Interim Joint Committee on Labor and Industry


Minutes of the<MeetNo1> 2nd Meeting

of the 2005 Interim


<MeetMDY1> July 21, 2005


The<MeetNo2> 2nd meeting of the Interim Joint Committee on Labor and Industry was held on<Day> Thursday,<MeetMDY2> July 21, 2005, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Senator Alice Kerr, Co-Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Alice Kerr, Co-Chair; Representative J R Gray, Co-Chair; Senators Julian M Carroll, Julie Denton, Brett Guthrie, Denise Harper Angel, Jerry P Rhoads, Richie Sanders Jr., and Ken Winters; Representatives Joe Bowen, Denver Butler, C B Embry Jr., Charlie Hoffman, Dennis Horlander, Joni L Jenkins, Thomas Kerr, Charles Miller, Russ Mobley, Rick G Nelson, Jim Stewart III, and Brent Yonts.


Guests:  Andy Frauenhoffer, Deputy Commissioner, Department for Workforce Investment; Janet Givens, Director, Division of Unemployment Insurance, Office of Employment and Training; Larry Moore, Internal Policy Analyst, Division of Unemployment Insurance, Office of Employment and Training; James Inman, Field Office Liaison, Division of Unemployment Insurance, Office of Employment and Training; Lowell Williams, Benefits Branch, Division of Unemployment Insurance, Office of Employment and Training; John Rose, member, Unemployment Insurance Commission, Office of Employment and Training; Glenn Jennings, Executive Director, Kentucky Department of Insurance.


LRC Staff:  Linda Bussell, CSA; Betty Davis; Adanna Hydes; and Ashli Schmidt, Committee Assistant.


Co-Chair Kerr welcomed the committee and guests and noted that Sen. Richie Sanders was attending the committee meeting via video-conference.  Co-Chair Kerr then asked for a motion to approve the minutes from the June meeting. Co-Chair Gray made the motion which was seconded by Senator Winters. The minutes were approved without objection.  Co-Chair Kerr reminded members of the August 25 meeting, where black lung and KEMI (Kentucky Employer’s Mutual Insurance) will be topics on the agenda, and the September 14 meeting that will be held in conjunction with the 2005 Labor Management Conference at Kentucky Dam Village.  She reminded members that in order to attend the conference members must obtain approval from their respective leadership offices. Co-Chair Kerr also informed the members that the NCCI Advisory forum for Kentucky will be held August 4, 2005 in Louisville. An update on the Workers’ Compensation system in Kentucky will be presented at the NCCI forum.


Co-Chair Kerr introduced guests Janet Givens Clayborne, Director, Division of Unemployment Insurance, Office of Employment and Training, and Andy Frauenhoffer, Deputy Commissioner, Department for Workforce Investment.


Mrs. Clayborne greeted the committee and stated that she would like to address questions that were raised at the June meeting regarding unemployment insurance program and the trust fund. She said at the last meeting, she and other unemployment insurance officials spoke about trust fund issues and the pilot program on benefit overpayment collections. She noted that several questions arose from that discussion and they wanted to address some of those today, especially questions relating to disqualification issues. Mrs. Clayborne said as they explore solutions to the financial problems of the unemployment insurance trust fund, one avenue of investigation is the relationship between benefit overpayments in relation to program integrity. She reminded the members that each state administers its own unemployment insurance program under federal guidelines. She said most states are quite similar in terms of benefit eligibility as most are mandated by federal law. She said Mr. Frauenhoffer would discuss some of those eligibility issues.


Mr. Frauenhoffer then directed the committee to a handout included in their folders dealing with eligibility issues. He reviewed basic monetary eligibility requirements. He said most of the nonmonetary eligibility issues revolve around the reasons for the job separation, whether it is a discharge or a voluntary quit. Again, most state laws are similar in terms of disqualifying events. Under Kentucky law a worker may be disqualified from benefits under the following circumstances: a worker is unemployed due to a strike, or other labor dispute; a worker is unemployed due to a customary vacation or holiday shutdown and has reasonable assurance of reemployment following the period of unemployment; a worker is suspended from work for misconduct connected with the work; a worker refuses an offer of suitable employment, or fails to apply for available work when so directed by the employment office, without good cause; and if a worker left work voluntarily without good cause attributable to the employment.


Next Mr. Frauenhoffer addressed the issue of misconduct which is one of concern to both employers and employees. He said all states recognize discharge for misconduct connected with the work. He said Kentucky's law, under KRS 341.370, contains eight specific examples of misconduct that would disqualify an employee from receiving benefits. Mr. Frauenhoffer also stated that under the statute, in the case of voluntary quit, the claimant would be disqualified from benefits if the voluntary quit was “without good cause attributable to the employment”. Mr. Frauenhoffer said in cases where the misconduct does not fall within one of the statutory examples, the division has adopted the principles in a 1941 Wisconsin case, adopted by the Kentucky Court of Appeals, the Boynton Cab decision.


