. She had difficulty with the lid, and in the course of her attempts to pry it off, the tea spilled onto her left leg and foot. Moltner suffered severe enough burns to require a skin graft. To compound her woes, during her hospital stay she suffered from bed sores and a fractured sacrum and herniated discs caused by a fall out of bed.

Moltner sued Starbucks. In a follow up to the suit, Starbucks asked how much Moltner was seeking, to which she responded, "not more than $3 million." (Even at Starbuck's prices, that's a lot of tea...)

The suit accused Starbucks of serving tea that was too hot and that the serving in a doubled cup was inherently dangerous. She also said Starbucks should have warned her the tea could spill.

The appeals court rejected her case, saying "double-cupping is a method well known in the industry as a way of preventing a cup of hot tea from burning one's hand." Hm. Mitigate one risk, expose another...

Moltner also lost a subsequent appeal, based upon Starbuck's slow response to her initial suit.

Tea Time
David Jaroslawicz, a lawyer for Moltner, said Tuesday's ruling probably ends his client's case.

"The other side presented an old lady knocking over her tea," he said. "The case was really about that Starbucks has a directive to employees that you should not double-cup because it changes the center of gravity and can cause the cup to tip over."

Note to engineers: Does double cupping really change the center of gravity?

Note to risk managers: Double cup to spare the hand or single cup for steadiness?

Better yet, how about taking your afternoon cuppa in a big white reusable porcelain mug? Still risky, to be sure, but slowing down is the best way to prevent bad things from happening, and slowing down is what tea used to be about.

When a laborer is unable to perform physical work, the options are limited, not only for the worker, but for the workers comp system as well. Meet Pennsylvania's Sam Muzzicato. He came to America from his native Italy in 1969. He had only four years of schooling in Italy. He immediately went to work in America and continued working until January 2007, when he injured his back while employed as a laborer for Strow's Plumbing and Heating Company.

Strow's insurer hired a vocational expert to determine Sam's earning power. The expert came up with five possible jobs in the immediate labor market:
- Cashier at a Jiffy Lube
- Teller at a local casino
- Dispatcher for a trucking company
- A customer sales rep
- Front desk clerk in a hotel

Do you see a common denominator in all of these jobs? Some degree of computer literacy is needed. The Administrative Law Judge dismissed the first four jobs as not within Sam's capabilities, but for unknown reasons determined that he could perform the desk clerk position. With this theoretical job available, the ALJ approved a reduction in Sam's weekly indemnity benefit.

Here is the theory in PA law behind the wage reduction:

"[A]n employer may seek modification of a claimant's benefits by either offering the claimant a specific job that it has available that he is capable of performing or establishing earning power through expert opinion evidence."

Sam appealed to the Commonwealth Court, where the judges determined that the inclusion of the single job by the ALJ was capricious, and that Sam was incapable of performing any of the jobs recommended by the voc expert. Sam, in other words, has few, if any, transferable skills. When his body broke down, he had nothing to bring to the marketplace. As a result, his full indemnity will continue.

Broken Bodies
Sam's story is by no means unique. Many of the immigrants who came to this country to find work had limited education in their native lands. Once here, they were too busy or too indifferent to pursue educational goals. They gained a foothold through hard work, perhaps shifting educational goals onto their children. Now as they enter the waning years of employment, their bodies break down. Where once they recovered quickly from workplace injuries, now the pain lingers, eroding their capacity to work. And once out of work, there is literally no place to go.

What lies ahead for the Sam Muzzicatos of the world? While it sounds odd to say it, Sam is lucky that he was injured at work. His back problems will be treated through the comp system for the foreseeable future. He will collect roughly 2/3 of his average weekly wage, tax free, at least until his eligibility for temporary total benefits runs out. After that, he will probably qualify for some form of permanent partial award. Sam, in other words, will transition rather smoothly into retirement through the generosity of the workers comp system.

Strow's Plumbing and Heating will foot the bill through the experience rating process for three years. After that, the insurer will be on the hook for whatever is owed to Sam. Is this fair? Does it make sense? Is Sam being rewarded for his failure over the years to improve his skills through education? Ironically, if Sam did have transferable skills, his benefits would have been reduced, despite the fact that he might not be able to find work in this troubled economy. Would that have been fair? Indeed, in the world of workers comp, as judges parse the letter of the law and and employers struggle to pay the bills and injured workers battle to survive, is fairness even an issue under consideration?

In yesterday's blog on this topic, we told the story of a pizza delivery driver whose undisclosed seizure problem put others (and herself) at risk. Today we examine the inordinate and ultimately terrifying risks that routinely confront the people who deliver pizzas to homes.

The risks of delivery jobs are embodied in one sad tale. Richel Nova, 58, was a hard working immigrant who worked two jobs, one being delivering pizzas for Domino's in Boston. He responded to a call from the Hyde Park neighborhood. The address was a vacant home. He was lured into the house, robbed, stabbed multiple times and left for dead. The three thieves took his money ($100) along with the pizza and drove off in his 1995 Subaru. (The age of the car tells us a lot about Mr. Nova.) The abandoned car was found a bit later, along with the blood-stained pizza box. All but three pieces had been eaten.

Nova's life revolved around his family: twin 20-year-old daughters and an older son. The twins are both juniors in college. All that stood between Nova and a seat at his daughters's graduation next year were a hundred bucks and a pizza to go.

Robberies of delivery people in the Boston area have been a long-standing problem - 52 were reported through mid-September.

Common Ground Among Competitors
The three main pizza chains - Domino's, Pizza Hut and Little Caesar's - have collaborated on developing safety programs for drivers. Among them, they have nearly 90,000 drivers on the road. (Here is the Domino's description of the job.) Statistically, it's not difficult to identify the riskiest neighborhoods for delivery, but the chains face pressure from neighborhood groups and the federal government to provide delivery services without discriminating against the poor.

Back in 2000, Domino's reached an agreement with the Justice Department to formalize a delivery policy for all its restaurants. Reflecting what Domino's said were well-established standard practices, the new guidelines require managers to evaluate crime statistics with local law enforcement agencies and community groups before limiting delivery. As part of that policy, drivers must report any incidences of violence, and delivery limits must be drawn narrowly. (Easier said than done.)

(Sort of) Managing Risk
There are a number of ideas floating around on how drivers should handle what appear to be risky delivery scenarios:
- Require the customer to come to the car to pay for the delivery and pick up the pizza. (This may not be feasible in all circumstances - for example, disabled customers may not be able to come to the street.)
- Require customers to have exact change for their purchase (and hope against hope that they have a bit extra for the tip!)
- Advise drivers not to enter darkened dwellings
- Limit deliveries after certain hours (in the Boston data mentioned above, many of the robberies took place after 9:00 pm.)
- When in doubt, when confronted with what appears to be immediate risk of harm, the driver is instructed to return to the store (and risk the wrath of legitimate, irate customers awaiting their dinners)

For those of us who have never had a gun or knife thrust into our faces, the dangers confronting delivery workers every day are both frightening and unimaginable. For Richal Nova's children, any mention of pizza will haunt their thoughts for the rest of their lives - reminding them of their father's lonely and senseless demise at the hands of cruel thugs with a half-baked plan for a free meal.

Every time I see a marginal car with a pizza delivery sign slapped onto the roof, I think about the driver. How old? How experienced? How desperate to make a few bucks in a tough economy? And from the employer's viewpoint: how competent is the driver? Just how far must an employer go before they entrust a driver with the plastic logo and the insulated bag for delivering pizza to those of us who want dinner delivered in a box?

These thoughts congeal like day-old pizza in the sad case of Nicole Fisk, an 18 year old driver who worked (briefly) for Pizza Hut. Nicole only had her license for 3 months when hired by Pizza Hut in Clairemont CA. She was delivering pizza in November 2008 when she blacked out and drifted across the solid line into oncoming traffic. She slammed into a car operated by Shari Novak, 62, who suffered permanent brain damage and can no longer take care of herself. Shari's mother, Olena, suffered a broken neck.

Who Pays?
The Novaks sued Pizza Hut, arguing that the company was responsible for the collision because they hired Fisk, a relatively inexperienced driver, who had a history of suffering blackout spells. Ah, there's the rub. What did the employer know about Nicole Fisk? Only what she told them. She had a clean record, she carried the necessary insurance and her references were fine. She was not diagnosed with epilepsy until after the crash. Pizza Hut called it an "unforeseeable medical emergency" - which can be used as a defense to a negligence lawsuit.

Jurors rejected the defense, awarding Shari Novak $8.6 million and her mother $2.2 million. As one juror put it, "Fisk should have known she could have a blackout episode because of her medical history."

Here's where it gets interesting and where the issue of employer accountability comes to the fore. A consultant attorney points out that Nicole lied continuously about her health problems. When she first experienced blackouts, she was put on medication for acid reflux (a seemingly bizarre diagnosis, but perhaps based upon the limited information she provided her doctors). She apparently under-reported subsequent problems to these doctors. When she applied for a driver's license, she failed to disclose her medical condition to the Registry. And when she applied for a job at Pizza Hut, she once again lied about her condition and its potential impact on her ability to perform the job safely.

It's not difficult to feel some sympathy for Nicole. She is only 18. Her medical condition frightens her - she probably prefers not to think about it. Like any 18 year old, she wants to drive like her friends and earn a few bucks. In her own mind, she was not endangering herself or anyone else.

Impossible Standard?
While it's important to note that the jury did not find Pizza Hut guilty of negligent hiring, it did conclude that the company is responsible for damages because Fisk was their employee at the time of the accident. John Gomez, the attorney for the Novaks, said that the verdict should send a signal to other companies "to be a little more careful when hiring professional drivers." This is a bit disingenuous. Surely, the attorney is not suggesting that employers (illegally) research medical records on every potential hire. In this case, Pizza Hut followed its own reasonable procedures. Other than hiring a relatively inexperienced driver, they did nothing wrong.

Nicole Fisk was initially named in the personal-injury lawsuit but was later dropped from the case. Not because she was innocent - she is responsible for the tragic events on that November day - but because she had no assets of the magnitude sought - and secured - by the Novak attorneys.

There are few lessons to be learned here. Employers are routinely held accountable for many things which they do not control. It's not so much a matter of accountability as the crass ability to pay. In a case of this scale, with damages this severe, someone must pay. That someone, obviously, is the corporate entity that was unfortunate enough to hire Nicole Fisk.

In November the voters in the Evergreen state have the opportunity to end one of the few remaining monopolistic systems for workers compensation (the three others are North Dakota, Ohio and Wyoming). As you might expect, there is much fulminating and little rational discourse evident in the pre-election build up on Initiative 1082.

Opponents of privitization project visions of greedy insurers denying claims (Hank Greenberg with an ax?), while proponents lampoon the arrogance and incompetence of a bloated state bureaucracy. (If you want to see what passes for humor in the great northwest, check out this rather lame rap video in support of the initiative.)

It's hardly surprising that opponents of the measure view insurers as a greedy, heartless enemy. On the other hand, it's pretty clear that most monopolies tend to evolve (or is it devolve?) into behemoths slow to respond and slow to innovate. Both visions suffer from inaccuracy and distortion.

Who Pays?
In most states, employers bear the full cost of workers comp: employees pay nothing for the premiums and nothing for the treatments. In Washington, there are three funds supported by comp premiums: an indemnity fund; a medical fund; and a supplemental pension fund. Employees contribute through payroll deduction to the latter two funds. The current deduction is 0.1543 percent of earnings, with no caps. If I've done the math right - a big if, unfortunately! - that's about $76 per year for the average worker. Not a lot of money, but the principle is interesting - employees have a little "skin" in the game. Total employee contribution of premiums does reach the substantial level of about 22 percent.

While you would expect small businesses to embrace competition, some oppose 1082 for the simple fact that it will eliminate the employee contribution to premiums and shift the entire burden onto employers. Costs might go up. On the other hand, competition might bring costs down.

Decision Makers
Currently, costs for workers comp in Washington are modest: they rank 38th for cost in the 2008 Oregon survey, with an average rate of $1.98 per $100 of payroll. If the costs were higher, the pressure for change would probably be much more intense. As it is, voters will go the polls as they often do, with a lot of inflammatory rhetoric (and perhaps an annoying rap song) ringing in their ears. Then they will fill out their ballots. The fate of Washington's comp system is in their hands.

Five years ago we blogged the problem FedEx would inevitably run into in Massachusetts, where the definition of "employee" is so inclusive, it's almost impossible to find a truly "independent contractor." Well, the proverbial chickens have come home to roost.

Attorney General Martha Coakley has announced a settlement with FedEx, wherein the delivery giant has agreed to pay a little more than $3 million relating to the status of 13 "misclassified" delivery drivers. Without admitting liability or wrongdoing, FedEx has agreed to refrain from using the "independent contractor" strategy in response to claims for benefit coverage, including payroll taxes, unemployment insurance, and workers comp. In exchange, Massachusetts will refrain from any further legal action for one year. In other words, for the modest sum of $3 million, FedEx has bought itself a year to clarify its business strategy. Therein lies a tale of attorneys, well worth the telling.

FedEx maintains a steadfast commitment to a business model for its ground delivery system where the work is performed by independent contractors. With a healthy scepticism in our hearts, we have frequently blogged the barriers to independence: the drivers wear FedEx uniforms, drive FedEx trucks, adhere to FedEx dress codes and schedules, etc. FedEx ground does not exist without these drivers and that makes them, in effect, employees. The response to the fundamental query "who controls the work?" has been unambiguously, FedEx.

ISP to the Rescue?
As part of its agreement with the Commonwealth, FedEx has outlined its rationale for the independent contractor model. They propose entering into an Independent Service Agreement (ISP) with driver/managers in each service area. Appended to the MA settlement in draft form, the ISP agreement tries diligently to carve out a middle ground where the work is performed independently, but to FedEx standards.

Here are a few of the details:

As you can see, FedEx is trying to establish independence while still maintaining its identity and its standards. The Attorney General has not made any judgment about the validity of this strategy; she has simply cashed a nice check, in exchange for which she has given FedEx a year to work out the kinks. After the year is up, the FedEx model will likely be challenged once again.

Not Quite Independent?
You have to credit the presumably well-paid FedEx team: they have tackled head on the thorny issue of "free from control and direction." On the surface at least, the ISP approach offers a credible if not totally convincing appearance of independence.

Unfortunately for FedEx, the MA standards have two additional components, neither of which appear to be addressed in the draft ISP agreement: independent contractors must provide a service outside of the general contractor's usual course of business (no way FedEx can do this) and their independence is reflected in their marketing of services beyond a single customer (what would this look like?).

It will be interesting to see how FedEx responds when local driver/managers stretch the rules and standards in an attempt to assert some real independence. That's where the rubber will meet the road in this seemingly endless saga: a company with a ferocious need to control, giving up control in order to preserve their idiosyncratic business model.

And some folks say employment law is boring....Stay tuned.

Massachusetts has been in the forefront of the independent contractor issue. The state has narrowed the definition of "independent contractor" to the point where almost anybody can be defined as an employee. But how do you enforce this? Where is the leverage to confront employers who are avoiding comp premiums by misclassifying their employees as independent contractors?

Under the direct influence of labor unions, the Commonwealth has empowered "any 3 persons" to take action against suspected comp fraud. Governor Deval Patrick recently signed a law that allows any 3 people to file suit against an employer who fails to comply with the workers comp statute. If that sounds pretty broad, well, it is. Here is first section of the new law:

Whenever facts exist showing that an employer has failed to comply with this chapter, then any 3 persons may bring a civil action and that civil action shall be deemed a private attorneys general action....Plaintiffs shall prove a violation of this chapter by a preponderance of the evidence.

I do wonder what those "facts" and the supporting evidence might look like. Beyond that, this language invites lawsuits for any violation of the workers comp statute, a very wide parameter of possibilities, indeed. The focus, however, will be on premium fraud: deliberate misclassification of employees; paying people under the table; and failing to carry workers comp insurance altogether. The plaintiffs can collect up to $25,000 in unpaid premiums and an additional $25,000 in damages, plus "costs and reasonable attorneys fees."

These suits must be filed no sooner than 90 days after a policy ends (how would the "3 persons" know this date?). Then the process will take an additional 90 days. So six months after the policy ends, all hell breaks loose.

Bitter Remedy
Where are the "3 persons" likely to come from? I'm guessing that disappointed bidders on (increasingly rare) construction projects are likely to team up with disgruntled (former) employees of the successful bidder to form a merry band of 3. You might find three laid off employees/independent contractors jumping in to get back at their former bosses. Heck, the standard of "3 persons" is so low, this game is not much more difficult than playing the state lottery.

It will be fascinating to watch this new statute roll out. Simmering rivalries are going to boil over. The frictional cost of doing business in the Bay State is about to go up. The ultimate question, of course, is how effective this new weapon against premium fraud will be. To the extent it exposes unfair business practices, it will help level the playing field for all Massachusetts employers. But given the broad and ultimately vague language of the enabling statute, there is plenty of opportunity for abuse in this cure for abuse. From a blogger's perspective, of course, it's just about perfect.

A sewer may not be the preferred place to begin the work week, but the working world calls and we must follow. About a year ago, we blogged the sad story of Shlomo and Harel Dahan, respectively the owner and heir of S. Dahan Piping and Heating company in Queens, New York. They were hired to vacuum an 18-foot-deep dry well at a plant owned by Regal Recycling. Harel went in first. When he failed to emerge, his father went in after him. When the father failed to surface, an employee of Regal, Rene Rivas, went in after them. All three were overcome by deadly fumes at the bottom of the well. All three died.

Now we read in the New York Times that Sarah Dahan, Shlomo's widow and mother of Harel, brought the remains of her husband and son to Israel for burial. She left the company in the hands of Ygal Lalush, a trusted employee. In her absence, Lalush changed the locks, stole the company's four trucks, wrote $30,000 in company checks for his personal benefit and started running the company out of his own home under a different corporate name.

Ms. Dahan discovered the problem when she returned from Israel. She first tried to resolve the issue directly with Lalush. When that failed, she went to the authorities. Lalush has been charged with fraud, grand larceny, forgery, possession of stolen property and falsifying business records.

Lessons from the Underground
We could conjecture about the frailty of human nature and the dark shadows that accompany us all as we make our way through the world. We could wonder at the transformation of a loyal employee into a pathetic crook. (Perhaps his lawyer will chalk it up to post-traumatic stress syndrome!) That aspect of this tale will remain forever hidden, like the contents of the sewers cleaned by S. Dahan Piping and Heating.

The take-away from this tale lies within the Dahan family: the father who tried in vain to save his son. The mother who fulfilled a commitment by burying her husband and son in Israel and who tried unsuccessfully to convince her wayward employee to abandon his demented plan. There is genuine dignity in these people, who deserved both a better fate and a higher class of employee.

The saga of the New York self insurance trusts continues. We reported in April that justice had been served by Judge Kimberly O'Connell, who ruled that requiring solvent trusts to pay for the sins of insolvent trusts was unconstitutional. Now, according to Work Comp Central (subscription required), O'Connell herself has been overruled by a four judge panel, which has reinstated the assessments on the solvent trusts. While the justices are undoubtedly correct in their literal interpretation of the law, the ruling comes under the heading of "let no good deed go unpunished." It may be legal, but it is in no way just.

Here's the (rotten) deal: 15 self-insurance trusts are shut down by the state. They ran out of money because they under-priced their premiums, under-reserved claims and sold insurance like a ponzi scheme. Oh, they also paid themselves handsomely for their fine work as administrators. These defunct trusts are in the hole to the tune of $500-$600 million. State oversight? There wasn't any.

