Do I HAVE to Buy Workers’ Compensation Insurance?

There are a variety of expenses associated with running your own business.  From inventory to lease payments to taxes, there are many expenditures included in your total overhead.  In California, workers’ compensation needs to figure into this computation.  Especially in the case of small businesses, many business owners wonder if it is necessary to purchase workers’ compensation insurance, as the cost can be extensive.  It is very important for business owners to understand the different permissible options under California law, as well as the consequences of not acting pursuant to the relevant regulations.

The option that is most common is purchasing a workers’ compensation insurance policy.  Pursuant to California Labor Code § 3700, a business must provide workers’ compensation benefits to its employees if it employs one or more employees.  Recent changes to the law provide that executive officers and directors of corporations are no longer exempt from the requirement that all employees must be covered, with some limited exceptions.  California Labor Code § 3351 defines “employee,” and it should be noted that “every person in the service of an employer under any appointment or contract of hire or apprenticeship, oral or written, whether lawfully or unlawfully employed” is included under the definition.  Moreover, other people such as minors, handymen, aliens, nannies, and several others are also included.

Self-Insurance can also be an option for some businesses.  Businesses or employers who want to be self-insured must fulfill very particular financial requirements.  In addition, the business must apply to the Office of Self-Insurance Plans for Approval.  The business or employer must provide 1) three calendar years in business in a legally authorized business form; 2) three years of a certified, independently audited financial statements; and 3) acceptable credit rating for three full calendar years leading up to the application.  Employers should note that subsidiaries must apply separately.

If you choose not to provide workers’ compensation insurance, the consequences could be severe.  Not only could you and your business face stiff fines, there is a possibility you could even face criminal prosecution.  The first offense could result in a fine of $10,000 and a year and jail, and subsequent offenses carry even stiffer penalties.

If you have questions about whether you are required to carry workers’ compensation insurance for your business, contact us today.  We can discuss your business and what we can do to protect its future.

Who Can Be Excluded From Workers’ Compensation Insurance?

California law provides that businesses must carry workers’ compensation insurance for their employees, and there are sometimes severe criminal and civil penalties for failure to comply with this requirement. Moreover, workers’ compensation is designed to provide remuneration to those sustaining work-related injuries. However, there are some exceptions to both the requirement that all employees must be covered by workers’ compensation insurance and also that any worker sustaining a work-related injury is eligible for workers’ compensation benefits.

Some business owners may decide to exclude him or herself from coverage under their workers’ compensation insurance. As of January 1, 2017, in order to qualify, the excluded person must be an officer or member of the board of directors and own at least 15% of the outstanding stock of the corporation. In addition, it is also possible for general partners or managing members of a limited liability company to be excluded from coverage. It should be noted, however, that to be excluded, the excluded person must execute a particular type of affidavit.

It is also possible for employers to opt out of purchasing workers’ compensation insurance and instead be self-insured. The employer must be certain criteria in order to qualify for this option. Specifically, the employer must 1) have $5 million dollars of shareholder equity; 2) have an average net profit of at least $500,000 for each of the last five years; and 3) have certified, independently audited financial statements. If a company meets these benchmarks, it may apply to have be self-insured for workers’ compensation insurance instead of purchasing insurance. Each subsidiary of the company must independently apply.

Not every person who works for a company and sustains an injury is eligible for benefits under the workers’ compensation insurance of the employer, regardless of whether that employer is insured through a company or is self-insured. The most notable exception to this are workers who are actually independent contractors. Independent contractors are not covered by workers’ compensation insurance and even if they sustain an injury while performing a work-related task, they are not eligible for benefits. The test for whether a worker is an independent contractor is whether an employer has the right to direct and control how the work is performed, and the means by which it is accomplished. It is important to note that the employer’s classification is not controlling as to whether the employee is an independent contractor; the determination is made after examining the worker’s function and control over his or her work activities.

Other work-related injuries may also be excluded. If the injury was intentionally inflected by the employee, or was sustained while engaging in horseplay,  the injury may not be covered.

If you have questions about whether you are required to cover certain individuals on your workers’ compensation insurance or if certain injuries will be covered under workers’ compensation, contact me today at (714) 516-8188. We can review your business together to make sure it is in compliance and discuss any claims you could be facing.

Who is Required to Maintain Workers’ Compensation Insurance in California?

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.

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