 Mr. Frauenhoffer said in misconduct cases, the burden of proof is on the employer to show that the discharge from employment was for misconduct. Often the employer fails to show by a preponderance of the evidence that the misconduct did actually occur. In such cases, the decision is usually in favor of the employee. In a case of a voluntary quit, the burden of proof is on the employee to show that the voluntary quit was with good cause attributable to the work. Regarding burden of proof, he said there are many cases in which the party that has the burden of proof does not provide necessary documentation and witnesses. In conclusion, he said Kentucky law and administrative regulations are controlling in the determination and adjudication of unemployment insurance cases. In the absence of specific statutory language, the division relies on case law, federal Department of Labor Program Letters, and unemployment insurance precedent rulings to adjudicate cases.


Co-Chair Kerr thanked Mrs. Clayborne and Mr. Frauenhoffer for their presentations and noted that Senator Rhoads had distributed to members a letter clarifying questions and concerns that arose at the last meeting regarding issues of eligibility and disqualification. She thanked Senator Rhoads for that letter and asked the members if they had any questions.


Responding to a question from Co-Chair Gray concerning benefit eligibility during a labor dispute, Mr. Frauenhoffer stated that if an employee cannot go to work due to a strike at a different location, this would not disqualify the employee from receiving benefits.


Representative Yonts asked if a person who is jailed in contempt of court but has not been convicted of anything would be disqualified for benefits. Mr. Frauenhoffer replied that under current law such a circumstance would not disqualify one for benefits.  Representative Yonts then noted it has come to his attention that many hearings are being held over the telephone and asked what would happen if there were problems with the phone system.  Melanie Murphy, Appeals Branch, Division of Unemployment Insurance, Office of Employment and Training, replied that the division sends notices to the parties informing them when they will be contacted by phone. If there is good cause for missing a call, a party is given seven days to reschedule. Representative Yonts said he is aware of a situation such as this where the party did not get the call. The party notified the division of this but the notification was ignored. Mr. Frauenhoffer said the situation would be investigated if further details were provided.


Stating that he was not in attendance the previous meeting, Representative Yonts asked about the relationship between benefits paid and revenue collected for the unemployment insurance program. Mrs. Clayborne said benefit payments exceed revenue collected. Represenative Yonts asked if it is necessary for adjustments to be made to the tax schedule. Mr. Frauenhoffer said there is opportunity within the next few weeks or months to explore different ways to shore up the trust fund inadequacy and that federal officials have offered their assistance in doing this.


Senator Rhoads commented that Kentucky is an employment-at-will state and it is important to have specific standards defining misconduct, especially such standards relating to uniform rules of the workplace, and that it is important that employers have such rules, preferably in writing, in order to prove misconduct.


Representative Butler asked whether an employee who is receiving a pension from one employer and is laid off by another employer would qualify for benefits? Mr. Frauenhoffer responded that the employee would qualify for benefits as long as the retirement pension is not paid fully by the employer.


Responding to another question from Representative Butler, Mr. Frauenhoffer stated that if a military spouse quit work because the spouse was transferred, the employee would not be eligible for benefits because this would be considered a voluntary quit.


Senator Denton asked about the eligibility of merit and non-merit employees of the state.  She asked if a non-merit employee was terminated because their position was eliminated, then decided to retire, could the employee be eligible to receive unemployment insurance benefits? Mr.Frauenhoffer stated that those circumstances would not make the employee ineligible. Senator Denton then asked if a non-merit employee could obtain benefits at the end of an administration? Mr. Frauenhoffer replied that it would be dependent on the type of position held in the administration.


Representative Bowen said many small employers do not have written rules or policies, and if there are no written rules and an employee clearly engages in misconduct, could the employee possibly obtain benefits? Mr. Frauenhoffer replied that employers are not required to have written rules, yet it is the responsibility of the employer to document and prove misconduct and written rules or policies are very important in this process.


At this time, Co-Chair Kerr thanked Mr. Frauenhoffer and Mrs. Clayborne for their presentations and asked them if they would attend the September 14 committee meeting at Kentucky Dam Village. She then turned the meeting over to Co-Chair Gray.