Who Pays?
The WCB decides to assess the remaining, solvent trusts to make up the deficit. In other words, the "joint and several liability" within a trust group now expands to include liability for all trust groups. To be sure, the enabling legislation allows the WCB to do this. After all, someone has to pay and this is New York, so deal with it. In this case, the trusts that operated by the rules, fairly pricing and fairly reserving claims, are penalized for the sins of the clowns who are no longer in business.

As we pointed out in yesterday's post, a task force has recommended that New York get out of the self insured trust business. We concur. Any state that loads the dice of "joint and several liability" to this absurd point makes a mockery of the concept. Self-insurance is based upon the ability to limit risk and contain exposures. Given New York's operating rules for self-insured trusts, conventional management tools are rendered useless. The liabilities of operating a group trust are uncontrollable and virtually infinite. Why would any company choose this path for managing risk?

Two years ago, New York Governor Patterson convened a task force to examine the status of self-insured trusts for workers comp. He was forced to take action when a number of trusts failed, most notably those administered by Compensation Risk Managers (CRM). The insolvent trusts left behind a deficit of $500 million. (See our prior blogs here and here.) The task force recently presented its findings to the governor. In 189 pages of closely reasoned text, the commission recommends that New York abandon this particular model for insurance. The risks, in their view, outweigh the benefits and perhaps most important, the state lacks the resources to adequately monitor how these groups operate from day to day. You cannot trust the trusts.

The commission zeroed in on what it considers to be the (fatal) flaws in the group trust model:
: Joint and several liability, where prudent employers are held accountable for the actions of the weakest members
NOTE: it's one thing to have "joint and several" liability; as the commission points out, it's quite another to actually collect on these obligations: less than 15% of what is owed by participants in the failed trusts has been collected to date.
: potential conflicts of interest involving group administrators and TPAs, who seek to grow the business by keeping rates artificially low and by understating losses
: inability of trustees to understand what is really going on
: inability of the state to monitor and assess the true status of each operating trust

Death Spiral
Self insurance groups currently operate successfully in 18 states, but not in New York. As we pointed out in a prior blog, the NY comp board tried to assess all trust members - not just those in the insolvent trusts - to make up the $500 million deficit. The solvent trusts sued and for the moment, have prevailed. (The Held decision can be read in the appendix of the task force report).

There is a certain logic to assessing all members for the failings of a few, but this only works when you are dealing with very large numbers, so the individual assessments are relatively small. This was not the case back in 2008, when there were about 18,000 employers participating in NY trusts. After all hell broke lose, the number dwindled to 4,000.

The crippling assessments issued by the comp board to cover the trust deficit created a death spiral, with solvent trusts folding their tents and moving out of the state. Even though those assessments have been retracted by the courts, that action comes too late to save the viable trusts. New York probably has no choice but to abandon the group trust model.

Rotten Apples
The New York narrative, as written by the governor's commission, attributes the trust failures to fatal flaws in the business model. But where New York sees an insurance approach that cannot work, other states see vulnerabilities that can be addressed through prudent management. Self-insured groups still operate profitably and effectively in many states. What happened in New York was the result of rogue and perhaps felonious trust management combined with inadequate state oversight. The state failed to see the true status of the troubled trusts in a timely manner and then took exactly the wrong action to correct it. That's not a problem with trusts themselves, but with the people entrusted to run them.

We are following the consequences of the gulf oil disaster with increasing despair. Images of oil soaked birds, dead fish, and the serene Gulf waters transformed from the customary beautiful blue-green to an appalling brown. Our thoughts also turn to the men and women laboring under very challenging conditions to contain the impact of this man-made disaster.

NIOSH has issued the following summary of the exposures facing the recovery workers:

Chemical exposures may include benzene and other volatile organic compounds, oil mist, polycyclic aromatic hydrocarbons, and diesel fumes. Physical hazards may include ergonomic hazards, excessive noise levels, sun exposure and heat stress. Injuries may occur due to slips, trips, and falls on slippery or uneven walking and working surfaces. Other safety hazards are associated with the use of tools, equipment, machinery, and vehicles. Biological hazards include possible exposure to biting or venomous insects or other animals. Psychological hazards may include witnessing traumatic injuries or death, inability to help affected wildlife, and fatigue.

You can read the CDC's 96 page opus on managing the exposures to emergency workers here. (I can't help but wonder if this particular web-available document is symbolically collecting dust on the shelf, like so many other well-intentioned but rather long-winded safety manuals - the ones risk managers point to with pride during a tour of an industrial plant.

"We're Hiring!"
BP has hired about 22,000 workers to help with the clean up. I wonder how carefully they screened the new hires. Any rapid ramp up is full of risk; the hazards of hiring on this scale for jobs full of open-ended risk is simply beyond calculation. How many of the 22,000 workers will end up with work-related illnesses and injuries? How would you project the future impact on BP's workers comp costs? (Perhaps BP is calling the new hires "independent contractors." Some may well be; most are not.)

Under regulatory scrutiny, BP has provided some form of rudimentory training and the necessary personal protective equipment (PPE) for the new workers. But how well is the work supervised? With temperatures routinely in the high 80s and the heat index over 100 degrees, how long can people function in the requisite protective suits, steel-toed boots, gloves, hard hats and safety glasses? What is the impact of raw crude on bare skin and laboring lungs?

Looming Epidemic?
There have already been reports of illnesses among these workers. Law firms have put out the word that at least one of the dispersants used in the clean up may harm workers:

OSHA representatives, Obama administration officials and others have expressed concerns that the oil dispersant chemical Corexit may be the source of the illnesses reported on May 26 by cleanup workers. In May, the EPA urged BP to stop using Corexit because of its toxicity. Corexit is manufactured by Nalco, whose board of directors has strong ties to the oil industry, including sharing at least one board member with BP.

We all feel a sense of urgency on an unprecedented scale as the pristine Gulf waters are sullied by millions of gallons of oil. A huge workforce has been mobilized to help with the clean up. Looming on the distant horizon is the cost of cleaning up the damage to those who are currently engaged in the clean up. It's something we give only passing thought to today. But the time will come when those costs are as conspicuous and nearly as disturbing as the image of an oil-soaked pelican trying to spread its soiled wings, trying and failing to launch itself into the brilliant blue skies of its Gulf home.

With a population around 1.5 million and a land mass the size of New England, Idaho is probably not the first state that comes to mind in the national struggle to contain medical costs. Nonetheless, orthopedists in Idaho have managed to attract the attention of the federal government in their effort to increase rates of reimbursement for services. The feds are not happy with the Idaho docs.

The first problem came with the workers comp fee schedule. The "Resource-Based Relative Value system" set a price of $88 for most orthopedic procedures. The 65 or so orthopedists in Boise got together and decided to refuse to treat workers comp cases. As a result, the Industrial Commission raised the rates by 61 percent. Score one for the docs.

Emboldened by their success, the docs refused to accept Blue Cross patients under the prevailing fee scheme. But in taking on the conventional health care (as opposed to the state-based workers comp system), the docs crossed a line from a program run exclusively by the states into a behemoth system in which the federal government plays a big role. The feds came down hard with charges of violations of the Sherman Anti-Trust Act. Prosecutors sued five doctors, the Idaho Orthopaedic Society and the Idaho Sports Medicine Institute in Federal Court. If you think about it, it's not hard to see how a bunch of doctors agreeing to hold out for higher reimbursements might fall under the general heading of "price fixing."

As we have blogged rather frequently, Massachusetts has the lowest fee schedule in the nation. Most orthopedists have responded by refusing to accept the (ridiculously low) rates. But unlike the orthos in Idaho, the MA docs deal with the palty rates on their own. By refusing to accept them, they compel insurers to negotiate higher rates. These negotiated rates vary from doctor to doctor. There is simply no way and no need for the hundreds of orthopedic doctors in MA to agree on rates:it would be like the proverbial herding of cats.

In Idaho it's different. The state's unique characteristics - the large land mass and relatively small population - make a genuine "conspiracy" possible. The docs all know one another. So what seemed to them a fairly innocent attempt to leverage the system for higher reimbursement rates appeared to the feds as a conspiracy. In other words, their mistake was in sharing information about the rates and in uniting to take action against them. Had they acted individually, there would have been no violation of the anti-trust act.

War on Docs?
One blogger with roots in the libertarian Ludvig Von Mises movement sees in the government action a declaration of war against doctors. He believes that doctors will be "forced" to accept the government rates. Not exactly. As we have seen in Massachusetts, individual doctors can accept or reject patients as they please. What they cannot do is collude with fellow doctors to achieve a fee schedule to their liking.

With rising medical costs looming over every aspect of our economy, this little skirmish in Idaho is simply the opening salvo in what is likely to be a prolonged and painful battle to contain the costs of health care. It's no accident that the Obama health care bill punted on the cost containment issue. One person's cost containment plan is inevitably another's cut in pay.

In the coming months, the battle of Idaho will move into the great metropolitan areas of our country. Just imagine the formidable barricades to be erected by the men and women in blue scrubs! This will be an interesting brouha, to say the least.

Joe Cassano, the man who brought insurance giant AIG - and the world economy - to their knees, has dodged the proverbial bullet: he will not be indicted for his actions in the collapse of AIG's Financial Products unit, which he ran until his resignation in 2008. Federal prosecutors searched diligently for evidence of wrong doing. What they found, however, was evidence of cluelessness. Joe Cassano was no crook: he was just a manager in way over his head. He apparently believed that underwriting credit default swaps was relatively risk free. Oh, well, it seemed like a good idea at the time.

If no good deed goes unpunished, incompetence on a cosmic level is not without its rewards: Cassano made about $280 million in eight years of running the FP unit, in addition to receiving a performance bonus of $35 million in his final year with the company. That last payment truly boggles the mind. Cassano was paid for high volume sales of a product that destroyed his company.

Joe Warin and Jim Walden, Cassano's (presumably high paid) attorneys were delighted with the outcome of the investigation:

Although a two-year, intense investigation is tough for anyone, the results are wholly appropriate in light of our client's factual innocence. This result was the product of two things: an innocent client and fair prosecutors and agents. The system worked.

It would be more accurate to say that the system was worked. As was evident in a prior blog, Cassano was not a nice guy who happened to make a mistake. He was a thug dressed up in a fancy suit. Perhaps on some level it's reassuring that his actions were not criminal, that he acted in the expectation that his company would make money. Cassano certainly made an obscene amount of money, but AIG rank and file, the shareholders and the tax payers have to foot the bill for the mistakes of one greedy goon.

Arizona has been getting a lot of criticism lately. Frustrated by the federal government's inability to confront the undocumented worker problem, they took matters into their own hands and passed their own law. Now police are required to stop anyone who "looks illegal" and ask for papers. I'm not sure that illegal immigrants from Ireland have much to worry about, but Hispanics - who make up one third of the state's population - had better be careful. The Arizona legislature missed an opportunity by not requiring Hispanics to wear their documents in a packet around their necks. Perhaps they can amend the law.

I have been on board with the need to deal with illegal immigration. Back in 2006 I strongly endorsed the congressional initiative to build a wall at the Mexican border. This new version of the "Great Wall" offered an tremendous opportunity to ineffectively seal the border, build a tourist attraction/theme park and temporarily employ thousands of undocumented workers until the project was finished, at which point we would escort the workers through the wall back to Mexico.

Some people feel that Arizona has created a law that penalizes people simply for looking Hispanic. Others believe that only the federal government has the power to deal with immigration issues. As we await the legal challenges that may or may not resolve the issue, we need to shift gears and recognize an area where the maligned state has actually gotten it right.

Public Versus Private
I am referring, of course, to the decision to privatize the state fund for workers comp insurance. Arizona has provided insurance since 1925 through the State Compensation Fund (SCF). With 40 thousand employers and $191.8 million in premiums, SCF is the largest workers' compensation carrier operating in the state, with a 31.5 percent market share.

One of its subsidiaries, SCF Premier Insurance Co., is the second-largest, with $34.1 million in 2009 direct premiums written. Another subsidiary, SCF Western Insurance Co., is the 10th-largest, with $10.7 million in 2009 direct premiums written. In other words, SCF is by far the dominant player in the insurance market for comp.

Under the recently signed law, SCF will become a mutual fund in 2013. This move should open the door for more carriers to do business in Arizona, which will join the vast majority of states in operating a private insurance system for workers comp. I find it encouraging that in this area, at least, the goal is not to make the rest of us "Arizonians," but to have Arizona join the mainstream of American culture. Bienvenida, las damas y caballeros!

At its annual conference in Orlando, the National Commission on Compensation Insurance (NCCI) recently presented an overview of the state of workers compensation insurance across the country . Dennis Mealy, NCCI's chief actuary, presented to a standing-room only crowd, which is notable in itself, as the normal crowd for an actuary would fit in the proverbial phone booth.

Anyone with an interest in workers comp should take a peak at Mealy's presentation. As is often the case, viewers will pull out different nuggets, depending upon their points of view. Here's what jumped out at me:

• From 2008 to 2009 workers comp premiums dropped by 11.8%. No surprise, as premiums are tied to payrolls and the latter have tanked along with the economy. In addition, average premium rates have declined steadily since 2003, as no politician wants to approve a rate hike.
• Net written premium from 2007 to 2009 is down 23%.
• The payroll for manufacturing has been on a steady decline over the past two decades.
• The payrolls for manufacturing and contracting comprise 20% of comp payroll nationwide, but generate 40% of the premium. Again, no surprise, as the manual rates in these areas are higher then the rates in other occupations.
• Investment gain - the crucial money made off the float of premium dollars - dropped to 7.1% in 2008, after averaging nearly 15% in prior years.
• The combined ratio for workers comp is running around 110 - in other words, for every dollar insurers collect in premium, they are spending $1.10.
• Insurers continue to offer premium discounts in order to secure new business or retain existing business (what my colleague Tom Lynch refers to as "eating their young").
• Frequency of injuries continues to trend downward.
• The average cost of indemnity per lost-time claim and the average medical cost per claim continue to rise.

As is usually the case, insurers are betting that they can beat the odds of a tough market: by writing only the best businesses, by preventing injuries through loss control, by managing claims aggressively and by investing prudently.

There's Always Tomorrow
What you see from the bridge depends upon what you are looking for: where the despairing see reasons for jumping, the optimist simply enjoys the view. The risk transfer business requires optimism (for everyone, that is, except the actuaries). The great insurance wager never really changes: carriers are betting that premium dollars collected will ultimately exceed what they have to pay out in losses. The negative results of the last few years are viewed as an aberation. Just wait 'til Tomorrow:

The sun'll come out
Tomorrow
So ya gotta hang on
'Til tomorrow
Come what may
Tomorrow! Tomorrow!
I love ya Tomorrow!
You're always
A day
A way!

For insurers, that "tomorrow" hopefully includes more favorable rates, improved return on investment, employers truly committed to safer workplaces, employees who really pay attention, and, while we're making a wish list, selfless attorneys. You gotta love tomorrow!

Salverio Todaro, a 68 year old entrepreneur, ran a safety inspection company called SAF Environmental Corporation. You may never have heard of Todaro, but if you live in the New York City area, Todaro may have succeeded in damaging your brain or shortening your life by a number of years. Certified to inspect buildings for lead and asbestos, Todaro rarely actually tested for the deadly substances. Beginning in 1989, he routinely filed bogus inspection reports, including phony lab results, on buildings scheduled for renovation or demolition across the five boroughs. (William Rashbaum of the New York Times provides the appalling details here.)

Think about the consequences of Todaro's failure to do his job. He gave the green light for projects that put construction workers on hundreds of jobs at immediate risk for exposure to lead and asbestos. These workers ripped apart buildings contaminated with asbestos, raising clouds of toxins for all to breath - construction workers, neighbors, passers by. It will take years for the toxins to do their work, but rest assured, that dreadful work will be done.
NOTE: I hardly need add that construction workers on the job sites certified as safe by Todaro are unlikely to qualify for workers comp benefits: thanks to Todaro, there are no records of hazardous substances on these sites.

In one documented case, Todaro was asked to examine an apartment where a young child had suffered from exposure to lead. Todaro gave the building a clean bill of health. As a result, the family had no reason to move, no reason to suspect that every breath their child took put him at risk for further brain damage.

A Punishment to Fit the Crime
In an earlier time, we might have pondered Todaro's fate after his death. In Dante's Inferno, the Ninth Circle of Hell is reserved for traitors, who find themselves eternally locked into awkward positions, encased in ice. Todaro betrayed his city and his fellow man, and made a few bucks in the process. But his actual fate is pretty mild by Dante's standards: he is facing four to six years in jail. After that, I imagine, he'll head south to a quiet retirement in Florida. No eternity encased in ice for this despicable betrayer of the public trust.

We have been following the implosion of self insurance groups (SIGs) in New York. Back in June 2008, SIGs operated by Compensation Risk Management (CRM) collapsed. CRM had grown their business by offering comp coverage at very low rates. For a long time, they were able to maintain an illusion of profitability by under-reserving losses. Eventually, it all caught up with them.

When the CRM SIGs went belly up, the state worker's comp board looked around for some free cash to pay for the $450 million in unfunded liabilities incurred by CRM. They decided to penalize all the SIGs that had been operating in the black. In a move stunning for its arrogance (facilitated by legislation passed in 2008), they decided to raise assessments on these SIGs from the modest annual total of $104,000 to a whopping $11.1 million.

In other words, the insurance groups operating prudently - charging adequate premiums, controlling losses and turning a modest profit - were forced to make up the losses incurred by a company operating like a ponzi scheme. Well, as they like to say in New York: "You gotta problem with that?"

Acting state Supreme Court Justice Kimberly O'Connor had a problem with it. She ruled on April 14 that the 2008 laws that empowered the comp board to assess the SIGs were unconstitutional, as were the assessments issued by the board.

Justice Too Late
Unfortunately, judicial relief comes long after the once-profitable SIGs have folded their tents. First Cardinal once operated 13 SIGs in New York, with $166 million in premium. When hit with the exponential increase in assessments, First Cardinal decided to move its business out of the state (in itself a sure sign of management that was paying attention). They stopped writing in New York and laid off the 57 (innocent) workers who were doing a good job of managing the New York business.

You may recall the old saying: "The wheels of justice grind slow but they grind exceeding fine." In this case, justice - and fairness - were eventually served. But the pace of the process seems to have crushed the parties harmed by an unjust law.

Of course, the comp board believes that the assessments are legal and is planning to appeal. That should add a few more months to this ridiculous situation.

"You gotta problem with that?" Indeed, I do.

In our first blog of the Upper Big Branch mine disaster that took 29 lives last week, we made no attempt to point fingers. It was a time for mourning, for acknowledging the sacrifices of the brave men whose jobs never see the light of day. Well, now that the final death toll has been rendered - there were no survivors - it's time for some accountability. Let's begin at the top.

The CEO for Massey Energy is Don Blankenship. He is a man of humble and hard-scrabble beginnings, raised by a single mother. He worked as a union miner (an irony that will soon become evident) and attended Marshall University, where he received a degree in accounting. He worked for Massey Energy in the accounting department. where his fiscal skills and his penchant for cost controls helped him rise in the ranks, culminating in his becoming CEO in 2000. He is a vehement foe of organized labor, along with government regulations and the "the hoax and ponzi scheme" of global warming. (His business is coal, so his disbelief in global warming runs as deep as his mines.) Blankenship constantly battles regulators over safety infractions, including adequate ventilation of the mines (which at this point appears to be a major factor in last week's exlosion).

