WASHINGTON — While wage and hour violations at contractors are complicating business for California apparel vendors, the manufacturers have been given a break in one key area, thanks to reform begun two years ago to target fraud in the state’s workers’ compensation insurance.

“I think it’s made a difference,” says Stan Levy, general counsel for Guess, Los Angeles, where workers’ compensation insurance claims have dropped 80 percent since 1992.

However, Bernard Lax, president of the Coalition of Apparel Industries in California, criticized lawmakers for taking so long to realize reform was needed and how readily insurance prices responded.

“The amount of money that workers’ compensation has cost business in the state is astronomical,” said Lax, who is president of Louie Bernard Inc., a vertical knitwear manufacturer and division of PJK Inc., Los Angeles.

California companies’ federally mandated workers comp rates doubled and tripled, beginning in the late Eighties. State lawmakers said the biggest culprit behind skyrocketing rates was fraudulent claims of stress-related illness, which reformers said was de rigueur after leaving a job. Prior to reform, a worker had to prove only that 10 percent of his stress was caused by his job.

Now, employment must be 50 percent or more of the cause of stress-related illness, and a worker can’t file a claim after he leaves a job unless the injury or illness was previously documented in his personnel records.

“What has been lowered dramatically and significantly are the claims, which has had a direct link to lower premium costs,” said Joseph Rodriguez, executive director of the Garment Contractors Association of Southern California. He said rates for apparel manufacturers and contractors have been lowered to roughly $7 per $100 of pay, but have yet to reach the $4 average seen before 1989, the point at which rates began to balloon.

In addition to state reform, Levy said Guess’s sharp decline in post-termination stress claims was a result of intermal company controls.

So far this year, there have been no post-termination stress claims at Guess. In 1991, there were 310 such claims, cases that Levy said were hard to challenge; but the costs piled up and jacked up rates. In addition to disability compensation, each case had medical evaluation bills of $6,000 to $8,000.

“When we did an analysis on the total cost involved in workmen’s compensation cases, the biggest costs were the clinics and the attorneys,” Levy said, citing two areas where limits have been imposed.

To weed out legitimate claims from fraudulent ones, Guess frequently intreviews its 1,500 employees about their health. Levy said this allows potential health problems to be addressed, and documents the lack of problems to head off post-termination claims.

While Rodriguez said reining in stress-related claims was an “almost instant cure” for escalating rates, the apparel industry — especially contractors — was looking to an open-rating insurance system to bring costs down further. The system, to go into effect Jan. 1, lifts state-mandated minimum rates to open workers’ comp to more competition.

Rodriguez said such a system could aid the state’s estimated 6,000 apparel contractors employing roughly 150,000 workers. In addition to benefiting from more competition among insurance companies, contractors would be able to join buying groups to keep down costs.

Small and start-up contractors without the capital or a track record to secure insurance would also benefit, Rodriguez said. These companies have traditionally had to turn to the higher-priced state insurance compensation fund.

“The current system has been a big disincentive for people to start this kind of operation,” he said.

Another reform idea, still in the pilot stage, allows employers to sign on to 24-hour worker insurance, combining in one policy regular health and workers’ compensation insurance. The system began testing in May in San Diego, and pilots are expected to follow in Los Angeles, Santa Clara and Sacramento counties.

“Why should we have both health insurance and workers’ comp?” asks Dan Goodstein, executive president of Yes Clothing Co., Los Angeles, maker of junior sportswear and men’s wear, calling 24-hour coverage a concept worth watching.

However, Rodriguez said, with the other reforms driving down costs, insurance companies have lost the incentive to offer 24-hour coverage since it would mean less revenue.

“Initially it seemed viable,” he said. “It was good in theory.”

— Fairchild News Service