Co-Chair Gray gave a brief background of the AIK Comp situation stating in the past year, AIK Comp has been in the news because of financial difficulties.  These financial difficulties have been well documented and have resulted in a transfer of regulatory authority over workers’ compensation self-insured groups, rehabilitation proceedings initiated by the Kentucky Office of Insurance, assessments on current and former AIK Comp members, and major reform legislation, SB 86, governing current and future groups. Co-Chair Gray welcomed Mr. Glenn Jennings, the executive director of the Kentucky Office of Insurance. Co-Chair Gray also said he was distributing a list of questions an employer member of AIK COMP might have about the assessment and the activities of the Office of Insurance.


Mr. Jennings introduced himself said he would provide an update on AIK COMP, a status report on the review of the other workers' compensation group funds,  implementation of SB 86, and a brief overview of the most recent NCCI Workers' Compensation Advisory Loss Cost filing.


Regarding AIK COMP, Mr. Jennings said it is a very emotional issue at the Office of Insurance as it is for many employers and employees. He started with the initiation of the rehabilitation proceedings initiated by the Office of Insurance. An order of rehabilitation was entered on August 5, 2004. He said he would provide some of the more pertinent information as to the current status of AIK COMP. Mr. Jennings said the plan has $18 million in assets, which amounts to about twenty percent of the first assessment. The first assessment was calculated on the deficit as of December 31, 2003. At that point, the deficit appeared to be $58.5 million. The assessment was approved by the court. Members were twenty percent of that amount. During that time additional actuarial studies were being conducted to determine whether any further deficit existed for calendar year 2004 through February 28, 2005 at which point all business of AIK COMP was cancelled. The duration of the total deficit was from 1999 through February 28, 2005. That total deficit amount has been calculated to be approximately $97 million. A second assessment plan was filed with the court on June 15, 2005. Mr. Jennings said an important point about that is that on September 14, Franklin Circuit Court Judge Graham will hold a hearing on the current assessment plan and other important issues, especially the issue of joint and several liability. He said he believes joint and several liability will be upheld by the court, because if that concept is not upheld workers' compensation group self-insurance will no longer exist in Kentucky. Mr. Jennings said the assessment plan filed in June is different from the first assessment plan, primarily in the inclusion of some employers' additional discount into the compution of their pro rata share of the assessment. Mr. Jennings explained that some employers were granted a discount that was in addition to the traditional discount based on underwriting policies. He said that meant that some employers were granted an additional discount to the disadvantage of other employers and he did not think it was fair to leave the additional discount out of the calculation of those employers' pro rata share of the assessment. He said the inclusion of the additional discount into the calculation will be controversial and will be discussed in front of Judge Graham on September 14. He said if the judge rules against the Office of Insurance, he will have to amend the assessment plan. He said this is an important point that he thought he should share with the committee.


Co-Chair Gray asked what options, other than legislation, Mr. Jennings had if the assessment plan is not approved by the court.  Mr. Jennings stated that third parties are also involved in this situation and that his office have sued these third parties, including the accounting firm, actuaries, trustees, officers, and others that his office believes have culpability and owe AIK COMP money as a result of their actions. He said he was working on a request to present to Judge Graham to seek approval for an independent evaluation of the third party lawsuits to determine the amount of funds that should be available to AIK COMP.


Mr. Jennings said another set of controversies his office is dealing with involves fourteen law firms that have intervened in the litigation. The law firms represent approximately 240 employers. The intervenors want to join the lawsuits against the third parties which would permit them to receive a portion of any amounts recovered. He said he is extraordinarily resistant to this because he is concerned about the 70,000 or more affected employees of AIK COMP members. He said his foremost job is to protect the injured workers while doing it as cost effectively as possible for the employers. The intervenors contend that such intervention might reduce legal costs. He said that might be the case, but if his lawsuits against the third parties are successful, the amount of money recouped or recovered would go into the pot to reduce the overall assessment for all employer members. He said these and other issues are currently before Judge Graham in Franklin County Circuit Court. He said it should be noted that while Judge Graham has made sure that all parties are fully heard on these issues, he has stood as an advocate for the injured workers and has consistently put them first in these proceedings.


Going back to his opening comment that AIK COMP currently has approxmately $18 million, Mr. Jennings said he would have to go back to Judge Graham in about five months and ask for permission to collect another twenty percent of the assessment.


Mr. Jennings said he should also inform the committee that when the first collection of twenty percent was mailed, many employer members of AIK COMP paid and his office has collected approximately $16 million. About 1400 of the 3700 employer members did not pay. He said those nonpayers have been sued and there has been a good response to those suits.


Representative Kerr asked for an explanation of the “run-out” activities.  Mr. Jennings replied that “run-out” activities include shutting down or reducing the nuts and bolts of the operation, such as getting smaller offices, downsizing employees, selling furniture, and sub leasing the building. Part of this process also includes building value into AIK Comp so an effective buyer can be found.