While famous for his focus on production, Blankenship does give lip service to safety. In a July 2008 depostion defending Massey Energy's safety record, he appears to talk the talk:

"As an accountant, I know that safety is an important cost control. So even if I were so calloused, which I am not, as to believe that safety should be sacrificed for production, I would understand that it doesn't make any sense because the accidents and so forth cause you to have more costs."

But somehow, in the dust and drive of production goals and profits, safety falls by the wayside. Blankenship does not walk the walk - or, as we are talking mines, he does not crawl the crawl.

Management Styles
There are clues to his management style in his personal life (a rather critical summary of which appeared in Business Week). His maid quit, saying the working conditions were intolerable. Ever the bean counter, the politically connected Blankenship successfully fought her application for unemployment benefits. The case wended its way to the West Virginia Supreme Court, where the maid prevailed. Two of the court's justices said that "the unrefuted evidence" before the state unemployment agency showed that Blankenship "physically grabbed" the maid, threw food after she brought back the wrong fast-food order, and tore a tie rack and coat hanger out of a closet after she forgot to leave the hanger out for his coat.

"This shocking conduct" showed that she was, in effect, fired because she felt compelled to quit, the justices said. They said the conduct was "reminiscent of slavery and is an affront to common decency."

The same, alas, could be said of Blankenship's management of Massey Energy.

Humble No More
Don Blankenship earned about $11 million in 2008. Not bad for a man of humble beginnings. As for the survivors of the miners killed last week, they must turn to the West Virginia workers comp system, which will provide indemnity for widows and dependents. (It appears that Massey Energy is self insured for comp - a penny-pinching decision that is about to haunt Blankenship, big time.)

The company is also vulnerable under West Virginia law for civil suits: comp's "exclusive remedy" provision can be transcended if you can prove "deliberate intent." I would say that repeated stalling, appealing, stonewalling and dismissal of documented safety violations is likely to reach the "deliberate" standard.

You may remember the song "Sixteen Tons" - made famous by Tennesse Ernie Ford:

You load sixteen tons, what do you get?
Another day older and deeper in debt.
Saint Peter, don't you call me, 'cause I can't go;
I owe my soul to the company store.

Surely the miners had souls to put in hock. That may be more than can be said for the man who currently runs the company store.

Whatever you may be doing as you read this, take a moment to focus on your breath - the simple act of breathing in fresh air and then exhaling. Then think for a moment of the all the people who work in conditions where clean air is nowhere to be found. Think especially of the miners working deep in the earth, extracting minerals which benefit us all.

I often wonder what compels people to choose work in such dire conditions. For many, it's the only work available. For others, it's just what they know. Here is a passage, quoted in a lovely essay by Colin Nicholson, from one of my very favorite writers, Alistair MacLeod of Cape Breton Island, Canada (whose books Island and No Great Mischief are simply wonderful). MacLeod's family emigrated from the Scottish highlands in the late 1700s and found work in the Canadian mines:

Once you start it takes a hold of you, once you drink underground water, you will always come back to drink some more. The water gets into your blood. It is in all of our blood. We have been working in the mines here since 1873.

Here he describes a young boy in his first working day underground:

And there was scarcely thirty-six inches of headroom where we sprawled, my father shovelling over his shoulder like the machine he had almost become while I tried to do what I was told and to be unafraid of the roof coming in or of the rats that brushed my face, or of the water that numbed my legs, my stomach, and my testicles or of the fact that at times I could not breathe because the powder-heavy air was so foul and had been breathed before.

I am haunted this morning by the thought of 25 miners in West Virginia, whose last breaths were taken 1000 feet below the earth's surface. For each, there was a first terrifying day in the mines, perhaps following their grandfathers, fathers or uncles into tunnels deep below the surface. Over time, the terror receded, followed by the grim routine of working in the dark and breathing powder-heavy air that had been breathed before.

In the coming weeks, there will be many questions about mine safety, company policies and procedures, and survival benefits for the families. But today, there is simply the hope that the bodies can be recovered and brought one last time to the earth's surface. In a concluding irony, the final resting place for these men will be far above the chambers where they worked and where they died.

We have blogged the sad tale of housekeepers at the Hyatt Regency Boston, who were fired and replaced by low wage workers hired by an outsourcing firm. The workers unknowingly trained their replacements in their final months on the job.

Katie Johnston Chace of the Boston Globe has done a follow up on the 98 laid off workers. It's a sad story of broken dreams and piling debts. Sixty of the workers have been unable to find work.

As Northeastern labor economist Andy Sum puts it: "At the low end of the ladder, it's not only that the unemployment rate is high, but that the number of applicants for every job is extraordinarily high."

At the time of the firings, there was a lot of bad publicity for Hyatt. The hotel workers union estimates a loss of $3.7 million in revenues. Fighting back, Hyatt says that the job restructuring was the result of "challenging economic conditions.'' As we pointed out in a previous blog, the hotel might have saved a lot of money simply by improving the safety and training of housekeepers; their injury rates - and associated costs - were double that of other major chains.

Business as Usual
Hyatt spokeswoman Amy Patti said it was interesting the union would "boast about actions they have taken to drive dollars away from Boston and put additional jobs at risk in this difficult economy.''

Well, Amy, sort of. The union wants people to keep on spending in Boston, just at other hotels. They might start with the Boston Park Plaza, which has hired four of the former Hyatt workers into housekeeping jobs with full wages and benefits. When introduced to the team, their new co-workers burst into applause.

That's a nice coda for 4 percent of the Hyatt workers. For the remainder, no applause and, for the moment, little hope. It's like the end of Tchaikovsky's Symphony Number 6 ("Pathetique"), which after much drama simply fades away into silence at the end. Hyatt knew they would take a hit at the time of the firings. They also knew that memory spans are short and that business would return to normal in a few months. Throw out a few bargain rates and customers will come surging back. It's the American way and it works like a charm.

Performance incentive programs are a good idea - except when they aren't. The Insider has always viewed such programs with ambivalence: yes, it's a good idea to reward employees for safe performance over a given time period. The problem is that these programs can discourage employees from reporting legitimate injuries. And the employee who does report an injury - the guy or gal who breaks the string of injury-free days - may incur the resentment of fellow workers. "You blew the pizza and the draw for a TV because you cut your hand!" It can be yet another form of the great American tradition, blaming the victim.

Then there are the rogue performance incentive programs, where non-reporting of injuries is embedded in the work culture. Which brings us to California. (Is it my imagination, or does every conceivable scam bring us to California?)

At the Smurfit-Stone Container Corporation, the performance incentive program rewarded managers for not reporting workers comp claims. The company's motto is "solving it from all sides" - and it appears that one of the sides is, well, illegal.

David Polk, 53, and Douglas Tateoka, 61, pleaded no contest Wednesday to charges of concealing events related to on-the-job injuries and conspiring to deny injured workers their benefits. The two are scheduled for sentencing May 20 in Monterey County Superior Court.

Employees were discouraged from reporting workers comp claims. When injured, they were treated outside of the comp system: the employer took care of the medical bills. It's not clear whether any attempt was made to pay indemnity for lost time. I doubt it.

As is usual and customary in California, doctors figured out a way to make a few bucks in the scam: in this case, Steven Davis of Davis Chiropractic, who once worked for Surfit-Stone as a human relations manager, and Eugene Guzman, a physician's assistant at Pinnacle Urgent Care. Both are facing charges in the fraud.

Whose Incentive?
Any performance incentive program that focuses exclusively on managers is immediately suspect: a legitimate program rewards workers first, then managers, for good safety performance.

Performance incentive programs have a positive role in many workplaces, but it's crucial to align the incentives with the realities of the workplace. These programs should celebrate safe performance without penalizing or ostracizing employees who suffer injuries on the job. Beyond that, performance incentives must never trump employee rights under workers comp laws. It's one thing to reward safe performance; it's quite another to stifle claims reporting and the awarding of statutory benefits.

Managers at box manufacturer Smurfit-Stone tried thinking out of the box to lower their comp costs. Now they are on their way to a concrete box with bars on the windows. They are about to participate in a very effective performance disincentive program, one that most of us try diligently to avoid.

Bryan Griffin was a pilot for Australia's Qantas Air from 1966 to 1982. In 1979 he began to have "uncontrollable urges" to switch off the engines in mid-flight in order to bring down the airplane. He would leave the flight deck and smoke a few cigarettes until he calmed down. He made no attempt to hide his problem - he talked to his colleagues about it. Qantas had him examined and treated by several doctors, but the problems continued, including the urge to "scream and cry." He routinely ignored instructions and repeatedly missed radio and altitude calls. On a flight from Singapore to Sydney, he felt his hand "being abused by the uncontrollable pull of the start levers" - which, if pulled, would kill the engines.

OK. Not exactly "pilot of the month" stuff. There are a couple of intriguing aspects to this tale.

First, Qantas made the management decision to keep Griffin on the job. While the Insider normally recommends following a "return to work/stay at work" protocol, in this case, "staying at work" for three years with severe mental illness clearly put far too many people at risk. Griffin was incapable of performing his job safely; he should have been put on indefinite leave until his mental state stabilized beyond any reasonable doubt.

Griffin continued to fly until he retired in 1982 with a diagnosis of anxiety, depression and obsessive compulsive disorder.

Indemnity for Working?
Here is the second unusual aspect to this case: Nearly 30 years after his retirement, Griffin has been awarded $208,000 by an industrial compensation commission, which ruled that his mental problems were exacerbated by his continuing to work. The Workers Compensation Commission found that the pilot's condition had been worsened by continuing to fly for Qantas until his 1982 retirement. The financial award covers "loss of earnings, medical expenses and legal costs."

While I am no expert in the intricacies of comp as it operates down under, I am confused by this award. How can you suffer a "loss of earnings" when you continue to work? How does workers comp indemnity come to play in a situation where there was no lost time? Perhaps the commission assumes that if Griffin had been grounded during his prolonged period of mental disability, he eventually would have been cured and then would have been to continue his career with Qantas beyond 1982. In other words, Griffin's premature retirement was caused by making him work while he was suicidal. If that is the reasoning, it's a bit of a stretch.

I have one additional question for the commission: why did it take nearly 30 years to reach this conclusion?

Qantas is considering an appeal on this ruling. I think they should shut up and cut the check. Any additional proceedings might further expose their amazingly reckless decision to keep Griffin in the cockpit. That is negligent entrustment at its very worst. Ironically, had Griffin succumbed to his demons and crashed the plane, we might never have known the real cause of the accident. As it is, Qantas is lucky that both Griffin and his hundreds of passengers survived. Air travel is stressful enough without having to worry about a pilot with a barely controllable urge to crash the plane.

Three months ago we blogged the ongoing agony of Bath Iron Works (BIW), the people who build destroyers for the navy. You may recall that BIW self insures for workers comp, and as such must pay the "usual and customary" fees for medical services provided to injured workers. There are only two categories of payers who are stuck with usual and customary fees: self insureds and uninsureds. BIW has been waiting 18 years for Maine to come up with a fee schedule. Eighteen years! The Board in charge of developing the fee schedule is asking for...a little more time.

So what's the problem? Paul Dionne, the Chairman of the Maine Workers Comp Board - the board responsible for developing the fee schedule - is also board chairman of Central Maine Healthcare Corporation - which stands to lose a lot of money once the fee schedule is implemented. Dionne is compensated by the comp board and by Central Maine Healthcare. If he were really candid, he might admit that his idea of a fee schedule is "usual and customary" fees. Dionne claims they are really getting close to the point where they will be able to issue a draft fee schedule for public comment.

Timely Remedies?
As reported by Lindsay Tice in the Lewiston Sun Journal, BIW has filed suit, claiming that Dionne has a conflict of interest. This is their second lawsuit. Back in 2006 they sued the board for its (then) 14 year failure to implement a fee schedule. The judge sided with BIW and ordered the board to create the fee schedule. Four years later...well, you get the drift (and I do mean drift!).

Dionne has consulted with an attorney, who advised him that there was a "potential" for a conflict of interest. (Brilliant work, counsel!) Dionne is seeking a second opinion from the board's general counsel. Here's a second opinion: it's a conflict of interest!!!

Dionne claims that, if necessary, he will fully disclose his personal interests, as he has done in the past. Sure, Paul. The foxes are promising better management of the chicken coop. Foxes love chickens. They are very committed to raising the "usual and customary" chickens, fat and healthy.

Start Over?
The sheer passage of time, now approaching two full decades, has compromised the Maine fee schedule beyond recognition. It has become an embarassment. It's unlikely that any fee schedule issued by this board will be credible. Perhaps it's time to create a truly independent body to develop the fee schedule. The bad news for BIW is that this would further delay the regulatory relief they have long sought. The good news is that the fee schedule might actually lower the fees.

During this prolonged process, BIW has tumbled down the rabbit hole, Maine version, into a world where nothing is quite what it seems. BIW - in the unlikely role of Alice, meets a cheshire cat, with a grin like Paul Dionne's:

`Cheshire Puss, ...Would you tell me, please, which way I ought to go from here?'
`That depends a good deal on where you want to get to,' said the Cat.
`I don't much care where--' said Alice.
`Then it doesn't matter which way you go,' said the Cat.
`--so long as I get SOMEWHERE,' Alice added as an explanation.
`Oh, you're sure to do that,' said the Cat, `if you only walk long enough.'

Joseph Casias was the Associate of the Year in 2008 for the Walmart in Battle Creek, Michigan. He achieved this despite his ongoing struggle with sinus cancer and an inoperable brain tumor. During his five years with the organization, the 29 year old Casias went to work every day determined to be the best. To help manage the pain that accompanied his challenging illness, his doctor prescribed medical marijuana, which is legal in Michigan. Casias used the drug only at home and was never "high" when he reported for work. (See our recent post on medical marijuana here.)

Last November Casias sprained his knee at work. Walmart ran a routine drug screen following the injury. Unsurprisingly, Casias tested positive for marijuana. Despite the doctor's prescription, Walmart terminated Casias for violation of the company drug policy. Despite the legality of Casias's pot use, the company appears to be on firm ground: as with smokers in many states, companies are free to impose their own prohibitions on the use of otherwise legal products.

Casias collected unemployment insurance after his termination. Now it appears that Walmart has had second thoughts about that, too. They are contesting his UI eligibility, as he was terminated for cause. Casias has already been collecting UI for over three months, so he is likely nearing the end of the benefit. But when Walmart sees a penny on the floor, they will push old ladies aside to get it.

Company Speech, Company Soul
In a recent ruling, the U.S. Supreme Court determined that corporations have the same free speech rights as do individuals. Perhaps the court will be tempted to take it one step further and rule that corporations have souls.

One look at Walmart should convince them otherwise. In their typical tone-deaf manner, Walmart has acted within legal parameters; Casias was in technical violation of company drug policy, even though his drug use was medically necessary and presented no risk to the employee, co-workers or the public. Casias was an award-winning employee - but, I suspect, a drag on the company health plan. So Walmart seized the opportunity of a failed drug test to show Casias the door.

As usual, Walmart shoppers, there are plenty of specials today, but don't bother looking in aisle three for remnants of compassion or a company soul .

Note: We have blogged Walmart's compassion struggles many times. Just enter "Walmart" into the site search engine in the column to the right.

As the holder of a couple hundred shares of AIG stock (your condolences are accepted), I feel compelled to track the remnants of the former empire, rather like an archeologist who finds fragments of an ancient civilization buried in a forgotten forest. The latest twist involves a lawsuit by two former female staffers in AIG's Financial Products unit - the unit at the very heart of AIG's collapse. Susan Potter, 56, and Deonna Taylor, 62, both former VPs, have filed suit alleging that Joe Cassano, the now-fabled head of the operation, favored younger staffers and ran the rogue operation like a "boy's club." Now that's a shock!

Potter and Taylor said that managers misled them about salary caps, paid younger, male employees more for similar work and fired them in retaliation for filing discrimination charges. Cassano's lawyer is disappointed by the lawsuit, because his client treated staff "fairly." This will be one fascinating discovery.

Raging Bull Management
Cassano is not actually a defendent in the lawsuit, as his employment ended prior to the firing of both women. But his over-sized personality placed a stamp as clear as a neck tatoo on the entire operation.

To get a flavor for Cassano's modus operandi, check out the fascinating August 2009 profile by Michael Lewis in Vanity Fair. Here is an example [obscenity alert]:

"One day he got me on the phone and was pissed off about a trade that had lost money," says a Connecticut trader. "He said, 'When you lose money it's my fucking money. Say it.' I said, 'What?' 'Say "Joe, it's your fucking money!"' So I said, 'It's your fucking money, Joe.'"

Here's another example of micro-management, Cassano style:

According to traders, Cassano was one of those people whose insecurities manifested themselves in a need for obedience and total control. "One day he came in and saw that someone had left the weights on the Smith machine, in the gym," says a source in Connecticut. "He was literally walking around looking for people who looked buff, trying to find the guy who did it. He was screaming, 'Who left the fucking weight on the fucking Smith machine? Who left the fucking weight on the fucking Smith machine?'" If that rings a bell it may be because you read The Caine Mutiny and recall Captain Queeg scouring the ship to find out who had stolen the strawberries. Even by the standards of Wall Street villains, whose character flaws wind up being exaggerated to fit the crime, Cassano was a cartoon despot.

Joe Cassano famously stated on an investor conference call: "It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 on any of those transactions."

Ah, the irony of that line: AIG stock was trading around $55 when Cassano spoke. After all the losses and the $182 billion government bailout, the stock is worth...about a buck.

It appears that Cassano believed his own blustery rhetoric. He was no Bernie Madoff. He was Joe Cassano, True Believer:

"When he said that he could not envision losses, that we wouldn't lose a dime, I am positive that he believed that," says one of the traders. The problem with Joe Cassano wasn't that he knew he was wrong. It was that it was too important to him that he be right. More than anything, Joe Cassano wanted to be one of Wall Street's big shots. He wound up being its perfect customer.

Serving Justice?
All of which leads me back to Susan Potter and Deonna Taylor. Their complaints are likely true, yet I am having some difficulty summoning up sympathy for them. They were part of a pirate crew. They simply wanted an equal share of ill-gotten bounty. Yes, they were forced to walk the plank (terminated) in 2008 (Potter) and 2009 (Taylor). But the entire operation is scheduled for shut down later this year.

The atmosphere in the financial products operation must have been difficult for middle-aged managers, especially women. Taylor and Potter were probably paid less than their male counterparts. But when you look at the actual work of the unit, which brought the world-wide financial system to its knees, it's difficult to feel sorry for them. Had they turned whistle blowers, had they been fired for calling attention to the house of cards being built by Joe Cassano and his pirate crew, I might feel different about their plight.

We'll let Jim Walden, Cassano's attorney, have the last word: Financial Products "had many capable women at all levels, including in senior management, who thrived under Joe's supervision, including these plaintiffs. That they would now turn around and accuse Joe of tolerating, let alone encouraging, chauvinism is disappointing indeed. Joe Cassano hired, promoted and supported employees based upon a single criteria: merit."

We can probably reduce Cassano's philosophy to a single criteria, but it would not be "merit." "Greed" is more like it, unadulterated, F-bomb greed.

William Ogletree practices personal injury law in Texas. On the most recent New Year's Eve he planned to fly from Houston to Las Vegas, presumably to celebrate the new year with libation, games of chance, and, who knows, a little extra fun in the city that tells no tales. Prior to his flight, he had dinner in the airport food court. He ate a slice of pizza, if you must know, and the service was lousy. But the real bummer involved the loss of a black leather coat, Polo brand, extra large, with a plaid lining. Ogletree was very fond of the coat, but he left it behind after his dinner. We have all lost things in the course of our lives. Most of us chalk it up to inattention, punish ourselves for being forgetful and move on. But not William Ogletree, esq. Someone not named Ogletree is going to pay for the lost coat.

