Penalty Upheld for Employer that Lacked Workers’ Comp Insurance

Company failed to exhaust administrative remedies

By Joanne Deschenaux, J.D. May 4, 2018

​Because an employer did not appeal to the California Department of Industrial Relations after the agency assessed a $30,000 penalty for failure to provide workers' compensation insurance to its employees, it could not later challenge the penalty in court, the California Court of Appeal ruled. The company failed to exhaust administrative remedies, as required by state law, the appeals court said.

In November 2013, the Office of the State Labor Commissioner within the California Department of Industrial Relations cited a retail business in Lawndale for failing to secure workers' compensation insurance for its employees. The commissioner issued a "stop order" requiring the business to immediately stop using any employee labor until the company secured workers' compensation insurance.

[SHRM members-only HR Q&A: What are the penalties imposed on a California employer who fails to provide workers' compensation coverage?]

The commissioner also issued a penalty assessment requiring the business to pay more than $30,000 for failing to have such insurance. The commissioner provided the business with instructions explaining its rights to administratively appeal the stop order and the penalty assessment pursuant to the procedures established by the California Labor Code.

The business never administratively appealed the stop order or the penalty assessment.

In August 2014, the business filed a complaint in court against the department seeking withdrawal of the penalty assessment. The trial court granted the department's motion to dismiss the complaint before trial, and the business appealed.

Exhaustion of Administrative Remedies

Under Section 3710.1 of the California Labor Code, the director of the department of industrial relations must issue a stop order to an employer who has not secured workers' compensation insurance for its employees. The employer may administratively challenge a stop order by requesting a hearing before the director.

Under Section 3722, the director must issue a penalty assessment at the time it issues a stop order. The employer also may challenge the penalty in a hearing before the director.

The employer in this case sought court review of the penalty assessment but conceded that it did not challenge the commissioner's decision in a formal agency proceeding.

The appeals court first noted that the doctrine of exhaustion of administrative remedies is well-established in California. Before petitioning the trial court for review of an administrative agency's decision, a party must first exhaust its administrative remedies. Generally, when an administrative remedy is provided by statute, relief must first be sought from the administrative agency responsible for providing that remedy, and all available remedies before that agency must be exhausted before courts will review the administrative body's decision.

The appellate court then ruled that because the business never sought a hearing before the director to challenge the stop order or the penalty assessment, the trial court properly dismissed the complaint.

Goni Enterprises v. Dept. of Industrial Relations, Calif. Ct. App., No. B277670 (April 10, 2018).

Professional Pointer: Although courts in years past have required exhaustion of administrative remedies for most claims arising under the California Labor Code, a 2014 amendment to the code provides that exhaustion of administrative remedies is not required unless the particular section of the code under which the action is brought expressly requires exhaustion.

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md.


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