Representative Kerr asked if the assessment of an employer is based on premium or experience. Mr. Jennings said the formula set out in the assessment plan is based on earned premium plus the additional discount. Mr. Jennings stated that the discount AIK COMP granted totaled over $122 million and it is important to get this money back. In response to another question from Representative Kerr about the third party lawsuit, General Counsel Julie McPeak responded that negligence is being claimed, but she could not go into further details, as members of opposing counsel were in the audience.


Senator Carroll questioned Mr. Jennings on the meaning of “joint and several” liability. He said he assumed that it meant that any one of the affected employers could presumably be liable for one hundred percent of the deficit? Senator Carroll asked Mr. Jennings what approach he would take if the lawsuits against those unwilling to pay are unsuccessful. Would Mr. Jennings attempt to double or triple the assessment for the employers who are willing to pay? Mr. Jennings said he is confident those lawsuits against the nonpayers would be successful. He said the employer responses have been good. Mr. Jennings said his interpretation of joint and several liability was the same as Senator Carroll' but he hasn't given up the hope of collecting the money owed. Senator Carroll asked why Mr. Jennings was pursuing a policy of joint and several liablity. Mr. Jennings said that was a part of all the contracts that members of AIK COMP signed and it is the basis of workers' compensation group self-insurance. He said he believed it is his legal obligation to pursue joint and several liability. Responding to additional questions from Senator Carroll, Mr. Jennings stated that employers would be granted a four-year period to pay the assessments, and he couldn’t say that the deficit of $97 million would not grow, however current calculations of the deficit are promising.


Representative Hoffman commended Mr. Jennings on his work and the daunting task he has undertaken and asked what single course of action the General Assembly could take to prevent another AIK COMP type of situation from occurring again? Mr. Jennings said a huge step was taken with Senate Bill 86 that transferred regulatory authority for workers' compensation self-insured groups from the Office of Workers' Claims to the Office of Insurance. Mr. Jennings added that in the context of implementation of SB 86, the other group funds have been issued certificates of filing and required to submit quarterly reports.


Representative Yonts asked if the 1200 lawsuits that have been filed are causing layoffs in any of the businesses that are being assessed?  Mr. Jennings stated that he knew of no businesses that had to terminate workers due to the assessments.


Senator Sanders noted that another assessment is due in five months and has this been relayed to the members?  Mr. Jennings said the upcoming assessment has not been relayed to the members because no information will be sent out until after the September 14 court hearing.


In response to questioning by Senator Winters, Mr. Jennings stated that the companies who left AIK Comp are having to pay for new coverage as well as their assessments for the AIK COMP deficit.


Representative Yonts said employers will also be liable for special fund assessments which will be in addition to the AIK COMP assessment. Mr. Jennings confirmed that employers will also have to pay a nine to eleven percent workers' compensation special fund assessment.


Representative Gray asked if an employer was a member of AIK COMP for only one year, would the pro rata share of the assessment be limited to the amount of the deficit for that year. Mr. Jennings said that was correct.


As a further status update, Mr. Jennings said payroll audits of AIK COMP members will be completed by September 30, which will result in adjustments to assessment amounts owed by employers.


Mr. Jennings then gave a brief update of the implementation of Senate Bill 86.  He stated the exams and final orders of three other group funds have been completed and all seven of the other group funds have been reviewed.


Last on the agenda, Mr. Jennings provided a brief overview of the 2005 NCCI Workers’ Compensation Loss Cost Filing received on June 30, and directed members to an executive summary of the filing included in their folders. Mr. Jennings said the filing recommended an average increase of 3.7% increase for the industrial classes, and an average 5.5% increase for coal, which was based on a 10.5 % increase for underground mining and a 5.5% decrease for surface mining. He said outside actuaries, the Milliman firm, are reviewing the filing. He said he has moved the effective date of the filing to October 1 to provide more time for the insurers to adjust to the new rates. He said he wanted to point out that AIG has 15.8 percent of workers’ compensation market in Kentucky and due to internal problems, AIG was unable to provide credible data. Therefore, AIG data was excluded from the data on which the filing was based but that exclusion had a negligible impact on the recommendations included in the filing.  Mr. Jennings stated that as of now, there is no plan to hold a public hearing on the filing.


Co-Chair Gray commended Mr. Jennings and said he was glad to hear the NCCI figures are being reviewed carefully for correctness.


Senator Sanders asked Mr. Jennings what percentage of the total employers in Kentucky does the 3700 members of AIK Comp represent? Mr. Jennings said he did not know but would obtain the information and get an answer to him.


Co-Chair Gray asked if there was any new or old business.  There being none, the meeting was adjourned.