As we read in the Smoking Gun blog, Ogletree has notified the operator of the food court, Continental Airlines and the city of Houston that he is holding them responsible for what happened to his coveted coat. Sure, he forgot it, but as soon as he exited the food court, the three parties assumed liability for the coat. They are jointly and severally on the hook for taking control of his lost property and securing it until he was able to claim it. He is kind of pessimistic that any of the parties will be able to locate the coat: "I am looking forward to discovering how all of you deal with lost property in the airport.I suspect that your record is dismal and that employee theft runs rampant." [An image comes to mind: an underpaid waitress leaving work in an elegant coat that is three sizes too large.]

The Clock is Ticking
Ogletree has given the three parties 10 days to come up with the coat or $800 to replace it. After that, he sues. Now you might think that Ogletree has a pretty weak case and that the three parties will blow him off. Don't be so sure. If you go to his firm's website, you will find a "settlement calculator" which helps people determine just how much they are owed. Here are the elements entering into the calculation:

• Medical Expenses $
• Future Medical Expenses $
• Rehabilitation $
• Prosthetics $
• Lost Wages $
• Future Lost Wages $
• Pain and Suffering $
• Future Pain and Suffering $
• Disability $
• Future Disability $
• Loss of Quality of Life $
• Future Loss of Quality of Life $
• Impairment $
• Future Impairment $
• Disfigurement $
• Loss of Consortium $
• Loss of Services $

Posted by Jon Coppelman

Joseph Stack set his house on fire and then piloted a small plane into a building housing the IRS in Austin, Texas. His daughter calls him a hero. Most of us would call him a terrorist. But whatever you call him, he was motivated in part by section 1706 of the 1986 Tax Reforms. Stack was a software engineer, and thus was directly impacted by the following language in the statute, which forbids the hiring of software engineers as independent contractors:

(d) EXCEPTION. - This section shall not apply in the case of an individual who pursuant to an arrangement between the taxpayer and another person, provides services for such other person as an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work.

As a result of this unusual and highly specific language, programmers are almost always compelled to work as employees. Unlike the situation for most workers - who may or may not meet the criteria for independence - there is virtually no wriggle room for engineers.

Stack's self-identity as a tax protester goes deeper and taps a rich pathological vein. Envious of the tax exempt status granted to religious organizations, he tried to establish his own church, in his own home. Ten years and $40,000 in tax liabilities later, he gave it up. But he surely did not forget, nor did his daughter, Samantha Bell, who appears to be the last remaining worshipper at the defunct church.

Bell concedes that her father's actions were "inappropriate." Nonetheless, she considers him a hero for taking a stand for "justice." Some stand, some notion of justice! In addition to his own life, Stack's violent act took the life of IRS manager Vernon Hunter and had the potential for killing many more innocent people.

Ironically, the national consensus building around independent contractors is quite the opposite of what Stack envisioned. There is a concerted effort at the federal and state levels to view most working relationships as employer/employee. The burden of proof has shifted onto the companies (most notoriously, FedEx) that try to avoid taxes by calling people "independent contractors."

Joseph Stack might have thought himself a martyr for the cause of tax reform. He is surely something else: a symbol of the violence, fanaticism and rage that threatens to destabilize the most enduring democracy the world has ever known. Not exactly my idea of a hero.

It will be years before we know the full implications of Toyota's recall problem, but a few things are already evident. In its relentless push to become the world's number one car manufacturer, Toyota lost its corporate soul (to the extent, of course, that any corporation has a soul). As with any business, performance measurement is a month to month, year by year priority. At this point, it appears that Toyota's primary measurement involved gross sales. Since 2003 the company has ignored alarming signs that their quality control was slipping dramatically. Long known as the producer of reliable, if somewhat pedestrian, cars, Toyota tried to become all things to all drivers. They expanded production capacity across the world as their market share grew. They buried the competition, but in doing so, dug a rather big hole for themselves. They will surely survive, but what form will the survival take?

The old adage "be careful what you wish for" should be engraved over every Toyota plant. They wanted to dominate the market and now they dominate the market. Alas, their cars are prone to uncontrollable accelation and compromised braking. A rather unfortunate combination, to say the least.

Acceleration and Stopping
As evidence of the acceleration problem accumulated - going back to the mid-2000s - Toyota entrenched itself in a denial stance. Finally, they acknowledged a problem with the floor mats. They fixed that. Then they admitted to a defect in brake pedal design, which is the subject of the current recall: they are attaching a small plastic shim to the brake pedal to fix that. Now there are indications that a problem may exist in the computers that determine gas feed. To date, Toyota has not conceded on this last potential source of the acceleration problem. If they are wrong on this one, it's virtually three strikes and you're out.

The braking issues in the Prius involve a sophisticated mechanism which seeks to transform the natural friction in braking into energy to charge the car's battery. The good news is that the battery runs longer. The bad news, of course, is that you might not be able to stop the car.

From a risk management perspective, rapid growth is frought with dangers. On the employment side, you are bringing in (thousands of) strangers to make your product. On the management side, your lines of communication are stretched to the breaking point (no pun intended): a work culture that was successful for a relatively small company might prove inefficient and even disastrous for a world-wide organization. Toyota executives may think that today's company is simply an extension of the modest, diligent operation that entered the world market some decades ago, but size matters. Toyota the Giant is no longer "the little engine that could."

Blame the Media?
One dealer thinks the media has created the problem. Tammy Darvish, who operates 4 dealerships in the Washington, D.C. area, thinks Toyota's commitment to safety is equal to that of other manufacturers. "I don't want to minimize importance of any safety matter. But I think the media has made a sport out of sensationalizing something that is very common: a recall. I sell Chryslers, and they had 18 recalls last year. Did you read about any of those?"

So Toyota's commitment to safety is no different from any other manufacturer. That's a comforting thought! True, the whole problem has been sensationalized. The image of 3,000 pound vehicles hurtling out of control is, well, sensational. It would be nice to think that Toyota will do a little soul searching and re-commit to the values that made them successful: producing a safe, high quality vehicle that accelerates when you want it to and stops when you press the brake. Anything less from Toyota at this point would be, to put it bluntly, criminal.

Way back in November 2005 we blogged the interesting issue of donning and doffing: whether the time meatpackers spend at the beginning of work putting on protective gear and taking it off at the end of the shift is time on task and compensable. The 2005 ruling of the U.S. Supreme Court went in favor of the workers, but other courts have split on the issue. Now 4th U.S. Circuit Court of Appeals in Richmond has once again ruled against the workers.

The court held that putting on and taking off the gear is “changing clothes” and thus is not necessarily compensable under the Federal Labor Standards Act.

“This sort of fact-intensive determination has classically been grist for the mill of collective bargaining, and Congress ensured that employers and unions could keep it that way by enacting Section 203 (o),” Judge J. Harvie Wilkinson III wrote for the three-judge panel. We assume that the salaried Judge Wilkinson was amply paid during the time he donned his robes to issue the ruling.

Clothes Make the Man
The district court has a rather expansive view of what comprises clothing: workers, members of United Food & Commercial Workers Local 27, each must wear steel-toe shoes, a smock, a plastic apron, safety glasses, ear plugs, a “bump cap,” a hair net, rubber gloves, mesh sleeves and arm shields to do the work, which includes the hanging, eviscerating and de-boning of chickens.

“Because many work clothes are protective to some extent, the distinction urged upon us by the employees would be difficult, if not impossible, for courts to administer in a consistent and coherent manner,” the judge wrote, before also rejecting the plaintiffs’ argument about the definition of “changing.”

What is at stake here is fifteen minutes of pay twice each shift, presumably at or near minimum wage. Call it four bucks per shift per worker. With 250 workers involved in the class action suit, that's a total of about $1,000 per workforce shift. Having lost the suit, the workers will be paid only for their gruesome "time on task."

As most of the workers are non-English speaking, the union stewards will have to translate the court's ruling into their native tongue(s). I trust that the workers will be dressed for the occasion in street clothes: it's pretty difficult to understand the court's subtle distinctions when you are encased in steel-toe shoes, a smock, a plastic apron, safety glasses, ear plugs, a “bump cap,” a hair net, rubber gloves, mesh sleeves and arm shields. Then again, perhaps their attorney should have made his case in court while dressed in full slaughterhouse regalia: the visual evidence distinguishing ordinary clothing from personal protective equipment might have been compelling enough for even a judge to understand.

How would you like a job that pays $12,000 a year, where 1 percent of the workforce is killed annually and hundreds of others are seriously maimed? I didn't think so. You would probably take a pass on working for Titan Corporation (now part of L-3) as an interpreter for the U.S. armed forces in Iraq. The L-3 website promises that "as a member of the L-3 Communications team, you will be exposed to the most exciting career adventures situated on the cutting edge of technology." Alas, it's not just the technology that is cutting edge. The roadside bombs cut pretty deeply, too.

We read in the Los Angeles Times about the sad fate of translators in Iraq. There are about 8,000 in all. Over the five year period from 2003 to 2008, 360 were killed. Those who were lucky enough to survive were often shipped to Jordan for treatment. The workers comp benefits fell under the Defense Base Act and were administered by AIG, among others. (See our previous blog here.) According to some of the wounded, they were offered a stark choice: accept a proposed settlement (which absolved the insurer of any future costs) or be shipped back to Iraq, where retaliation and death awaited former employees of the U.S.

The Times article describes the life of Malek Hadi, an Iraqi national who lost a leg and several fingers in a roadside bombing. He now struggles to survive in Arlington, Texas. At first, he was unable to collect any benefits:

Internal AIG documents indicate that a claims examiner withheld Hadi's benefits in an effort to force him to accept the lump sum. Hadi was "clearly entitled" to benefits, a different AIG examiner wrote in a memo dated August 2008. The company had not paid because the previous examiner "was trying to get the claimant to decide whether to settle his claim," the memo said.

Malik now receives the maximum monthly disability benefit - a whopping $612 per month. He has been diagnosed with post-traumatic stress syndrome, but AIG has refused to cover any treatments. Perhaps they are waiting for a second opinion from the company shrink? Meanwhile, Malik will just have to deal with it!

Former insiders at AIG describe how the game is played:

"If you're missing one piece of documentation, you got denied," said Colleen Driscoll, who oversaw the handling of interpreters' insurance claims for L-3. "These guys get murdered coming and going to work, and AIG turns them down because they don't have a letter from the insurgents."

Driscoll, a former United Nations refugee official, left L-3 in 2007. She said the cause was a dispute with company executives over treatment of injured interpreters.

She and another former L-3 official, Jennifer Armstrong, said their experience suggested that 10% to 20% of the company's Iraqi workers who should have received benefits were denied.

AIG stock is currently trading at the equivalent of about $1.40 a share. It would be nice to think that this was the market's judgment on the way things are being handled in Iraq, but that, of course, has nothing to do with it. The market, not exactly known for its humanitarian concerns, is punishing AIG for financial - not ethical - sins. Indeed, the market might well approve of the way the injured, the maimed and the dead are being squeezed in this mockery of a benefits program. After all, indemnity and medical expenditures are being kept as low as possible and that can only help support AIG's battered bottom line.

My blog post of last Thursday (19 November 2009) addressing why workers’ compensation costs in Massachusetts are the lowest in the nation, while benefits are among the highest drew a mild pushback from Mark Walls, who manages the excellent LinkedIn Workers’ Compensation Forum. Mark wrote:

"Working for an excess carrier, I would never have expected Massachusetts to be considered a "low cost" state. In Massachusetts you cannot settle medical, and there are COLA's on the lifetime benefits. In my world, it's a high cost state.

I guess it's all about your perspective."

And he’s right- it is all about perspective. Mark also wrote, “I’m a claims guy,” and the blog post in question was all about premium rates. Sometimes, what appears logical when looking at claims can appear illogical when viewed through the prism of premium rates.

I can certainly understand why claims professionals in Massachusetts might be a bit frustrated, because not being able to settle the medical portion of a claim, along with having to contend with annual Cost of Living Adjustments, tends to obliterate predictability.

The perspective Mark mentions changes, however, when one considers a workers’ compensation program unique to the Massachusetts voluntary market, a program that substantially increases premium collected in the state while not driving up premium rates: the All Risk Adjustment Program, or, as it’s better known, the ARAP Surcharge.

In all 38 NCCI states, the ARAP, a sort of second experience modification that penalizes severity more than frequency, exists as the Assigned Risk Adjustment Program and is found in the Residual, but not in the Voluntary, market. This is supposed to provide even more of an incentive for employers in the Pool to do the right things to get themselves into the voluntary market. It’s a debit mod only. In Massachusetts, however, the ARAP can be found in both the Residual and Voluntary markets. If an employer in the Voluntary market has a high experience modification, it will also most likely find itself with an ARAP surcharge, anywhere from 1% to 25%, which is applied to the standard modified premium.

For example, say a company in the Voluntary market has a manual premium of $100,000, an experience modification of 1.5 and an ARAP of 1.2. The resultant total premium will be $180,000. Think of the $30,000 ARAP charge as compound interest. This means that Massachusetts premiums are more sensitive to losses than premiums in other states, even “loss cost” states.

And why shouldn’t an employer with high claim severity pay more for workers’ compensation? Why should employers with low claim severity subsidize those with high claim severity? Although many in industry abhor the idea of the Voluntary market ARAP, it seems to me that Massachusetts is doing the fair and reasonable thing.

In 2007, ARAP surcharges in Massachusetts brought in additional premium of $60 million, or about 7% of total premium in the state. However, this should decline fairly significantly in 2008 and going forward for two reasons:

• First, until 2008, the maximum ARAP surcharge was 49%; in 2008, the maximum was lowered to 25%;
• Second, Massachusetts has been hard hit by the recession, causing payrolls to decrease substantially; lower payrolls result in lower premiums.

The Massachusetts Workers’ Compensation Rating and Inspection Bureau is now engaged in the monumental task of putting together a rate filing to be submitted in 2010. It will be interesting, indeed, to see to what extent lowering the maximum ARAP surcharge from 49% to 25% impacts the filing.

Back in September we blogged the mass layoffs of housekeepers at the Hyatt Hotels in Boston. After unknowingly training their replacements, long-term employees were laid off, their jobs taken over by employees of a temp firm called Hospitality Staffing Solutions (HSS). Given the the low wages and marginal benefits offered the replacement workers, this solution was lacking in hospitality, to say the least.

Well, there is more to the story. As we read in an article by Steven Greenhouse in the New York Times, a study is about to be published in the American Journal of Industrial Medicine on the disproportionate rate of injuries among housekeeping staff in several hotel chains. The findings of the report were presented to the annual meeting of the American Plublic Health Association in Philadelphia.

Would it surprise you to learn that injury rates among housekeepers in the Hyatt chain are nearly double that of the Hilton Hotels? Or that injury rates for hispanic and asian workers were twice as high as those for other workers? The study focused on 50 unionized properties and examined 2,865 injuries over a three-year span. The highest injury rate for housekeepers was at the Hyatt chain, at 10.4 percent, and lowest at the Hilton chain, at 5.47 percent.

Root Causes
Let's put on our MBA hats and perform a little "causal chain" analysis. The Hyatt Hotels find themselves paying too much for workers comp coverage. The high rate of injuries among housekeepers is driving up their costs. With cost reduction as the over-riding goal, the hotel strikes a deal with HSS, outsourcing the jobs. The cost of labor acquired through HSS is certainly lower for Hyatt (even when you factor in HSS admin and profit), but HSS also assumes responsibility for any workers comp losses. It is incidental and perhaps irrelevant to Hyatt that the work is being performed at much lower wage rates and with fewer benefits. From the Hyatt perspective, the goal has been achieved: hourly labor costs have been reduced and someone else is holding the bag on the cost of injuries.

When you ask the wrong question, you often end up with dubious answers - and, in this case, a public relations nightmare. The right question, of course, is why are Hyatt housekeepers suffering injuries at twice the rate of Hilton employees? As we back up the causal chain, the MBAs at Hyatt should have zeroed in on the real issues: Are we providing the requisite orientation and training for our employees? Are supervisors focused on best ergonomic practices? How well are we managing injured workers: do we provide prompt treatment and speed return to work through modified duty?

Hyatt opted to throw out the housekeepers with the bathwater- a solution that immediately gave rise to largely unforeseen problems, the most prominent being a tongue-lashing from Massachusetts Governor Deval Patrick. In full disaster-containment mode, Hyatt has offered to continue health insurance coverage and maintain wages of laid off employees - if they agree to join the ranks of HSS. (This "loss leader" of higher wages and benefits comes to an abrupt end next spring.)

One way or another, Hyatt will ride out the PR storm, but the fundamental problem of unsafe practices among housekeepers remains. Perhaps HSS, in the midst of slashing wages and benefits, will commit to making the work and the working conditions safer. I'm not holding my breath. In the meantime, the rooms at the Hyatt will continue to appear spotless, despite the fact that no one seems to care about the people who make them that way.

Well, bust our balloons and call us surprised!

We learned yesterday that the Lexis Nexis Workers’ Compensation Law Center has honored the Workers Comp Insider with the award of Top National Workers’ Compensation blog of 2009. With so many excellent blogs being written now, we’re proud and humbled at the same time.

When we created the Insider in September 2003, we hoped that we’d attract others to join the insurance blogosphere, but we never imagined that so many superb professionals would join the blogging rolls. Now, to be singled out for this honor is more than a little gratifying.

I need to take a moment to commend and thank Julie Ferguson for hatching the idea in 2003 and for managing the enterprise ever since. Julie is one of, if not the, nation’s foremost blog experts, and we are lucky indeed to have her at Lynch Ryan. Moreover, she’s an excellent writer who’s written about a third of all our blog posts.

And where would we be without the tireless search for blogging excellence exemplified every day by Jon Coppelman, a bona fide workers’ compensation guru. Jon’s posts are always interesting, thought-provoking, honest and well-sourced. Judging by your comments, they can also be provocative and controversial, but that’s what the medium is all about. I’m thankful for Jon’s expertise and his friendship.

In making the award, here’s what the Lexis Nexis Workers’ Compensation Law Center said about the Insider:

Workers’ Comp Insider’s excellent coverage this past year of the side effects of the economic recession on workers’ compensation, from government bailouts to bankruptcy to fraud and more, made it our choice for the Top Blog of the Year 2009 on national workers’ compensation and workplace issues. Workers’ Comp Insider also proved again the power of a company blog to showcase the expertise of its employees as evidenced this year by articles in both The Washington Post and the Las Vegas Sun, which cited the Workers’ Comp Insider on the issues of death from a workplace injury and controlling workers’ comp costs, respectively. Workers’ Comp Insider’s in-depth research to uncover the best government and industry websites and blogs in the blogosphere was second to none in 2009, and enabled policymakers, journalists, and anyone with an interest in and passion for workers’ compensation and workplace safety to do a deep dive into a collection of online resources that they may never have heard of otherwise.

All of us at Lynch Ryan are committed to doing everything in our power during the coming year to justify this award. Thanks again to Lexis Nexis and thanks to our readers for joining us on the ever-fascinating journey that is workers compensation.

Labor officials of three states have written to FedEx, announcing their intention to file suit for "widespread, long-term, and unlawful employment practices." We have blogged this employment law conundrum many times (search "independent contractors" in the box to the right). There are at least two mysteries in this action: why only three states are participating (FedEx has lost court cases in at least six states and doomed to lose in many others) and why the states chose to sue at this particular time.

