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California’s Comp Cost Crush

Rocketing workers’ compensation insurance in California is bringing many makers to the brink of layoffs, shutdowns or offshore sourcing.

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LOS ANGELES — Stay safe.

The mantra is more important than ever for California’s employers, particularly because the skyrocketing cost of workers’ compensation insurance is driving many firms to lay off workers, shut their doors or, in a scenario that’s just as bad for the state employment picture, move production offshore.

Take Cynthia Wylie, for example. As co-owner and chief operating officer of XLarge, a men’s and women’s streetwear manufacturer and retailer based in Glendale, Calif., she has seen workers’ compensation insurance rates spike 250 percent this year at a time when the apparel industry is already on its knees.

“You add to that rising health insurance premiums, regular insurance premiums, fuel prices and labor costs at a time when sales are falling flat, and it’s decimating the industry,” Wylie said.

Wylie is not alone. Skyrocketing rates in the $15 billion state workers’ compensation system — up from $6.4 billion in 1997 and headed to $20 billion by the end of this year — is one of the more serious issues confronting the fashion industry in California. By law, California employers must buy the insurance but contractors, manufacturers and retailers claim they are shouldering percentage increases on rates in the high-double digits to triple digits just within the last year.

Typically, employers with fewer than 100 employees now pay under $100,000 a year in insurance premiums. Those with more than 100 workers can pay as much as $300,000 to $500,000 a year.

“This is probably the number one issue for the entire business community right now in California,” offered Bill Dombrowski, president of the Sacramento-based California Retailers Association with 50 members representing 9,000 stores and $100 billion in annual sales. Dombrowski’s own six-person office has never had a claim but rates have more than doubled in the last year. “It’s a crisis,” he said.

It’s significant for the apparel and related textile industry, which, excluding the government and health care/medical industries ranks as the sixth largest employer in the state, with 130,300 workers.

In Wylie’s case, it makes little difference that XLarge has had only one claim in the last 11 years. “Basically, they’re forcing people like us to cover the real offenders,” she said.

This story first appeared in the May 21, 2003 issue of WWD.  Subscribe Today.

Observers say the way the state system has unraveled is not unlike the manner in which California’s energy crisis began two years ago. In the mid-Nineties, the deregulation of the California’s workers’ compensation industry led to a frenzy of competition among insurance carriers prompting all to lower their rates in exchange for greater market share.

Employers benefited for a time, but as the economy slowed and medical and legal costs soared (as did the prevalence of fraud), dozens of insurance carriers were forced to close — in the last three years, more than 25 carriers have shut down. Adding to the woes, the State Compensation Insurance Fund that stepped in to insure half of all California businesses and is considered the insurer of last resort, is now also buckling under the strain. On Friday, California Insurance Commissioner John Garamendi authorized a $500 million emergency bailout of the fund, which is currently paying claims of $1.6 million a day for an estimated 40,000 injured California workers. At that rate, the bailout will last a little more than a year.

Meanwhile, companies are feeling pinched even though, according to the Workers’ Compensation Insurance Rating Bureau, apparel ranks among the least hazardous occupations, a key barometer in setting premiums. Bruce Campbell, president of Westlake Village, Calif.-based Strategic Retail, which operates three contemporary stores under the Sugar banner, has seen his cost per hire go “up and up and up.”

“I haven’t had a workman’s comp claim since 1991 and every year it goes up between 30 and 40 percent,” he said. “I think I’m at the lowest end and it’s still very expensive. When I get done looking at everything, I just feel helpless.”

To fight back, the California Fashion Association recently sent a form letter to all its members addressed to Garamendi, urging him “to take all measures to reform the state’s broken workers’ compensation system currently driving state employers out of business. Of all the legislation and regulations enacted in the last few years, nothing has impacted business to the extent of these rising workers’ comp costs.”

This evening, the issue will be front and center at a meeting held by the Garment Contractors Association of Southern California Inc. in Los Angeles, whose members will discuss the issue with a political action network called the Independent Business Coalition.

In Sacramento, lawmakers are considering some 60 workers’ compensation-related proposals. On May 2, Governor Gray Davis unveiled his own initiative in collaboration with Garamendi that, through a development of fee schedules for unregulated outpatient surgery centers — one of the major costs of the system — claims to reduce workers’ compensation costs by at least $1.5 billion annually. Combating fraud, curtailing medical costs, reducing legal conflicts between employers and employees are also among the larger priorities of the bill.

But even if passed, naysayers abound. “It’s a nice first step, but it doesn’t go nearly far enough,” said Dombrowski.

The question also remains if the legislation comes too late for some apparel companies already struggling under the twin burdens of a tough economy and operating in a state known for high business costs. Chatter of layoffs and shifts to offshore production continues to grow louder as business owners scramble to stay afloat. In Los Angeles County alone, apparel jobs fell about 7 percent to 70,300 in April compared with a year ago, according to the Los Angeles County Economic Development Corp.

Sewing contractor Stitches Inc. in Los Angeles laid off nearly 20 percent of its employees in the last year, leaving president Bob Reed frustrated about the lack of wiggle room in his budget for future business reinvestment. It’s a similar sentiment echoed by Jimmy Macias, owner of sewing contractor Ja-Mar Apparel in Irwindale, Calif., who has seen workers compensation rates double while his profit margins have declined 10 percent.

“We’re cutting costs, we can’t put money back into the business, and laying people off may be a possibility,” Macias said. “It’s gotten bad. We’re scared about our renewal that comes due in June.”

Larry Hansel, chief executive officer of juniors resource Rampage here, said his company plans to downsize this year, though he wouldn’t offer more specifics. With sales to date running flat with last year, business isn’t keeping pace with rising expenses, he said. His total insurance costs have risen 20 to 30 percent each year for three years.

“We’re not happy at all,” Hansel said. “We’re definitely looking for ways to be more efficient.”

And, even with business on the rise, reasons for producing in California seem less compelling day by day. At contemporary brand Syrup Clothing, where sales have climbed 10 percent over last year, president David White wants to move production abroad.

“I understand the benefits of producing here — with shorter lead times and smaller quantities — but you have to weigh that against the difficulties stemming from government. You have to ask yourself if it’s worth it, and at some point, [the answer is] no,” he said.

There’s also the concern that the financial squeeze put on California manufacturers might prompt a return to sweatshop labor, though officials so far haven’t seen a spike in activity.

“In terms of the garment industry, it’s another excuse to use it, but it’s not the main reason for sweatshops,” said Cristina Vasquez, regional manager for UNITE.

If there’s one positive result of the workers’ compensation mess, it’s the stepped-up attention employers are giving the matter. In general, apparel companies aren’t exactly known for their corporate wellness programs, but company executives say they’re at least putting more teeth in their education and safety plans.

Zinc chief executive Eleanor Sanchez, who said workers comp costs have doubled in the last year at her juniors-oriented clothing firm here, said she has had her human resources department speak more regularly to employees. She’s also put together a handbook of safety measures and has toughened the dress code, measures she thinks can serve the growing company well.

“It used to be ‘wear whatever you want,’ but we were seeing more shoes with taller heels and open-toe sandals posing a hazard, so we had to be more restrictive,” Sanchez said. “I just can’t afford to have a problem.”

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