Colorado Case Law Update

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July 1, 2019 10:00am

Eighth Amendment—Corporations—Excessive Fines—Workers’ Compensation Noncompliance.

Colo. Dep’t of Labor & Emp’t, Div. of Workers’ Comp. v. Dami Hosp., LLC

(June 3, 2019)

Factual Summary

Dami Hospitality, LLC (“Dami”) is the owner-operator of a Denver motel. Dami employs between four and ten people at any given time. As an employer of three or more persons, Dami is required by statute to maintain workers’ compensation insurance. See § 8-43-409, C.R.S. (2018).

Dami allowed its workers’ compensation coverage to lapse on or about July 1, 2005. Upon receiving notification of the lapse from the Division of Workers’ Compensation (“DWC”), Dami conceded the violation and paid a corresponding settlement in June 2006.

Approximately two months later, Dami again allowed its workers’ compensation coverage to lapse. This time, Dami went without coverage from August 10, 2006, through June 8, 2007. Then, from June 9, 2007, to September 11, 2010, Dami carried the proper insurance, but the company’s workers’ compensation coverage again lapsed on September 12, 2010. Dami was without such insurance from that time until July 9, 2014.

On February 19, 2014, the DWC discovered Dami had allowed its workers’ compensation insurance to lapse for these periods of time and issued a violation notice to Dami. On July 11, 2014, the DWC received a faxed certificate of workers’ compensation insurance for Dami effective from July 10, 2014, through July 10, 2015. However, Dami did not offer any other documentation or any explanation for the extended periods of noncompliance.

The applicable statutory framework provides that the DWC shall:

For every day that the employer fails or has failed to insure or to keep the insurance required by articles 40 to 47 of this title in force, allows or has allowed the insurance to lapse, or fails or has failed to effect a renewal of such coverage: impose a fine of: (I) Not more than two hundred fifty dollars for an initial violation; or (II) Not less than two hundred fifty dollars or more than five hundred dollars for a second and subsequent violation

§ 8-43-409(1)(b), C.R.S. (2018).

Further, Rule 3-6(D), 7 CCR 1101-3, provides:

For the Director’s finding of an employer’s second and all subsequent defaults in its insurance obligations, daily fines from $250/day up to $500/day for each day of default will be assessed in accordance with the following schedule of fines until the employer complies with the requirements of the Workers’ Compensation Act regarding insurance or until further order of the Director…

The DWC applied this statutory and regulatory regime in calculating the fine for Dami’s second and third periods of noncompliance with the Workers’ Compensation Act. The total amount Dami owed as a result of the 1,698 per diem fines was $841,200.

Dami’s annual payroll was less than $50,000, and the aggregate fine proposed by the DWC exceeded the business’s gross annual income. Dami advised it was unable to pay the aggregated per diem fines and requested leniency in the form of a penalty “that is more reasonable to the size of [the] business.”

The DWC then made settlement overtures, offering to decrease the fine by nearly half, to

$425,000 (the aggregated minimum per diem fines permissible under section 8-43-409(1)(b)(II)). Dami did not accept the settlement, and instead submitted a brief in furtherance of the petition to review. Dami argued (1) it had “reasonably believed it was in compliance with the statute” at all relevant times; (2) the DWC failed to provide adequate and timely notice of Dami’s noncompliance; (3) because Dami promptly cured its default upon receiving notice, it should be assessed no penalty or at least a much smaller penalty; and (4) the assessed per diem fines were constitutionally excessive in violation of the Excessive Fines Clause of the Eighth Amendment.

The DWC issued an order upholding the fines. Dami appealed to the Industrial Claim Appeals Office (“ICAO”). The ICAO rejected all but Dami’s excessive fines argument. The ICAO remanded the matter to the DWC, directing it to review the constitutionality of the aggregated per diem fines assessed in accordance with the test established by the court of appeals in Associated Business Products v. Industrial Claim Appeals Office, 126 P.3d 323 (Colo. App. 2005). The DWC again concluded the fine was appropriate.

