Executive Opt Out Rule

The general overarching rule in California is that employers are always required to carry workers’ compensation insurance to cover their employees in case of injury on the job. There are exceptions, however, such as if the business is self-insured. With the new year, some of the exceptions have changed. One such example is what is referred to as the “executive opt-out rule.”

Before 2017, the executive opt-out rule was that certain high-level officials in California businesses had to affirmatively opt-in to workers’ compensation coverage. In other words, they had to take action in order to be covered. The new rule expands their coverage somewhat. It reverses the previous position, and states that if an executive does not want workers’ compensation coverage, he or she must affirmatively opt-out of coverage. This rule does not include any “high level” employee. The employees covered under that rule are corporate officers or directors who are the sole shareholders of the business. It also covered working members of a limited liability company or a partnership. The new rule, which is found in AB 2883, states that as of January 1, 2017, all officers or members of boards of directors who are employees of a company must be covered by workers’ compensation insurance, as any other employee. The only exception to this is if the officer or member of the board owns at least 15% of the outstanding stock for the corporation, and also executes a sworn statement that he or she is eligible for the exemption of workers’ compensation insurance coverage. Moreover, working members of a limited liability company or partnership who receives wages from that limited liability company or partnership may also qualify for the insurance exemption. In order to be exempted, he or she must 1) be a managing member of a limited liability company or a partner in a partnership, and 2) execute a waiver, just as the members of the boards of directors. This waiver is only effective once it has been signed and received by the workers’ compensation insurance company.

The general aim of this law is to expand those who are covered under workers’ compensation insurance in the state of California. It prevents owners of small businesses from giving an employee a false title in order to avoid providing workers’ compensation insurance for those employees, as was possible under the old rule.

These rule changes could have a big impact on your business. If you have a question about your responsibilities under the new law, contact me today at (714) 516-8188. We can discuss your business and how to make sure you are in compliance.

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