FedEx has until today to file objections to the suit. The complaint was filed from the office of the attorney general in New York and included the signatures of officials from Montana and New Jersey (a somewhat odd triumvirate). Their letter is addressed to William Conley, Esq., managing director of the FedEx Legal Department. With an office in Moon Township PA, Conley may end up mooning the AGs in response - after all, FedEx thus far has shown little interest in conventional employment standards. Mr. Conley runs what must be a very busy office, as there have been numerous court challenges to the FedEx business model. FedEx calls their delivery drivers "independent contractors," even though the drivers must wear FedEx uniforms (no white sox!), drive FedEx trucks, adhere to FedEx timetables, use FedEx scanners and meet detailed FedEx standards. Drivers they are; independent they are not.

The AGs are seeking restitution, damages, civil penalties and other unspecified types of relief.

Is It Legal, Or Is It FedEx?
In some instances, individuals take over FedEx routes and hire others to do the driving. Even though these subcontractor drivers must meet the explicit FedEx standards, the entrepreneurs managing the routes can run the businesses with at least some degree of independence. But where the driver has no employees and simply covers the route for FedEx, there is no credible case to be made for independence.

The FedEx business model has been languishing in state courts for years. Meanwhile, thousands of drivers have labored without a safety net. They work without benefits. If injured, they are completely on their own. It is not difficult to imagine the sense of frustration and outrage that led to this legal action. As for the timing, the three states are filing suit just a few days before Halloween, when ghosts and goblins will prowl dark streets in search of a candy fix. It's as good a time as any to bury this bogus incarnation of the "independent contractor" concept once and for all.

Stephen Zaczynski, 49, is a lieutenant with the Connecticut Department of Correction. He claimed an on-the-job injury in September of 2008 and collected over $12,000 in benefits. While on disability, he continued to run a company he co-owned, New England Pellet. People in need of pellets pre-paid for the product, which, unfortunately for them, was never delivered. The company closed soon after Zaczynski went out on comp and filed for bankruptcy protection in January. To complete the trifecta, it appears that Zaczynski did not carry workers comp protection for his employees.

Let's see if we've got this one straight: Zaczynski collects comp for an injury that did not disable him, freeing him up to run a business that did not deliver the product that his customers paid for - a product at least theoretically handled by employees who were not covered by workers comp insurance. (Perhaps they were "independent contractors"?)

Zaczynski has a court date on October 20, where he faces charges of first-degree larceny, workers comp fraud and failure to maintain workers comp insurance.

His attorney, Jim Oliver, denies all the charges: "I do not believe that a crime has been committed by Stephen. We intend to vigorously defend all claims."

Oliver may have a case. In not delivering the pellets, Zaczynski perhaps was not performing work that exceeded the medical restrictions that kept him out of work. (We have no way of knowing whether the DOC tried to bring him back to work on light duty - as a lieutenant, this would surely have been an option.) While not delivering the product reduced the workplace hazards for his employees - less material handling, for sure - Zaczynski would still be required to provide workers comp protection, assuming these folks were, in fact, employees of the company. There's usually not a lot of wiggle room on that issue.

Finally, failure to deliver the pellets certainly appears to be a form of larceny, but theft on a much bigger scale worked out pretty well for the giant banks, mortgage companies and insurers, so perhaps it can work for Stephen, too. In the final analysis, his problem may be one of scale: he just didn't think big enough. If you're not going to deliver the goods, you want to screw people out of more than a few pellets for a stove. Next time, Stephen, think big, really big. It's the American way.

AIG may have lost a bit of its swagger - that's what happens when your stock tanks and the government has to bail you out to the tune of $150 billion, give or take a few billion. But tough guys don't dance, they fight back. AIG is suing NCCI and a host of major workers comp carriers (Travelers, The Hartford, Liberty Mutual, etc.) for under-reporting comp premiums and conspiring to harm AIG. That's right. All those bullies have been picking on AIG.

AIG's lawsuit is in direct response to an eerily similar suit filed by NCCI against AIG, accusing the staggering behemoth of under-reporting its share of premiums in nationwide assigned risk pools. This suit, filed in U. S. District Court, was dismissed by Judge Robert Gettlemen, who found that NCCI lacked legal standing to file it. The fallen banner has been quickly retrieved by Liberty Mutual, among others, who intend to refile the complaint. After all, it is AIG's direct competitors who would have been harmed if, indeed, AIG under-reported premiums.

Badda Bing, Badda Boom
Which leads us to the not-so-lovely, two-can-tango result of AIG counter-suing, alleging a conspiracy to shift costs to AIG. "AIG's complaint asserts that a number of its competitors under-reported their workers compensation premiums over many years and formed an illegal conspiracy to conceal that fact and to harm AIG," said company spokesman Mark Herr.

It's a shame that this colorful gang war has to play out in sedate courtrooms, with immaculately dressed lawyers mouthing lines better suited for Brando, Pacino and Cagney. After all, these are suits filed under anti-racketeering laws. It's doubtful that the original crafters of the RICO legislation had insurance giants in mind when they fashioned this weapon to attack organized crime.

AIG stock is trading near $46, which sounds pretty good when compared to the under-a-dollar price of just a few weeks back. But appearances can be deceptive. To avoid the humiliation of trading as a penny stock, AIG did a reverse 20 for 1, carving each share into 20 pieces. For long-term shareholders, that $46 is really just two bucks and change. (Go ahead, shareholders, celebrate with a bottle of two buck chuck!)

"You gotta problem with that?" No, sir, no problem at all. I'm just walking down the street with my hands in my pockets, minding my own business. I'm not looking for trouble. What you folks do with all those premium dollars, all that TARP money, all those securitized loans, that's your business. I wish you the best, I really do. And by the way, that's a swell suit you're wearing. A really nice fit. Would you mind my asking how much it cost...?

Lucine Williams, 41, worked as a housekeeper for the Hyatt hotel chain in Boston for over 20 years. She earned $15.32 an hour, plus a fairly robust benefit package that included health, dental and a 401(k). That's where Katie Johnson Chases's story begins in the Boston Globe, but it hardly ends there.

Last month Ms. Williams and her co-workers were asked to train some new workers, who were going to fill in during vacations. It turns out that these trainees were employees of Hospitality Staffing Solutions, a Georgia-based company with offices proliferating across America.

At the end of August, Hyatt laid off Lucine and 100 other housekeeping employees. They were replaced by Hospitality employees, who make $8.00 an hour with no benefits. Heck, people complain about outsourcing jobs to the third world. Now you can bring third world jobs to your workplace!

A little number crunching reveals the potential profit margins. If we assume that the benefits once paid to housekeepers at the Hyatt added about 35 per cent to the payroll, the hourly cost of labor was over $20. Hospitality Staffing pays its workers $8.00 and limits benefits to what is required by law. On their website, they say they can save companies up to 12 percent on labor costs. If you subtract 12 percent from $20, Hospitality would bill Hyatt about $17.60 per hour. That might not sound like much, but multiply it every week by a payroll for 100 housekeepers and you are talking serious savings. How that savings relates to the lives of long-time, loyal workers is another question.

Outsourcing Poverty
Hospitality Staffing presents itself as a female owned company: Kathryne King is the "owner." John King is the Chairman. All but one of the other senior staff are men. Their website features smiling, well dressed workers. One spokesperson for the company described the wages as "competitive." Competitive with what?

It's important to note that Hyatt's major competitors in the Boston area, the Hilton and Marriott chains, are not planning on using this particular cost-saving measure. They prefer to cultivate a loyal and stable staff and pay them decent wages for physically demanding work. One wonders where Hospitality Staffing finds people desperate enough to work for low wages and no benefits who can still provide an acceptable level of service to the host company.

Paul Sacco, president of the Massachusetts Lodging Association, has no problem with Hyatt's strategy. He points out that outsourcing has been going on for years at companies around the country. He says the move will save Hyatt money and will not affect the hotel guests. "If you stayed at the Hyatt last night and you bumped into the housekeeper, would you notice a difference?"

Excellent point, Paul. Guests at the Hyatt Harborside will still enjoy the amenities: the "celebrated architectural details such as an inlaid marble floor map, ornate dome ceiling and exterior lighthouse and beacon accents." Guests are not likely to spend much time worrying about Lucine Williams, an out-of-work single mother, and her 13 year old asthmatic child. They will, however, be quick to complain if the bed is not well made, if the bathroom is not spotless and if there is no bed-time mint on the pillow.

Hawwah Santiago was a "sandwich artist" at a Subway restaurant in New Smyrna Beach, Florida. She was fired after refusing to remove her nose ring while at work. Visible body piercings (other than earrings) violated the company dress code. Ms. Santiago sued, claiming that the nose ring was a practice of her Nuwaibian religion. The Nuwaibians, based in Eatonton GA, are a black supremacist cult with an elaborate set of beliefs, some of which require an inordinate degree of faith. Here is a very brief sample, courtesy of Wickipedia:

The Illuminati have nurtured a child, Satan's son, who was born on 6 June 1966 at the Dakota House on 72nd Street in New York to Jacqueline Kennedy Onassis of the Rothschild/Kennedy families. The Pope was present at the birth and performed necromantic ceremonies. The child was raised by former U.S. president Richard Nixon and now lives in Belgium, where it is hooked up bodily to a computer called "The Beast 3M" or "3666. [Hmmm. Wonder what brand of virus control is used on the computer.]

There is an underground road connecting New York and London.

The issue here is not the quality of Santiago's beliefs, but whether these beliefs entitle her to an exemption from company dress policy. The EEOC supported her charge of religious discrimination in the firing and brought suit against the employer. (While a government agency may not be in an ideal position to determine where religion ends and whackiness begins, the EEOC appears to have erred on the side of inclusiveness.)

A jury found that Ms. Santiago did not wear the nose ring because of a "sincerely held religious belief." Not satisfied, the EEOC sought injunctive relief and punitive damages. But the court dismissed the case. Judge John Antoon II wrote: "The EEOC's own publications acknowledge that some inquiry into the sincerity of an employee's belief is appropriate. Otherwise, an employer would have to grant an accommodation any time an employee requested one."

The leader of the Nuwaubians, Dwight York, currently rules his flock from a jail cell, where he resides under a sentence of more than 135 years for racketeering and child molestation ("suffer the children"?). Oh, ye of little faith! Someday in the not-too-distant future, York will begin his leisurely stroll through the underground road that runs from New York to London. Deep beneath the turbulent waters of the Atlantic Ocean, he will doubtless pause along the way for a delicious sub, lovingly prepared by a sandwich artist with dazzling piercings. When he emerges at last in London - near the lions guarding Nelson's column, one assumes - the doubters will be vanquished and Nuwaibian claims for religious accommodation will finally be deemed credible.

California has a California-sized fraud problem, with much of action in the medical arena. Unscrupulous providers are billing for services that are never provided, often under the names of people who have never been injured. It's identity theft targeted at businesses, not individuals. In California's $7 billion comp system (down from $21 billion just a few years ago), fraud is a significant cost driver.

Here is just one example of medical billing fraud, involving the Los Angeles Unified School District. In August of 2006 the district received a bill for lab services involving a principal injured in a fall the previous May. Unfortunately for the perpetrator, one James Wilson, the principal had died prior to the date of the lab test. (Comp is rarely interested in post-mortems.) Wilson was a financial rep at Cedars-Sinai Medical center - a highly reputable institution - and had access to patient medical records. He was convicted on five felony counts and sentenced to 4+ years in prison.

As we read in the LA Times, a task force of private and public employers, including the Walt Disney Co., came up with an intriguing solution: require insurers to send notices to injured workers to check whether they actually received all the medical services billed. To eliminate the suspense, I will tell you now that the bill died in committee, at the request of the insurance industry. As much as the Insider detests fraud, we're with the carriers on this one.

Junk Mail?
The fraud problem is very real, but this particular solution is flawed. Too many assumptions are embedded in the approach. The bill assumes that:
- the carrier has a valid address for the individual
- the individual will read and understand the mailing, which is likely to contain technical information on treatments provided. (The claimant may be non-English speaking and/or illiterate.)
- the individual will take the time to fill out the form and respond, even though there is no direct incentive to do so
- the individual is not a willing participant in the fraud (having received a few bucks for the effort)

The fundamental flaw is that injured workers have no direct financial stake in fraud: they are held harmless in the comp system, with no co-pays, no deductibles and no premiums. The stake holders are the employer, who either pays for insurance or is self-insured, and the carrier/TPA, who under this bill is confronted with the significant cost of mailings (perhaps multiple mailings to individual claimants) and the arduous task of logging responses, which would be random: most would indicate no problems, while those pointing to fraud might well come from folks who simply did not understand the questions. This solution is equivalent to using a shotgun to eliminate a bunch of (very pesky and rather deadly) mosquitoes.

There may be a quick fix to make this approach somewhat more effective: send the confirmation of services to the employer. That way a vested stake-holder would be given useful information and would have an incentive to follow up on it. The employer could sit down with the individual and verify the treatments. Any problems could be relayed to the carrier. In this approach, the scale of the effort becomes more manageable, as the burden falls on hundreds of thousands of employers, as opposed to a few hundred carrier/TPAs.

A cost-benefit analysis would probably place this fraud buster where it currently resides, in the circular file. It's always tempting to legislate solutions to intractable problems, but alas, mandated solutions often become a new set of problems. Administrators, employers and carriers need a variety of tools to tackle fraud. This aborted bill is not exactly what the prudent doctor would have ordered.

The King Arthur Lounge in Chelsea, MA does not exactly bring to mind the Knights of the Round Table. It's a tough place in a tough town - a strip joint with a motel attached (don't ask, don't tell). The strippers had to work under some pretty difficult conditions. They were hired as independent contractors. They paid a $35 fee for every shift. There were no wages, just customer tips. They provided their own (easily removable) costumes. When they moved to the darker regions of the bar and provided "private shows" (please don't ask, don't tell!), they had to turn over one third of their earnings to management.

Jonathan Saltzman tells the story in the Boston Globe: About 70 strippers, led by Lucienne Chaves, a 32 year old former stripper, filed suit, alleging in a class action that they were not independent contractors, but employees entitled to minimum wages and benefits. Their lawyer, Shannon Liss-Riordan, compared the strippers to indentured servants: "They weren't making any wage. Imagine a restaurant where a waiter has to pay to come to work and hand over a portion of the tips."

Robert Berluti, King Arthur's lawyer, countered that some strippers made hundreds of dollars a shift. He argued that the strippers were truly independent contractors, picking their own music, costumes, partners and routines.

Judge Frances McIntyre did not buy management's argument. "A court would need to be blind to human instinct [indeed!] to decide that live nude entertainment was the equivalent to the wallpaper of routinely-televised matches, games...and sports talk in such a place. The dancing is an integral part of King Arthur's business." She went on to say that the club hired and fired strippers, determined their hours and made hiring decisions solely on looks. In other words, the strippers were employees.

Mr. Berluti lamented the burden of overcoming Massachusett's strict standards for independent contractors. "This was a case where the judge was saddled with a MA law that makes it an outlier with respect to the rest of the country." Does Berluti really think the outcome would have been different if the law had been more ambiguous?

Debt Collection
The strippers have been awarded thousands of dollars in damages. It will be interesting to see if they can collect. As noted above, King Arthur's Lounge is a tough place. Back in 1982, there was an argument between Alfred Mattuchio and an off-duty Everett MA police officer named John McLeod. The cop left the lounge and returned with several fellow officers, armed with nightsticks, baseball bats and tire irons. They attacked a dozen patrons and employees, one of whom was beaten to death. Four cops were indicted and three were convicted. The Insider wonders which, if any, of the King Arthur employees injured in the fracas collected workers comp.

The chivalry of the original Round Table still lives in some places, but not, alas, in the dank recesses of King Arthur's Lounge.

We live, alas, in interesting times. As the health care debate spirals downward, the fault lines in our culture become more and more evident. On one side, anti-reformers stack town meetings to prevent any meaningful dialogue from taking place. These folks are even trying to intimidate unions. What am I missing here? Who is supposed to intimidate whom? On both sides of this momentous debate, pockets are being stuffed with special interest money. This makes the ultimate outcome - whether status quo or some degree of reform - highly suspect. The notion of genuine debate and civil discourse have disappeared altogether.

Which leads us back for a moment to the lingering conflict between UPS and FedEx. Back in December, we blogged FedEx's unusual charter:

FedEx began 35 years ago as an airline. As such, it fell under the Railway Labor Act of 1926, which made unionization of public and commercial transport companies extremely difficult. By contrast, UPS began as a trucking company and was subject to the National Labor Relations Act from day one. UPS is unionized: they pay workers more than FedEx, they provide better benefits.

It would be to UPS's advantage to remove their fierce competitor from the Railway Labor Act and force them to operate under the NLRA. That requires an act of congress, so it's no surprise that UPS has been aggressively lobbying congress for this change. They say they want to level the playing field.

Level playing fields are fine. The devil is in the details: how do you accomplish your goal? Apparently, by playing unfairly. UPS has been accused of forcing union members to write to their congressmen, urging passage of legislation to eliminate the FedEx exemption. The letters bombarding congress appear to express the views of individual UPS drivers. In fact, many are based upon prescribed forms. We read in the Washington Post:

Officials with UPS and the International Brotherhood of Teamsters, which represents 240,000 UPS drivers, acknowledge that the company has paid for workers' time to pen many of the letters and has supplied the envelopes, paper and stamps needed to mail thousands of them to Congress. UPS spokesman Malcolm Berkley said the effort was "totally voluntary, and any allegations to the contrary are ridiculous."

But Internet sites dedicated to UPS-related discussions feature dozens of accounts from anonymous employees who in recent weeks have said they were forced to write the letters or felt they would be punished for not doing so. Such tactics could run afoul of both labor laws and lobbying disclosure requirements, according to legal experts.

So it appears that UPS may be violating labor laws in order to force FedEx to operate under labor laws. Were you expecting anything different?

Images
In one of Norman Rockwell's many iconic images, a humbly dressed man stands up in a town meeting to express his opinion. The painting is entitled "Freedom of Speech." We could certainly argue the degree to which such freedoms ever existed. But it's all too clear that Rockwell's image bears no relation to what is occurring today. If he were to depict our present situation, we would see an enraged citizen shouting down his local congressman. This individual would waive an inflammatory poster complete with Nazi symbols. In his pocket, we might glimpse the bus ticket that brought him into town. In the corner we might see an innocent mother, huddling to protect her child from the pending violence.

We are currently facing many complex issues, ranging from FedEx's status as an employer to the health care options for every American. There are pros and cons to every path. No one really knows how to get from point A to point B. Indeed, we may not even agree on what point B is. But when civil discourse deteriorates into the ravings of the mob, we all lose. If winning is defined by who shouts the loudest, who cheats the most effectively, who succeeds in intimidating the oppostion, there will be no victory for anyone.

Back in May, we blogged the appalling story of Albania Deleon, a legal immigrant who founded Environmental Compliance Training (ECT), the largest asbestos removal training school in New England. Despite the fact that the training only requires 32 hours, she frequently sold certificates of completion to "students" who never attended classes. In other words, she sent these marginal workers - many of them undocumented - into asbestos-ridden jobsites with no preparation whatsoever.

Well, Albania, meet Chong-mun Chae, an illegal immigrant who ran a Queens-based asbestos removal company apparently modeled on ECT standards. Chae claimed to have only one employee, a receptionist. In other words, his company removed asbestos from job sites all over New York, but he accomplished this without any workers. By calling his workforce "independent contractors," he avoided workers comp premiums to the tune of $1.6 million. As we read in the New York Times, Chae has been sentenced to 4 years in prison, to be followed by deportation to South Korea.