Dami again appealed to the ICAO, which affirmed the DWC’s supplemental order. Dami then appealed to the Court of Appeal. The Appellate Court set aside the assessment of aggregated per diem fines, concluding that DWC abused its discretion by failing to apply the Associated Business Products factors to Dami’s specific circumstances. The division remanded the Order to the DWC for recalculation in accordance with its opinion. Id. The DWC petitioned for certiorari, and the Supreme Court granted the petition.

Supreme Court Analysis

The Supreme Court considered whether the Eighth Amendment’s prohibition on the government imposition of “excessive fines” applies to fines levied on corporations. It concluded it does.

In doing so, the Supreme Court noted the bail clause is necessarily limited to natural persons because corporations cannot be jailed and, therefore, cannot be subject to bail. Similarly, cruel and unusual punishment cannot be imposed upon a corporation.

By contrast, the Supreme Court noted the payment of monetary penalties is something a corporation can do as an entity. Moreover, the government regularly imposes a wide array of monetary penalties, both civil and criminal, on corporations for the purposes of punishing corporate misconduct and regulatory violations.

The Supreme Court concluded when the government imposes these punitive sanctions, it must do so in compliance with the Excessive Fines Clause. The Court found justification to conclude the purpose of the Excessive Fines Clause supports its application to protect corporations even if the other clauses in the Eighth Amendment do not.

Having determined corporations are entitled to assert claims that fines imposed by the government for punitive purposes are excessive in violation of the Eighth Amendment, the Supreme Court next considered what standard a corporation must meet to succeed in such a claim. The Supreme Court held the proper test for determining whether a fine is unconstitutionally excessive is whether it is grossly disproportional to the gravity of the subject offense. See United States v. Bajakajian, 524 U.S. 321, 334 (1998).

Neither the Court of Appeal nor the ICAO hearing panel in this case applied the

United States Supreme Court’s “gross disproportionality” test to evaluate the fines imposed on Dami for its protracted failure to maintain workers’ compensation insurance. The Supreme Court concluded that courts considering whether a fine is constitutionally excessive should consider the defendant’s ability to pay in making that assessment.

Nonetheless, the Supreme Court found that when a fine is imposed on a per diem basis, with each day constituting an independent violation, the evaluation of whether a fine is excessive must be done with reference to each individual daily fine.

Holding and Reasoning

The Supreme Court concluded that the Eighth Amendment protection does apply to corporations.  The Supreme Court held the proper test to assess the constitutionality of government imposed fines requires an assessment of whether the fine is grossly disproportional to the offense for which it is imposed, as articulated in United States v. Bajakajian, 524 U.S. 321, 334 (1998). The Court of Appeal’s ruling was, thus, reversed and the case remanded to the Division of Workers’ Compensation to determine whether the per diem fines at issue are proportional to the harm or risk of harm caused by each day of the employer’s failure to comply with the statutory requirement to carry workers’ compensation insurance.

The Supreme Court concluded the purpose of the Excessive Fines Clause is to prevent the government from abusing its power to punish by imposing fines, and nothing in that purpose or in the text of the Eighth Amendment limits its reach to fines imposed on individuals.

Overall, the Supreme Court held the Eighth Amendment does protect corporations from punitive fines that are excessive. The appropriate test to apply in assessing whether a regulatory fine violates the Excessive Fines Clause is the “gross disproportionality” test. In assessing proportionality, a court should consider whether the gravity of the offense is proportional to the severity of the penalty, considering whether the fine is harsher than fines for comparable offenses in this jurisdiction or than fines for the same offense in other jurisdictions. In considering the severity of the penalty, the ability of the regulated individual or entity to pay is a relevant consideration. And the proportionality analysis should be conducted in reference to the amount of the fine imposed for each offense, not the aggregated total of fines for many offenses.

Takeaway

Not all constitutionality challenges are pursued, but such challenges should be considered. The long-term impact of constitutional challenges on workers’ compensation systems continues to develop. Cases over the past few years have shown that many courts are willing to examine the essential elements and purposes, and to weigh them against the fundamental fairness ensured by state and federal constitutions.

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