The Colorado Court of Appeals has set aside a fine imposed by the Division of Workers’ Compensation on a local business woman for failure to maintain workers’ compensation insurance.
Soon Pak was ordered to pay $841,200 for the time her company, Dami Hospitality, which operates as the Star Motel in Denver, went without insurance.
In the opinion, however, Judge John Webb called it excessive and remanded the decision back to the division’s director for recalculation. Webb said the director should consider the time it took to notify Pak of the violation and her ability to pay when determining a new amount.
“The fine must be set aside because the Director abused his discretion when he failed to apply the Associated Business Products,” Webb wrote in the court’s decision.
Complete Colorado first reported the abuse in May through the stories of several small Colorado businesses that were assessed fines against large enough to put them out of business.
The fines stemmed from a 2004 state audit that found businesses across the state weren’t keeping up with state-mandated coverage requirements for workers’ compensation insurance, and the state wasn’t enforcing the laws. Because of the audit, that same year, legislators passed a bill that allowed for heavy fines for businesses out of compliance.
Workers’ compensation pays for employees’ medical bills if they’re injured on the job, as well as a portion of lost wages. Pak’s hotel, which has never had a claim, employs at maximum three or four people and according to court records has a payroll of less than $50,000 per year.
“If the penalty stands as presented, I have no choice but to declare personal and business bankruptcy and go out of business,” Pak said in the complaint.
According to court records, Dami had been without coverage from August 10, 2006, through June 8, 2007, and again from September 12, 2010, through July 9, 2014.
The director fined Dami from $250 to $400 per day, through September 18, 2006; and $500 per day from September 19, 2006, through June 8, 2007, and from September 12, 2010, through July 9, 2014.
The fine was based on the formula adopted by the division under Colorado statute.
But Webb said in his ruling that “the more time that lapses before the division gives notice to an uninsured employer, the more the fine will have mounted. Due to this variable, significantly disparate fines could be imposed, despite the Director’s formulaic approach.”
Webb also noted that “uncontroverted evidence provided in Ms. Pak’s affidavit indicates she trusted her insurance agent to maintain the necessary coverages.”
Dami’s agent agreed that Pak was likely confused, that she did not realize she lacked the insurance, and that he “did not tell” tell her or explain the difference between workers’ compensation and property insurance.
“I think I feel part of responsibility for this matter that I did not tell about Worker’s Compensation and I will be managing my client in the future. …” the agent said in a letter to the director that was part of the evidence in the case. “Actually she confused Property Insurance and Worker’s Compensation.”
Webb wrote that Dami did not act with “indifference to or reckless disregard for the safety of others,” nor did it act with intentional malice, trickery or deceit.
The court believed Dami was unaware that the required insurance had lapsed and that the failure by the director to notify Dami of the lapse for almost half a decade and Dami’s ability to pay are relevant.
The court ordered the Division of Workers’ Compensation to recalculate the fine in accordance with the findings, basing that opinion on similar cases in other states, federal laws and Colorado criminal penalty guidelines.
“We conclude that ability to pay should be considered when determining whether a penalty imposed against an employer for failure to carry workers’ compensation insurance is constitutionally excessive,” Webb wrote.