Chae avoided detection for over a decade by frequently changing the name of the company. He was not without a sense of humor - let's call it diabolical - as one of his company's incarnations was "Charlie Brown Services." His premium avoidance scheme was exposed when an investigator read a report filed by Chae stating that he had no workers. You might think that a connection would easily be made between a company with hundreds of thousands in billings and no payroll, but that was not the case. In our collective haste to get rid of asbestos, we try not to think very much about the people actually performing the work.

Killer Jobs
Chae, like Albania Deleon, is getting off lightly. After all, he has only been convicted of insurance fraud. At some point in the not-too-distant future, when Chae is enjoying his retirement in South Korea, he will be guilty of murder, as his phantom workforce and their families succomb to debilitating lung disease. We don't know who they are or where they live. Collectively, perhaps we don't really care.

Entrepreneurs like Chae and Deleon exploit the margins of the working world, removing a deadly menace in a deadly manner. They offer jobs that pay relatively well, to a workforce that labors in the shadows. Chae and Deleon are nothing less than murderers. It's too bad that our system of justice is incapable of holding them accountable for their deeds.

If hell operated a dating service, surely the decrepid Chae and the fugitive Deleon would be a match: at 71, he is a lot older, where Deleon is a single mother with a now-abandoned 3 year old child. Despite the difference in ages, however, they have a lot in common. They have ruined hundreds of lives, wreaked havoc on thousands of families and reaped the profits of a corrupt business scheme. With values like those, age is surely no barrier.

The Defense Base Act (DBA) was enacted in 1941, to cover the injuries to civilian employees - primarily a few hundred engineers - during the second world war. The act might have worked then, but it certainly is not working now, nearly 70 years later. As we have blogged in the past, the DBA is a boondoggle, generating huge profits for a small number of insurance carriers and routinely devastating both the civilian workers wounded or killed in war zones and their families. There are over 10,000 claims filed each year: the medical only claims are usually paid; the indemnity claims are dissected, inspected, detected, and ultimately, rejected. A handful of insurers (AIG, CNA among others) are making big bucks at the expense of the wounded and the dead.
NOTE: As bad as the situation is for U.S. citizens wounded and killed in Iraq, it is far worse for foreign nationals.

The Domestic Policy Subcommittee of the House Oversight and Government Reform Committee held a hearing last week on the DBA. The title of the hearing betrays an (understandable) prejudice: "After Injury, the Battle Begins: Evaluating Workers' Compensation for Civilian Contractors in War Zones." The hearing focused on the handling of workers' compensation insurance for federal contractors working overseas, specifically on the inordinate delays in compensation running parallel to the enormous profits for insurers. Among those testifying were Deputy Labor Secretary Seth Harris; Timothy Newman, Kevin Smith and John Woodson, former civilian contractors in Iraq; Kristian Moor, president of AIU Holdings, Inc., a division of AIG; George Fay, executive vice president for Worldwide P&C Claims, CNA Financial; and Gary Pitts of Pitts and Mills Attorneys at-Law.

Kristian Moore defended AIG's decisions and motives, pointing the finger at a lack of Labor Department oversight and a system overtaxed with cases. "We are doing everything we can do," suggested Charles Schader, senior vice president and chief claims officer for AIU Holdings. Yeah, everything you can do to make money.

At the conclusion of the hearing, Dennis Kucinich (D-Ohio) warned AIG executives that he plans to demand copies of internal memos and documents that will link claims denials to the company's profits. Most of us do not get terribly excited by the prospect of reading claim files, but these will undoubtedly provide some compelling reading. While I doubt that the subcommittee will find a direct, written link between denials and profits, the rationale for the individual claim denials - in the face of compelling evidence of compensability - should prove riveting. Was it incompetence or was it greed? Something cruel, heartless and cynical took place in the back rooms of carriers with responsibility for civilian claims. If you like Edgar Alan Poe, you'll love the claims files of AIG and CNA.

Risky Job, Risky Work
Seth Harris, the new deputy secretary at the U.S. Department of Labor, is in charge of this mess for the government. He's been on the job for 3½ weeks. Congratulations on the new job, Seth! (You might want to keep your resume circulating.) Seth has been working less than a month, but he has already figured out that the system is in need of fundamental change.

The work of insurers usually involves risk transfer. Under the perverse incentives of the DBA, the risk is absorbed by taxpayers, the pain falls on civilian workers and their families, and the profits - running from 37 to 50 percent of premiums - are pocketed by the carriers. Risk without transfer. It's amazing that AIG can generate this level of profit in one division and still only trade at $1.40 a share. I guess that they have been looking for risk in all the wrong places.

If health care reform is the proverbial 800 pound gorilla, then the medical portion of workers comp is a 15 pound Maine Coon cat: it might big for a cat, but compared to a giant gorilla, it is barely noticeable. Nonetheless, this cat is blessed with a very strong notion of what it needs. As the nation moves closer to universal health care, the implications for workers comp are both profound and troubling. Comp medical services comprise a mere 2% of total medical expenditures, so policy makers in Washington will be inclined to ignore its special needs. That could create profound problems for the employers, insurers, and state administrators who deal with comp issues.

There are a number of key reasons why reform of health care may undermine the ability of states to deliver a quality workers comp system. (We previously blogged these issues here, here and here.) In order to provide some focus for the pending debates, here is a brief summary of how comp fits into the overall medical universe:

The focus is similar but not identical
The general health care system focuses on the prevention of what can be prevented and the treatment of that which can be treated, up to limits of coveraged defined in specific health plans. The overall goal is to preserve the life and health of individuals and families. This system provides treatment from conception up to the moment of death.
The comp system has a much narrower focus: comp provides treatment only to workers who are in the course and scope of employment. Comp treats work-related injury and illness, with the specific goal of returning injured/ill workers to productive employment.

Eligibility is Radically Different
The general health system provides defined services to individuals and families. Virtually any illness or injury is covered, including many forms of mental illness.
Comp covers only what occurs during work and is proven to be work-related, with an almost phobic disregard for mental impairments.

The cost structures are very different
In general healthcare, the premiums for coverage are paid by individuals and their employers. Depending upon the plan, individuals and their family members assume at least some of the cost of treatment, through premiums, co-pays and deductibles. The trend has been to shift more and more of the costs onto the consumer (which, in turn, becomes an incentive to reduce utilization).
In comp, employees never pay comp premiums and are never charged co-pays or deductibles. Injured workers are covered from the first dollar. Thus, only the employer, self-insured or who purchases mandatory coverage, and the insurer have the incentive to control costs. No such incentive exists for injured workers.

There are Perverse Incentives in the Comp System
Under comp, injured workers are paid not to work (indemnity). They may not like their jobs. They may malinger, seeking treatment more often than medically necessary (no co-pays to discourage them), thus prolonging disability in order to avoid work. The incentives for returning injured/ill employees to work lie primarily with the employer (who pays the premiums or is self insured) and the carrier (who pays the bills, which may exceed the premiums collected).

For employees with minimal job skills and perhaps no job to return to, the incentive for remaining on comp as long as possible is powerful.

Comp is a State-Based Program
The new mandates for health insurance coverage will come from the federal government. Comp, by contrast, is strictly a state by state program. The new federal mandates (eg., employee choice of doctor) may well conflict with long-established systems.

Policy makers are trying to create a new paradigm for medical coverage in the twenty first century: truly, a daunting task. Ultimately, the new direction for health care will be driven by cost and coverage. Whether the providers are public, private or both, health care cost controls and rationing will lurk in the shadows: will there be a cap on total expenditures for any given individual and any given conditions? Will there be limits on end-of-life services? How much of the costs will be shifted to consumers? What incentives will be created to reduce utilization?

In stark contrast, comp is and will remain an early 20th century system, based upon an industrial world that no longer exists. It already provides virtually universal coverage for people who work. The costs belong exclusively to employers and carriers; there is no cost-shifting onto injured workers and there are no incentives for these workers to limit expenditures. The over-arching goals are returning injured workers to productive employment and providing lifetime benefits for the totally disabled.

So it all comes down to this: When and if the 800 pound gorilla that is universal health care actually sits down, will it be beside - or on top of - the comp coon cat? Will the federal mandates take into account the unique and idiosyncratic needs of the comp model, or will the new mandates inadvertantly crush the system, state by state by state?

There are often unintended consequences when well-intentioned humans try to solve gargantuan problems. Let's hope that the comp system does not fall victim to this fundamental law of human endeavor.

In the world of workers comp, there is no lack of opportunity for fraud. We've seen doctors rip off the system by billing for services that were either never provided or not needed. We've seen employees fake injuries (relatively rare) or malinger on comp long after injuries have healed. We've seen insurance agents pocket money intended for insurance premiums. We've seen insurance adjusters embezzle claims funds. We've seen state comp bureaus (Ohio) engage in fraud. And we've seen employers rip of the system in a number of ingenious ways.

Which brings us to the saga of NBC Contractors (presumably no relation to the television network), a California general contractor. Three owners of the company - Monica Mui Ung, 49, of Alamo; Joey Ruan, 31, of San Leandro; and Tin Wai Wu, 28, of Millbrae - have been charged with 48 counts of insurance fraud, labor code violations and tax fraud. Bail was set at $535,000 for each of them. (You can check out their bare-bones website here.)

With Ung listed as the (minority, female) owner, NBC Contractors qualified for preferential treatment on public projects. Between 2003 and 2007 they successfully bid on 27 public works projects, including El Cerrito City Hall and Piedmont Elementary School.

Cheater's Delight
According the indictment, NBC used a trifecta of cost cutting measures:
1. They underpaid workers comp premiums a total of $1.45 million, by misclassifying their workers into lower risk occupations and by under-stating payrolls
2. They violated fair labor standards, by failing to pay for overtime or sick leave, impacting 19 workers a total of $3.6 million
3. They underpaid payroll taxes on workers, depriving state and federal government of tax revenues

With these (criminal) "cost savings," NBC was able to underbid their competitors. These business practices cheated a lot of people: NBC's own workers, their insurance carrier, their competitors, and all law-abiding businesses who played by the rules. We can only hope that the quality of their work was up to standards, which would at least keep their customers off of the long list of parties directly injured by their actions.

Albania Deleon is a entrepreneur. A legal immigrant and naturalized citizen from the Dominican Republic, she founded and operated Environmental Compliance Training (ECT) in Methuen, Massachusetts, the largest asbestos removal training school in New England. Between 2001 and 2007, she trained over 2,500 people in the intricacies of asbestos removal. Except that she didn't. Instead, she would fill out tests for certificate applicants and enter a passing grade. For $400, the (usually undocumented) worker was handed a certificate and then placed in a job through Deleon's other enterprise, Methuen Abatement Staffing. Her temporary workers handled hazardous abatement jobs throughout New England. (You can read the sorry details in a fine article by Beth Daley of the Boston Globe here.)

By the way, the training involves a total of 32 hours - not much of an investment in a life or death matter. (Some ECT students paid $350 and actually completed the training; for an additional 50 bucks, you could skip the training, pocket the certificate and get right to work, earning upwards of $15 per hour.)

ECT "graduates" went in to hundreds of schools, hospitals, churches, libraries, and homes throughout New England to remove asbestos. Most of them had no idea what they were supposed to do. Now there is deep concern that the workers, mostly young men from Central America, breathed the fibers, which can lodge in the lungs and lead to death decades later. Most had no idea how to properly wear a respirator.

In addition to their own exposure, these workers may have exposed their families to the cancer risk. Asbestos workers, if not properly trained, can inadvertently carry the fibers home on their clothes or hair.

More than a third of the 12,750 asbestos worker licenses and renewals issued in Massachusetts between 2002 and 2007 went to ECT "graduates." In New Hampshire, it was more than two-thirds.

Crocodile Tears
In November 2008 Deleon was convicted on 28 felony counts. Shortly before her sentencing, she wrote a rambling, hand-written letter to the sentencing judge. Among other things, she wrote:

"I pray that God will forgive my soul and allow me to atone the rest of my life repaying and repairing the harm I have done. This is my solemn promise...I commit myself to work ceacelessly [sic] to make restitution to the government and to the keeper of my soul until I draw my last breath life (sic)."

The reference to "last breath" is especially ironic, given that many of her "students" - along with innocent family members - will suffer excruciatingly painful deaths, as their breathing slowly and inexorably shuts down.

Facing more than 7 years in prison, Deleon skipped town. There is a warrant out for her arrest. Oh, she abandoned her 3 year old son in the process. Alas, it appears that "the keeper of her soul" doesn't have a whole lot to work with...

The Sioux Fall Storm are members of the Indoor Football league (not to be confused with the Arena Football League, although, truth be told, I am confused). They have won the league championship four years in a row (bet you did not know that) and were well on their way to a 5th title, having won their first six games in 2009. Then they made a big mistake. They neglected to purchase workers comp insurance for the team.

The league owners, all of whom have had hopes of a championship crushed by the relentless Storm, came up with a set of sanctions unique in the history of workers comp. The owners forced the Storm to forfeit the first six games of the season (6 and 0 instantly becomes 0 and 6). In addition, the Storm is only allowed to dress 20 players for future games (other teams can have 21). Finally, if the Storm should overcome the formidable obstacle of six losses and reach the playoffs, they are not allowed to host the initial playoff game. That sounds like roughing the franchise to me!

League owners have converted one team's failure to buy insurance into leverage to ensure that someone else - anyone else - wins the title this year. I have no idea which teams are any good, so I have handicapped my preferences based solely upon the intriguing names:
Billings Outlaws
Bloomington Extremes
Maryland Maniacs (I am not making this stuff up!)
Omaha Beef
RiverCity Rage
Everett (WA) Destroyers

And then there is the Kent*. No, not the Kent Asterisks. This is either an expansion team or inactive franchise, currently lacking a name. Given that they represent Seattle, I think something nerdy might be in order: The Kent Keyboards? Or given the need to project a violent image, how about the Kent (Hard Drive) Crashers?

Comp in Professional Sports
We have blogged the uneasy fit between workers comp and professional athletes. There really is no class that reflects the risks of being a football player. Given that the estimated premium for covering the Storm is about $200,000, it appears that insurance coverage per player runs in the range of $8,000 to $10,000.

Storm team President Colin Steen is not happy with the penalty:
“Clearly, these outrageously harsh punitive measures, imposed by a majority vote of IFL team owners, are intended to place the Sioux Falls Storm and its players at a competitive disadvantage against the other teams in the League for the remainder of the season and into the playoffs for a mistake that was totally unrelated to competition on the field.”

Steen is correct, but unfortunately his only recourse puts the issue right back into the hands of the same resentful owners who dreamed up the sanctions. In other words, it may be roughing the franchise, but the call stands.

This situation reeks of conflict of interest. It's admirable and necessary to enforce insurance requirements on all teams, but in this case, the penalty is totally out of alignment with the infraction. It's piling on - a fairness problem in most endeavors, but perhaps appropriate for indoor football.

AIG has been in the news mostly for its ingenious method of losing money: insuring the riskiest possible financial transactions and tanking after these risks go bad. But give the biggest insurance company in the world some credit. They still know how to make money the old fashioned way: collecting premiums and denying claims. To be sure, this strategy is not easy to do in the states, where public scrutiny is never more than a phone call away. But it works rather effectively in Iraq.

T. Christian Miller from Propublica and Doug Smith from the LA Times have described in great detail how AIG transformed Iraq into a business opportunity with an enormous upside. AIG is the predominant workers comp carrier in the war-torn country, insuring civilian workers. When these workers are injured - and the injuries can be devastating - AIG has routinely denied their claims for basic medical care, artificial limbs and desparately needed counseling for post-traumatic stress syndrome. More than 1,400 civilian workers have died and 31,000 have been wounded or injured in the two war zones.

Insurers have collected more than $1.5 billion in premiums paid by U.S. taxpayers and have earned nearly $600 million in profit, according to congressional investigators. That's nearly 40 percent profit after expenses - an unheard of loss ratio in the states.

Collect and Deny
The AIG strategy is deceptively simple: first, charge exorbitant fees for premiums, roughly 100 percent of a worker's pay. (Don't feel sorry for the companies paying these premiums; they are fully reimbursed by taxpayers.) Then, accept all the small claims and fight almost any claim involving lost time (more than four days of disability). Delay, delay, delay. Never make a payment until ordered to do so by a court.

The denial rate on serious claims is pretty astonishing: about 44 percent. How could you argue that any injury - let alone a serious one - is not work-related, as civilian employees are in Iraq for one purpose, supporting the war effort? In addition, fully half the claims for PTSD are denied. All this in the context of a war where catastrophic injuries are all too common and legitimate PTSD is as prevalent as cuts in a glass factory. How many state-side workers have watched co-workers blown to pieces by roadside bombs? Do you think that such incidents might qualify as PTSD?

AIG used the argument of extremely high-risk working conditions to boost the premiums. Then they turned around and used the strategy of denial to boost profits. Who says capitalism is dead?

I suppose you could argue that this reporting is just piling on poor AIG.The behemoth just cannot catch a PR break. Oh, well, dear reader, don't waste too much energy feeling sorry for AIG. After all, you are paying for AIG big time: in the bailout that exceeds $200 billion; in the war-based premiums that generate profits nearing 40 percent; and in all likelihood, in the social costs of caring for devastated civilian employees, who have so much difficulty accessing the comp benefits to which they are entitled.

AIG may not know diddly about the risk in risky financial vehicles, but they certainly know how to make money in conventional comp insurance. Of course, it helps that the injured workers are so invisible, like obscure figures in a desert sand storm, struggling blindly to find some kind of shelter in a harsh and unsympathetic world.

Back in September we blogged a lawsuit filed by three former wrestlers of World Wrestling Entertainment (WWE), the colorful circus of flying bodies managed by Vince McMahon. The wrestlers claimed that they were not independent contractors, but employees of WWE and entitled to all the benefits of employment. We guessed that Vince would be crushed in court. Well, we guessed wrong.

Judge Peter Dorsey of the U. S. District in Connecticut has dismissed all the charges against the formidably muscled McMahon. The judge found no merit in the three fundamental assertions of the plaintiffs:
: that WWE failed to withhold taxes (no harm to the individuals, the judge said)
: that the three grapplers were denied the "rights and benefits" of employment (no specifics in the filing, so the judge ruled against them)
: That WWE benefitted from "unjust enrichment" (again, the judge found no basis in law for this assertion)

One thing puzzles me about the findings. Nowhere does Judge Dorsey consider the fundamental test for independent contractors: who controls the work? Here's what the IRS has to say about the issue:

The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.

Despite the fact that every match is scripted from introductions to outcome ("means and methods"), despite the fact that these "independent contractors" have no control whatsoever over their work: when to show up, how to perform the job, whether or not to lose the match...Despite these compelling indications that they are indeed employees, the judge has determined that they are not.

I believe the plaintiffs dropped the proverbial ball when they failed to mention at least one benefit near and dear to the Insider: workers comp. WWE offered a workplace full of unusual hazards. (Ever try cracking a folding chair over the head of a co-worker without hurting him?) Despite the fixed outcomes, injuries are commonplace in this high-risk field of endeavor. Yet these three wrestlers - along with their fellow independent contractor colleagues - are on their own for the inevitable injuries that occur in the course and scope of their work.

Hope for FedEx?
While the judge dismissed this particular lawsuit on technicalities, I wonder how he would view the contracts between FedEx and its "independent contractor" drivers. Perhaps he would stick to the letter of the written agreements and, once again, ignore the core issue of who controls the work. So there may be hope for FedEx's battered business model, at least in one U.S. District court.

