Businesses in California are required to maintain workers’ compensation insurance. Under California Labor Code Section 3700, any business that employs one or more people must carry this insurance. This includes family members or friends of the owner who are employed by a business. There can be heavy civil and even criminal penalties for failing to maintain workers’ compensation insurance as is required, so it is important to understand if you and your business are required to carry it.
Some business attempt to classify workers as independent contractors instead of employees. It is vital that you make sure your independent contractors really do fall into that category. Merely calling them “independent contractors” does not mean that is how the law will consider them. If they are employees, then you are required to carry workers’ compensation insurance. Even if a friend or family member is only working for your business for a few hours a week, or on some other limited basis, they are likely an employee for purposes of needing workers’ compensation insurance.
It is also possible for a sole proprietor to purchase workers’ compensation insurance to provide extra coverage for him or herself. If this is the route you are taking, this is an issue that needs to be disclosed to your insurance carrier, and it is possible you will need to pay a different type of premium. Other viable options for a sole proprietor could include purchasing health or disability insurance.
Directors and executive officers of a corporation present a new set of facts. These people must be included in workers’ compensation insurance coverage. The only exception to this is if the corporation is fully owned by the directors and executive officers. In such a case, they are allowed to be excluded from workers’ compensation insurance, if the executive owns 15% or more of the corporation. This is an issue that directors and executive officers should discuss with their insurance broker before deciding to opt out.
An alternative to purchasing workers’ compensation insurance from a broker is to be self-insured. Self-insurance requires approval from the state. It also requires a net worth of five million dollars, net yearly income of $500,000, and a security deposit.
If you have questions about whether you need to carry insurance, I would value the opportunity to discuss the issue with you. Contact me at (714) 516-8188 or email [email protected] to set up a consultation.