In the meantime, when your channel surfing brings you to the scripted mayhem of the WWE, pause for a moment and consider the fate of the behemoths pummeling each other with abandon. They may appear to be working in a collaborative - if cartoon-violent - manner; they may appear to be following a script written by others, but don't be fooled. As far as the law is concerned, WWE performers are independent contractors, answerable to no one but themselves. I suppose that makes wrestling matches real. Now if they could just get those comically incompetent refs to do their jobs...

We continue to be amazed at the ongoing saga of AIG. We learn in Sunday's New York Times that 400 employees of the financial products unit (yes, the geniuses who destroyed the company) are receiving bonuses ranging from $1,000 (the hard-working and relatively innocent) to $6.5 million (the brains behind the fiasco). Commitments to pay these bonuses were made in the spring, after the troubles began, but before the proverbial all hell broke loose. Outside counsel (presumably paid at their usual and customary rates - and no doubt in advance) confirmed that the promised bonuses must be paid.

AIG's current CEO, Ed Liddy, expained to Treasury Secretary Tim Geithner that the bonuses were needed to keep the most skilled executives. "We cannot attract and retain the best the brightest talent [unfortunate choice of words, Ed] to lead and staff the AIG businesses - which are now being operated principally on behalf of American taxpayers - if employees believe their compensation is subject to continued and arbitrary [arbitrary?] adjustment by the U.S. Treasury."

So the bonuses are being paid with taxpayer dollars: had AIG been allowed to fail, there would be no money to pay these obligations. We surmise that the checks were cashed immediately, before the feds had an opportunity to figure out a way to shut this scam down.

As a tax-paying owner of AIG, you will be delighted to know that the top 25 executives of the financial products unit - all of whom needed the incentive of huge bonuses to stay on the job - have agreed to reduce their salaries for the remainder of the year to one measly dollar. Their pay is finally aligned with their performance. And for the record, that annual salary won't buy them a cup of coffee, but it will cover more than one share of AIG stock.

If AIG survives this current crisis, the company will be on the hook to repay the bonuses to taxpayers. Don't hold your breath. The company that is too big to fail probably should fail, precisely because it is too big.

Is there a moral to this sordid saga? Perhaps. The Bhagavad Gita, India's great spiritual document, describes three gates to hell: lust, anger and greed. Perhaps I am hallucinating, but I believe the logo inscribed over the third gate is that of its most recent corporate sponsor, AIG.

I have a few shares of AIG stock, which is currently trading at 35 cents a share. I do not like to dwell on the pathetic disappearance of this particular asset, so it's an opportune time to seek comfort in history. This is not the first collapse of a financial empire, nor will it be the last.

The financial products division that brought down AIG rented space at One Curzon Street , a tony part of London. The building, owned by the Abu Dhabi royal family, features elegant curves, polished white stone, sweeping windows and a panoramic atrium. On the street it's known as the hedge fund hotel. Its tenants include GLG Partners, a once high-flying fund that has fallen on hard times, the struggling Swiss bank UBS, and on the fifth floor, its most famous tenant, AIG.

Nice digs for Joe Cassano and his crew. A great place to gamble with other people's money and pocket nearly $300 million in personal swag. If you are going to lose half a trillion dollars, you may as well do it in style. The bad news is that tax payers have already ponied up over $200 billion to cover Cassano's bad bets. The really bad news is that we may eventually be on for more than double that amount!

The Fall of Empires
Joe Cassano, the son of New York City cop, became a financial moghul, hanging his hat in the fanciest building on Curzon street. The street was named, of course, for Lord Curzon, one of the great figures of the Victorian age. Curzon's fame derived mostly from his time as Viceroy of India. He shot tigers from the backs of elephants, took his afternoon tea on the veranda, and made policy for India's millions. Like most of the British administrators who ran India, he came away with a substantial personal fortune.

In 1899, India suffered from a terrible famine. The death toll was six to nine million people, give or take a couple million. Among other administrative actions taken during the crisis, Curzon cut back on rations, which he characterized as "dangerously high" and tightened relief eligibility requirements. You know: stiff upper lip and all that. Even as Curzon ruled India with an arrogant hand, a dimunitive Indian national named Mohandas K. Ghandi was organizing fellow Indians in South Africa. Ghandi would eventually lead the movement toward self rule for India, and in doing so, would bring a formal end to the British Empire.

Curzon was born at Kedleston Hall, built on the site where his family, who were of Norman ancestry, had lived since the twelfth century. While at Oxford, he was the inspiration for a piece of doggerel which stuck with him in later life:

My name is George Nathaniel Curzon,
I am a most superior person.
My cheeks are pink, my hair is sleek,
I dine at Blenheim twice a week.

Joe Cassano cannot match Curzon's pedigree, but he surely lost more money than Curzon ever dreamed of. Joe did his thing and brought down the biggest insurance company in the world. One hundred years from now, other folks, consumed by a similar raw greed, will bring down some corporate entity beyond our current imagining. But one thing is certain. The street where the debacle takes place will not be named Cassano Way.

In most states, owner/officers of a company can opt out of workers comp coverage. So would it surprise you to learn that the scammers have parlayed this exemption into a scheme to avoid comp premiums? I didn't think so. (On the scale running from naive to cynical, Insider readers inevitably tend toward the latter.)

Contractors Asset Protection Association (ConAPA), a company based in California, helps companies avoid comp premiums by designating employees in high rate occupations as stock-owning corporate officers. (The company website - no surpise - is down.) The California exemption applies to company officers who are also the sole shareholders of a corporation. So the folks at ConAPA don't just have employers give workers inflated titles, they also issue these workers worthless shares of stock.

ConAPA focused on industries with high injury rates and expensive comp costs: housekeepers, security guards, roofers, maintenance and cooks. Thus, a housekeeper might become a "senior vice president, facilities." A roofer becomes "VP for environmental protection."

Jerry Brown (yes, that Jerry Brown), California's attorney general, sued a similar operation called PacifiStaff in 2007. One of their clients, the now defunct Pic-A-Bagel, refused to pay the claim of a baker who carried the impressive title "Senior Vice President of Dough Making" (sounds more like a CFO). The denial fell apart on the employee's testimony: he was never asked if he wanted to become a company officer and was not aware of any ownership in the corporation. That kind of ignorance is usually reserved for former presidents of brokerage houses or AIG, folks who never seem to have any idea how we got into the current mess. At least the poor bagel maker knows how the flour got onto the kitchen floor...

We have frequently blogged the labor issues at FedEx, the ubiquitous delivery giant. FedEx relies on "independent contractor" drivers for business and neighborhood deliveries. An interesting article by Corey Dade in the Wall Street Journal (subscription required) discusses the potential impact of a Democratic Congress on FedEx's business model. An 800 pound gorilla has just taken a seat in the board room beside FedEx CEO Fred Smith.

FedEx began 35 years ago as an airline. As such, it fell under the Railway Labor Act of 1926, which made unionization of public and commercial transport companies extremely difficult. By contrast, UPS began as a trucking company and was subject to the National Labor Relations Act from day one. UPS is unionized: they pay workers more than FedEx, they provide better benefits. (Of course, the Wall Street Journal points out that these higher wages and benefits have hurt the growth of UPS stock.)

With the pending Democratic control of Congress, FedEx finds its business model under fire. Representative James Oberstar (D-Minnesota) will propose an amendment to the Federal Aviation Administration Act that would remove truck drivers, couriers and other FedEx employees from the Railway Labor Act. In other words, the door to unionization will be thrown wide open.

The Journal article does not mention the difficulties that FedEx has had in state courts, where their so-called "independent contractor" drivers, who wear FedEx uniforms and drive FedEx trucks, have been consistently found to be FedEx employees. FedEx finds itself caught in a big squeeze: potential changes in enabling legislation opening the door to unions plus state level pressures to reclassify 15,000 drivers as employees. The entire business model is at risk.

FedEx has remained profitable during the recent downturn, posting a 3% increase in net income. Nonetheless, CEO Smith has voluntarily reduced his own salary by 20% and has given up his bonus. The company has also cut wages for all employees and stopped contributing to employee retirement plans. Because the workforce is union-free, the company has been able to react quickly and unilaterally to reduce (payroll) expenses.

This type of maneuvering would be much more difficult - if not impossible - under a unionized workforce. Rates of pay, benefits and working conditions are all subject to collective bargaining - never a speedy process when take-aways are on the table. It's ironic that the very flexibility that keeps FedEx profitable during this economic downtime is also the source of FedEx's troubles in the long run. It's always difficult to predict the future, but the 800 pound gorilla stalking FedEx appears ready to light up a cigar.

On December 1 we blogged the story of Taneka Talley, an employee of the Dollar Tree stores who was stabbed to death at work by a deranged racist. We believed that Talley's death was compensable under workers comp, as she died at work, performing her job (she was stocking shelves at the time of the assault). Dollar Tree's TPA denied the claim under the theory that the death was not work related because the killer was motivated solely by Talley's race (she was African American). A few of our readers agreed with the denial.

This was no personal dispute. Talley and her assailant had no prior relationship. She died because she was in the wrong place at the wrong time. If she had been stabbed on the street, there would be no workers comp claim. But she died while working, so in our view her orphaned son is entitled to benefits.

Dollar Tree's mission statement refers specifically to the importance of good judgment: "Do the right thing for the right reasons." Well, Dollar Tree has now agreed to pay the full amount allowed by California workers comp for death benefits. The company's statement asserts that it was acting voluntarily because "we feel this is the right thing to do." Mission accomplished!

In this emotion-laden situation, a literal and nit-picking interpretation of the law is simply not in the company's best interests. To be sure, a case for denial can be made. They might even prevail in workers comp court (we doubt it), but Dollar Tree had much to lose in the court of public opinion. Some customers had called for a nationwide boycott and protesters picketed the Fairfield store where Talley died. With this agreement to pay the claim in full, Dollar Tree ends a public relations nightmare and preserves its standing in the community. Dimes to dollars, that's money well spent.

Jdimytai "Jimbo" Damour took a temp job for the Christmas rush at the Walmart in Green Acres Mall on Long Island. Some rush. When a crowd of bargain hunters pushed into the store at 5 am on "Black Friday," Damour, a 34 year old who weighed 270 pounds, fell to the floor and was trampled. He died within an hour of heart failure. Undeterred by Damour's plight, many shoppers pushed on toward the electronics department, where big screen TVs were going for $800.

Damour was employed through Labor Now, a temp agency. Because Walmart was not the employer of record, Damour's family has a number of options for legal recourse. They have filed suit in the Bronx Supreme Court, alleging that Damour's death was caused by "the carelessness, reckless negligence, wanton disregard for public safety and gross negligence" in the "staging, conducting and advertising for sales events."

The lawsuit names Walmart, the shopping mall and the security company employed by Wal-Mart to control the crowd. Heck, they may as well include the advertising company that stirred up the masses. Despite what appears to be a good faith - albeit unsuccessful - effort to control the mob, the settlement is likely to be substantial.

The Green Acres Mall, where the incident took place, has a troubled past. According to New York Times reporters Ken Belson and Karen Zraick, the mall opened in 1956 on the site of the Curtiss Wright Airport. It was one of the first open-air shopping centers on Long Island, with 1.2 million square feet of retail space. In the 1980s, the mall was dubbed the "car theft capital" of Long Island. In 1990, four moviegoers were shot, one fatally, when two groups of teens opened fire in a movie theatre. What was playing? Appropriately enough, The Godfather, Part III.

The most telling comment concerning this sorry indictment of consumer mania came from an anonymous employee stationed at the time of the mayhem in the electronics department. "It was crazy. The deals weren't even that good."

For many of us, Amityville NY brings to mind a book (and movie) called the Amityville Horror, which tell the story of an innocent couple moving into a house whose prior inhabitants had been murdered. The house is haunted by the ghosts of the deceased. If the story were to happen again, the house would surely be cleaned by Icon Cleaners.

New York's Labor Department has determined that Icon Cleaners unlawfully deducted hundreds of thousands of dollars from the paychecks of their 170 cleaners. Icon called these people independent contractor "technicians" - all of whom wore Icon uniforms, worked under Icon control and used Icon equipment. Not only were they not independent, they labored under conditions of virtual servitude.

Here's how Icon functioned: each employee was forced to pay a $500 security deposit upon being hired at the company, which could either be paid for up front or deducted from subsequent paychecks. ("Congratulations on your new job, sucker!"). Technicians often found their paychecks reduced for a variety of (illegal) reasons:

- In the event that a customer was not satisfied with the service provided by the company, or if the wrong services were rendered, a deduction was made from the employee’s paycheck.
- In instances where the company was doing a promotional campaign on discounted services, these discounts were taken out of employee paychecks.(!)
- If an employee indicated that he or she needed extra assistance on a particular project, in some instances Icon Cleaning would provide another worker for the project and that worker’s wages were deducted from the requesting employee’s paycheck.
- If a customer provided a check to the employee and it bounced, the employee was required make up for the lost revenues through payroll deductions.

Technicians worked up to 12 hours a day, 60 hours a week cleaning air ducts and carpets in private homes and businsses. After the illegal deductions had been made, some workers brought home less than $100 in a given week. They had been taken to the proverbial cleaners.

It's not surprising to find that customer satisfaction mirrored the working conditions; you can read some disgruntled customer comments here.

There is no mention of worker immigration status in the press release from the Department of Labor, but I suspect that illegal workers would be more likely to tolerate these intolerable working conditions. It's ironic, of course, that Icon is in the cleaning business. When it comes to fundamental employee rights, it doesn't get any dirtier than this.

We are all struggling to keep our bearings in a world where the conventional compass is spinning madly. The economic crisis has sent the stock market plummeting and has impacted every aspect of our lives. We wake up with the same thoughts that Alice had, following her fall down the rabbit hole:

I wonder if I've been changed in the night? Let me think. Was I the same when I got up this morning? I almost think I can remember feeling a little different. But if I'm not the same, the next question is 'Who in the world am I?' Ah, that's the great puzzle!

Great puzzle, indeed. For what it's worth, here are just some of the financial crisis implications for workers compensation:

Illegal Immigrants: Our colleague Peter Rousmaniere has done a great job of keeping us up to date on immigration issues. He points out that all states (with the single exception of Wyoming) provide at least some comp benefits to injured, undocumented workers. Ironically, the collapse of the economy may be accomplishing what an ineffective Congress has been unable to do: with jobs becoming more difficult to find, many illegal immigrants are returning to their native countries. The scale of this exodus is only likely to impact the overall numbers if the recession turns into a full-scale depression. That is one "solution" to the undocumented worker problem that no one wants to see.

Older Workers: many older workers have seen retirement nest-eggs - in the form of equity in a home and stocks - disappear altogether in just a few weeks. These people will do everything they can to stay employed. Older bodies break down and are slower to heal. There are profound and as yet unknown implications for the workers comp system.

Lay offs: There are a number of factors leading to the loss of jobs, most of them related to tightening credit. Work has dried up in construction and related industries. Consumer-based industries, confronted with reduced demand, are cutting back on inventories. With credit more difficult and more expensive to secure, companies are having difficulty making payrolls. This means lay offs. Once the employer-employee bond is broken, desperate unemployed workers will scramble for any benefits they can find: while unemployment insurance provides support for just 26 weeks, workers comp can help pay the bills for years...

Commercial insurance: Insurers make money by conservatively investing premium dollars in the market. The float from invested dollars provides an essential cushion for covering future losses. Well, the float is no longer floating - it has sunk. Blue chip stocks have been transformed into cow chips. As a result, the margin of error for insurers is much tighter than it was just a few months ago.

A Dark Wonderland
We live in interesting times. The Republicans accuse the Democrats of socialism, even as they provide a socialistic intervention for Wall Street. The federal government cannot find money to rebuild our crumbling infrastructure, but suddenly $700 billion is "freed up" (actually, put on the credit card) to bail out the financial system. We all recognize the need to reduce our dependence on foreign oil, even as the earth cries out for less harmful forms of energy. Then oil, impacted by the collapsing economy, suddenly becomes cheap again. Is it my imagination, or is there less urgency in the talk about alternative energy sources?

The once reliable assumptions - steady growth, blue chip reliability, stability in the markets - have suddenly evaporated. We have tumbled down the rabbit hole and our world is becoming "curiouser and curiouser." We have returned to a cruder form of the fundamentals, as outlined by the mock turtle: Reeling and Writhing, of course, to begin with, and then the different branches of arithmetic -- Ambition, Distraction, Uglification, and Derision. In these undesirable respects, we are doing pretty well!

The Gryphon reminds us: "The adventures first… explanations take such a dreadful time." Alas, we are still in the middle of our adventure, with no reasonable explanations in sight...

One of the many fascinating sidebars in the decline and fall of the AIG empire is the saga of Joe Cassano. He was the genius behind AIG's Financial Products Unit, which insured high risk sub-prime mortgage deals. In other words, he is the man most responsible for AIG's abrupt demise. Perhaps you are wondering how much money Cassano made in the course of destroying AIG. Beyond that, I am sure you are concerned that Cassano may now be struggling, like the rest of us, to make ends meet. Well, this is at least one problem that you can take off your worry list.

Cassano raked in $280 million over an eight year period beginning in 2000. That's an average of $35 million a year - pretty good even by professional athlete standards. Keep in mind that his salary and bonus were based on the scale of business generated by his virtually unmonitored unit. Cassano and his colleagues siphoned off 30 percent of every dollar generated in his (non insurance) division. The more they wrote, the more they made. And because AIG was so well collateralized, the company did not have to back up the risks with outside capital. Sweet. Like stealing candy from a blind man, right?

OK, it kind of fell apart once the nature of the risk became public. By February 29 of this year, losses in the Financial Products Unit reached $11 billion. Cassano was fired (appropriately enough on Leap Day). That's the fate you would expect for a man who almost single-handedly brought down the largest insurance company in the world. Of course, he was allowed to keep his bonuses, which totalled $35 million. A man's gotta live.

Free Market Run Amok
Congress has been interviewing former AIG executives. These former "masters of the universe" sound, well, both stupid and greedy. Former CEO Marty Sullivan was grilled by lawmakers for urging a compensation committee meeting in March (just weeks after Cassano was fired) to exclude losses from AIG's Financial Products unit when calculating bonuses.

Accused of helping himself to more compensation, Sullivan said he did it to retain key executives. "I was focusing on them more than me." What a guy. Sullivan himself was unretained shortly after this board meeting.

Would you be surprised to learn that Cassano is still on retainer as a consultant to AIG? His fee is his usual and customary $1 million a month. Why is he on retainer? Sullivan explained to Congress: "I wanted to retain the 20-year knowledge that Mr. Cassano had." Gee, Marty, the guy lost $11 billion. How did you come up with a pricetag for that kind of expertise?

The Shank from a Tanked Hank
Hank Greenberg was too ill to testify directly in Congress; heck, if you lost $6 billion over one weekend, you might feel a little under the weather, too. He submitted written testimony denying any knowledge of Cassano's risky actions. After detailing how he built up A.I.G. since the late 1960s and saying he placed tough controls on its derivatives business, Mr. Greenberg said the volume of A.I.G.’s credit default insurance business “exploded after I left the company in March 2005.”

Hank asserted that the company wrote as many credit default swaps on collateralized debt obligations in the nine months following his departure as it did in the preceding seven years. Maybe so. That might mean that just half the losses associated with this particular unit of AIG - $5.5 billion - occurred under his watch. Interesting enough, that is roughly the amount Hank lost when the stock tanked. Poetic justice, perhaps, of a very crude sort.

The most stinging assessment of AIG's demise came from Lynn Turner, the former chief accountant at the SEC. When the hapless Robert Willumstad, yet another short-term AIG CEO, blamed the problems on financial discosure laws, Turner replied: "That’s like blaming the thermometer, folks, for a fever." Touche. And good riddance.

The collapse of AIG over the course of just a few days may be astonishing, but in some respects, it is not surprising. A few years ago, AIG stock sold for $100. Today, it's listed at $1.54. AIG is all about risk: much of it reasonable, but a significant portion of it fatally flawed. Remember David Halberstam's "The Best and the Brightest" - the story of how very bright men, led by Robert MacNamara, led this nation astray into the swamps of Vietnam? Now the very bright folks at AIG are up to their necks in an another repulsive form of the Big Muddy.

Our colleague Joe Paduda has a personal story to tell about AIG: he once worked for the behemoth insurer and was asked to sit in on a meeting of the executive staff, all of whom reported to the legendary Hank Greenberg. (We blogged a strange attempt to clean up Hank's public image here.) Hank had one question for everyone sitting around the conference table: how much money has your division made? No excuses. No stories about value added. No details about lives made better or risks averted. Hank wants to see the bucks! Grown men quaked as the time came to make their presentations.

As the owner of 12 percent of AIG, Hank just took a very expensive bath. He lost more money this weekend than all the readers of this blog will collectively make in their lifetimes.

So how did this happen? How did the biggest insurer on the planet suddenly run out of money?

Risk Transfer for Dummies
One of AIG's business units sold credit protection against the possibility of default in a variety of assets, including, of course, sub-prime mortgages. (Why were so many astute business people so anxious to lend money to folks they knew could not pay it back? What am I missing here?) AIG has lost at least $18 billion over the last three quarters. And according to some reports, they continued to understate the scale of the losses as recently as last week. Like their compatriots at the now-defunct Lehman Brothers, they kept paddling their canoes up de Nile.

The irony is that AIG has plenty of money. Unfortunately, it's tied up in the form of reserves, spread across their multi-faceted insurance operations. It's money set aside to pay claims. It appears that New York state is allowing AIG to access some of these reserves for cash flow. (Presumably, this will not impact AIG's ability to pay claims...) This will fall far short of the approximately $75 billion that AIG needs to survive the crisis.

Thus we have the bizarre prospect of a mostly profitable company going belly up because of the losses in one of its divisions. It's too bad Hank was forced out of the company by the now departed Elliot Spitzer. I would love to have been at a recent roundtable of company executives, answering Hank's one and only question.

The derivatives whiz pulls on the collar of his $400 shirt and sweats into his coffee mug. He mutters almost inaudibly, "$75 billion."

Hank lights up like a pinball machine: "You made $75 billion?"

Derivatives whiz whispers: "Lost."

Hank turns the color of an uncooked lobster: "Lost? You lost $75 billion?" Hank reaches across the table to throttle the whiz, but something seizes his body from within and sprawls him across the table. He is trying to talk, but no words are coming out of his mouth. A coffee colored foam dribbles from his lips.

It looks like a medical crisis, but no one moves. They just sit in their chairs, looking down at the table and straightening the lapels on their $2,000 suits...

OK, I'm no Raymond Chandler. But then again, not even Chandler could come up with a story as full of greed and self-deception as that of the once mighty AIG.

I'm feeling Vince McMahon's pain. It's as if someone picked me up, body slammed me and then whacked me with a folding chair. Talk about ingratitude!

Three wrestlers affiliated with McMahon's colorful World Wrestling Enterprises (WWE) are suing the muscled entrepreneur. Scott Levy (AKA Raven), Christopher Klucsarits (Chris Kanyon) and Michael Sanders say they are WWE employees. McMahon says they are independent contractors. Maybe Raven, Kanyon and Sanders should dress up in FedEx uniforms and pile drive the haughty McMahon into the canvas.

As with FedEx drivers, the wrestlers have a pretty strong case. After all, I am shocked (shocked!) to report that wrestling matches are scripted. The "independent contractor" work is totally controlled by the writers at WWE: the wrestlers fall and rise on cue. They win when they are supposed to win and lose when they are supposed to lose. The remarkably ineffective officiating is also fixed. Given that the primary work of the WWE is wrestling, it's pretty tough to make a case that the wrestlers themselves are independent contractors. Without the work of the wrestlers, WWE ceases to exist (as FedEx disappears without its "contractor" drivers). Vince is going to lose this one.

I do have a suggestion for McMahon. Hold a mock trial in the ring: dress the wrestlers up as a judge and a bunch of lawyers. They could shout their speeches into a microphone and then pummel each other into submission. Under the script, of course, McMahon, bloodied and defiant, his fancy silk tie ripped to shreds, would ultimately prevail.

In the real courts of Connecticut, the procedure will be quite civilized and the outcome will likely go the other way. Given the scripted nature of the entertainment, it will prove very difficult, if not impossible, to demonstrate true independence for the wrestlers. While they do provide their own tools (costumes and make up, along with an occasional 2 x 4), every move is dictated by management. Wrestling is "entertainment" and the participants are actors.

This particular form of entertainment may seem far-removed from the traditional stage, where an actor is:

... a poor player
That struts and frets his hour upon the stage,
And then is heard no more. It is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.

We might well argue that life in general has more meaning than this despairing assessment by a beleaguered MacBeth. But in the case of the WWE, it's spot on.

Thanks to Overlawyered and Daniel Schwartz for a heads up on this irresistable item.

When it comes to fraud in workers comp, we usually look to employers, doctors and lawyers. They go after the big bucks. While there are opportunities for ordinary workers to exploit the system, most decline to do it. Today we examine two claims, both involving real injuries and both involving fraud. Coincidentally, it's a bi-coastal story.

Let's begin in the east, in Gardner, Massachusetts, where Erik Teong managed a Shell Station. On October 28, 2006, Teong reported to Gardner police that he had been assaulted and robbed while taking cash receipts to the bank. He sported a bruised face and injured eye.

The police did not buy his story. He eventually confessed to stealing the $7,000 deposit. In February 2007 he was charged with larceny and making a false report of a crime. In April, he pled guilty to both charges and was sentenced to one year of probation. He also must pay the insurance company $7,900 (to repay the "stolen" payroll).

The injury to his eye? Teong told police that he had a friend give him a hard punch to the face, to make his story more credible. The hapless Teong has permanently damaged his vision. And because the injury appeared to occur in the course of employment, Teong filed a comp claim. AIG, the comp insurer (with a few problems of their own!), paid his $16,000 medical fees and $3,000 indemnity. Now AIG wants its money back. They referred the matter to the fraud bureau, which led to Teong's indictment by a Worcester County grand jury.

So Teong has earned himself a place in the Hall of Fame for Incompetent Criminals. He botched the fake robbery. His friend all-too-convincingly smashed him in the face. He has to repay the medical expenses and ill-gotten indemnity. And to top it off, given his permanently impaired vision, he may have trouble reading the charges against him.

California Scheming
Now let's hop across the continent to the Lake Tahoe, where Nicholas Jason Beaver resides. Nick worked for the Sierra-at-Tahoe resort, but busy as a Beaver he was not: the resort told him they would not rehire him for the following season. One night, after a few beers with his buddies, Nick decided to get even. He decided get himself injured on the job.

On April 9, 2004 Nick jumped up and down on a snow bridge that covered the top of percolation test hole. After three or four jumps, he broke through the bridge and fell into the 5 foot deep hole, injuring his knee. He collected comp (the injured knee required surgery) and then decided to sue the resort: he wanted to pierce comp's "exclusive remedy" shield due to the resort's "extreme negligence" in allowing an "unprotected" hole to exist on their grounds. (Nick's story belongs in the burgeoning archives defining the word "chutzpah.") The resort spent $40,000 defending itself and over $42,000 in medical bills on Nick's injured knee. They offered Nick $110,000 to make the case go away.

Nick refused to accept the chump change. He apparently told his buddies that he wanted really big bucks. At that point, one of the (disgusted) friends who witnessed the incident dropped a dime on him. His friends were given immunity from prosecution; while technically co-conspirators, they did not benefit financially from the fraud. Nick was convicted of stealing more than $65,000 and now faces up to four years in prison.

Benefit of the Doubt?
Erik and Nick were both injured on the job, but their injuries were part of a conscious effort to defraud the employer and insurer. Their stories demonstrate how the comp system defaults toward accepting a reported claim: Erik and Nick both were successful in accessing comp benefits for their injuries. The wheels of justice in these cases ground a bit slowly, but they did grind exceedingly fine. The pain of the actual injuries, with the exception of Erik's impaired vision, has already faded. But the pain of lives ruined by impulsive greed will linger for a long, long time.

Imagine you are an attorney in Massachusetts looking for a little work. The Office of Labor and Workforce Development (OLWD), a state agency, hires you and 10 other attorneys to examine applications for unemployment insurance. Normally, this work would be performed by state employees, but the combination of cost-efficiency lay offs and a bad economy has caused a surge in applications. The state pays you through a 1099 form. You are responsible for your own taxes. And you soon find yourself in the middle of a story concocted by Franz Kafka.

In a parallel operation (bordering on a parallel universe), Governor Deval Patrick has announced a crackdown on employers who commit fraud by misclassifying workers to avoid paying workers comp insurance, plus state and federal taxes. The governor creates an Underground Economy Task Force to ferret out abuses of the independent contractor designation. The task force resides...in the OLWD. (You can read the AFL-CIO's endorsement of the task force here.)

These two worlds collided when someone (presumably a state employee affiliated with the unions who lost employees in lay offs) dropped a dime on OLWD, complaining that the 11 attorneys hired as "independent contractors" were performing the job duties of regular employees. So now OLWD is being scrutinized by its own task force. We can only hope that members of the task force are state employees, and not "independent contractors" who have signed on to carry out a short-term project: an image arises of a dog furiously pursuing its own tail.

Management Conumdrum
Many employers face the conundrum embodied in this situation: when you have more work than you can handle - especially on a short-term basis - it's convenient to hire temporary "independent contractor" consultants to carry out the work. Hiring is much easier; there are no long term commitments. When the work has been completed, you simply terminate the contracts.

Because there is such widespread abuse of the "independent contractor" designation (did someone say "FedEX"?), these convenient arrangements are now routinely challenged. At OLWD, the questioners themselves have been called into question.

Suzanne Bump, the state's secretary of Labor and Workforce Development, is not using the word "investigation" to characterize her examination of this particular form of outsourcing. She points out that the practice began in the prior (Republican) adminstration, which had enthusiastically reduced the size of the state's workforce, only to discover they did not have enough people to do the necessary work.

"We are taking steps to reverse this practice and are looking to hire more review examiners on a permanent basis when possible," Bump stated. This in itself raises a problem: by creating regular, full-time positions to handle the jobs, the state will have to grow the budget. Regular employees cost more than "independent contractors" because you have to pay for insurance and taxes (which is one of the reasons they hired independent contractors in the first place).

What used to be routine HR functions have become enormously complicated. I am sympathetic to all employers who have to work through these often paradoxical issues. When it comes to managing a business in these challenging times, we find ourselves lost in a dimly lit, endless corridor, characters in a Kafka story, looking for the room where all the answers are rumored to reside. Like the good folks at OLWD, we eventually conclude that the room does not exist.

Yesterday we blogged the death of Lauro Ortega, who was crushed while excavating a building site in New York. We assumed that he was protected by workers comp, even as his lawyer pursued more lucrative remedies from the (recently indicted) employer, William Lattarulo. It appears that we were just a bit naive. Ortega was an illegal immigrant, working construction jobs on a cash-only basis. He labored long hours, six days a week, sending most of his earnings home to his family in Cuenca, Ecuador.

"He came to this country to work. He liked to do it. That was his love," his brother is quoted as saying. Ortega lived in a tiny apartment by himself; he spoke to his wife and children every day. He had very little life outside of work, with Sundays reserved for church. He would have preferred to stay in Ecuador, but there was no work available. He came to this country for one simple reason: it's where the jobs - and the money - are.

There will be readers who lack sympathy for Ortega. He was here illegally. He was paid under the table. He took his chances and reaped a harsh reward. At best, he is viewed with considerable ambiguity: he was here illegally, but to some degree our laws still protect him as a worker. His family will receive some compensation for his untimely death: either in the form of workers compensation (presumably paid out of the state fund) or tort liability stemming from his employer's negligence. It will take some time, but eventually his family will receive financial support simply because Ortega died at work in America.

I am struck by the quiet desperation that brought Ortega to New York. I am impressed by his willingness to work hard, every day, and use his earnings to support a wife and two children back home. I am saddened by his sudden and very unnecessary death. And I am frustrated by the stalemate in Congress, which has been unable to construct a reasonable and just solution to what has become an intractable problem of enormous magnitude. There are over 12 million workers like Ortega, all of whom are here illegally and most of whom are working hard and doing jobs that need to be done.

Yes, they are illegal. And yes, we need their services. Two simple, contradictory facts. What, if anything, are we going to do about it?

William Lattarulo owns several buildings and vacant lots in Brooklyn NY. Back in March, his workers were digging a foundation for a commercial laundry at 791 Glenmore Ave, when a more experienced contractor warned Lattarulo of an immediate hazard: the excavation had reached a level below the foundation of the adjacent building. He advised Latturo to install underpins to make the excavation site more stable.

Instead of stopping the work, Lattarulo ordered his employees to keep digging. Moments later, the wall of the adjacent building collapsed, crushing Louro Ortega, a 30 year old laborer who had been on the job just two days.

"I don't think I killed that kid," Lattarulo is quoted as saying. "They're just looking for someone to blame for all this" (an apparent reference to the spate of construction-related fatalities in the city).

The attorney for Ortega, Kenneth Halperin, says the accident never should have happened. "They failed to make sure the foundation wall was stable. No one checked anything."

In the New York minute it took to snuff out the life of Louro Ortega, Mr. Lattarulo went from entrepreneur to defendant. He has been charged with manslaughter. Even if he is successful in avoiding jail time, he faces long and expensive days in court, trying to defend himself against charges of negligence.

Beyond Exclusive Remedy
Under most circumstances, workers comp offers the only recourse for a deceased employee and his family. Comp is an exclusive remedy. As we have blogged in the past, "substantial certainty" that an injury would occur is one of the factors that can help victims pierce the exclusive remedy shield. Lattarulo's actions appear to be so egregious, so likely to result in bodily harm, the doors to tort liability have been thrown wide open.

For the time being, workers comp will cover the cost of Ortega's funeral and provide his wife and two children with some modest level of support. Attorney Halperin will certainly not be content with that. He will pursue the big bucks that accompany criminal negligence. Mr. Lattarulo is about to learn that business owners can be held accountable for what in retrospect was an ad hoc and hasty decision. He thought he was just digging a hole for a new building. Through his dismal judgment, he dug a grave for an innocent worker and inadvertantly buried his own modest ambitions in the same rubble.

Postville Iowa is a one traffic light town with a population of 2,300 people. Last Monday, as we read in the Washington Post, 17 percent of the town's residents were arrested in a raid coordinated by the Immigration and Customs Enforcement (ICE). All were employees of AgriProcessors, the nation's largest producer of kosher meats.

The unusual story goes back to 1987, when Aaron Rubashkin and other members of a Lubavitch Hasidic sect moved from Brooklyn to (mostly Lutheran) Postville. That would have been a culture shock (on both sides) worth observing. In the years since, AgriProcessors has established itself as the town's main employer. The company has also become notable for dubious workplace practices: routine violations of fair employment laws, hiring underaged workers, falsifying documents on workers, wastewater pollution problems and inhumane slaughtering of animals.

So once again (remember New Bedford?) we have one of those highly ambiguous situations: the feds raid an employer who is exploiting undocumented labor. Federal actions have a veneer of concern for the workers, but these quickly evaporate in the context of ICE's primary function: arresting and deporting illegal workers. Some of these undocumented workers have been with the company from the beginning. As Eduardo Santos, 27, a worker who lost two fingers in the plant put it: "The raid was fair...but it's bad for everybody. There's no work."

Eduardo, if you will forgive the pun, has put his finger on the crux of the matter. These are jobs few are willing to take. The working conditions are abominable. The company owners may invoke a "higher law" in attempting to follow kosher rules, but they are demonstrably deficient in their application of the more mundane laws which govern the way we work.

Big Fish, Little Fish
There is a sense in all of this that the workers may not be the primary target of the raid.(See an excellent summary by Debra Nussbaum Cohen in the Jewish Weekly.) To be sure, the workers face very difficult times, leading inevitably to deportation for most. The feds, however, have positioned themselves to go after AgriProcessors's owners. Rabbi Sholom Rubashkin, the plant operator, finds himself accountable to rather formidable authorities of the conventional sort.

There are no clear winners here. The workers have been freed from jobs which they willingly embraced; they are about to be thrown out of their adopted community. Jewish consumers have lost their primary source of kosher meats. The town of Postville has lost its primary employer and will soon see the evisceration of its tax base.

The Postville saga is indicative of the overall undocumented worker dilemma: workers of last resort tolerate intolerable conditions because they are not supposed to be here in the first place. They take jobs no one else will take. Their pay and conditions fail to meet our basic standards, but are still far superior to what is generally available in Guatamala and Mexico, where most of these particular workers came from.

The ICE raids put a temporary halt to unacceptable working conditions in one small town. A handful of undocumented workers will be sent home. Some managers might end up in jail. It's not even a drop in the proverbial bucket. It's a drop in the ocean. Nonetheless, if members of Congress pay attention to the single drop hitting the water, they might remember it. They might actually try to do something about it.

As if Fed Ex did not have enough problems, the company with the unusual staffing model is now being sued by some shareholders. Given that the suit has been filed by Local 51 of the Plumbers and Pipefitters Pension Fund, it's no surprise to find that the suit attacks the business model of hiring "independent contractors" to carry out the core activities of the company. FedEx has hired over 15,000 of these "contractors" to deliver the goods: in FedEx uniforms and FedEx trucks, along company assigned routes, with company approved hair styles ...and no white socks!

FedEx dismisses the suit as "frivolous." Company spokesman Maury Lane asserts that "FedEx has a long record of providing outstanding shareholder value and is led by a board of successful and experienced directors..." To which Dan Newman, attorney for the disgruntled stockholders, replies: "There's nothing frivolous about illegally exploiting workers and cheating on taxes -- it's gross mismanagement and a grave breach of fiduciary duty." Ouch!

The lawsuit includes a chart of compensation for FedEx directors, which has risen from a minimum of $48,000 in 2002 to the current minimum of $160,000. For most directors, the annual pay is $220,000. Not bad for independent board members (who don't have to wear uniforms, who wear any color socks they like and who can drive any vehicle, the fancier the better).

Despite a series of losses in state courts and with the IRS, the company continues to defend the fundamental business model. They say that drivers can buy multiple routes and hire people to work those routes for them, thus making the route owners "entrepreneurs." True enough. But the key word is "can." Most can't and most don't. The vast majority of the 15,000 drivers have no employees and are not entrepreneurs. They are by any reasonable standard employees of FedEx, carrying out the basic work of the company.

At some point, sooner or later, FedEx will probably have to throw in the towel. Then they will face a huge bill for retroactive benefits (including workers comp) owed to their employees. The stock will surely take a big hit. I'd like to think that the directors who have managed this dubious experiment in outsourcing might actually be held accountable. But FedEx's team of seasoned (and I do mean seasoned) litigators will make sure that never happens.

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