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.

Bankruptcy and Uninsured Claims

All businesses are required to carry workers’ compensation insurance for their employees in California, with few exceptions. If a business fails to carry such insurance and a worker sustains a work-related injury and successfully receives an award for said injury from the WCAB, the worker can seek payment from the Uninsured Employers Benefits Trust Fund (UEBTF or UEF). The Uninsured Employers Fund will then seek to recoup the costs paid to the employee from the uninsured employer. When the Uninsured Employers Fund is seeking to recover those costs paid against a business which has filed for bankruptcy protection, the question becomes whether that debt is dischargeable by the employer in their bankruptcy.

The controlling case in this issue is In re George, 361 F.3d 1157 (9th Cir. 2004). In that case, the couple declared Chapter 7 (discharge) bankruptcy. Later, the UEF attempted to file a lien against them for funds paid out to an injured worker. They disputed the lien in their bankruptcy case, as they had received a discharge. The UEF  argued that the debt was not dischargeable. The Court disagreed, and ruled that debt to the Trust Fund for injury to an injured worker is dischargeable in bankruptcy.

However, there are actually two types of bankruptcy for businesses: liquidation (or Chapter 7) bankruptcy, and reorganization (Chapter 11) bankruptcy. In a Chapter 7 bankruptcy, your business gets a “clean slate” and all assets are completely liquidated to help pay off the debts against your business. However, in Chapter 11 bankruptcy, your debts are reaffirmed and your business will be put on a payment plan. Chapter 11 is more common, as not all businesses will be eligible to declare chapter 7 bankruptcy.

If your business is has a lien from the UEF or a pending claim from an injured worker, the important next step is to attempt to negotiate down the amount of the lien with the UEF. As it is more likely that your business will be in Chapter 11 bankruptcy and will have to pay off all debt, it is an obvious benefit to make sure that there is less debt and the lien is as small as possible.

I have experience in dealing with the Uninsured Employers Fund in the context of helping my clients negotiate down debts. If you are facing a lien or judgment from the UEF, contact me today at 714-516-8188 to discuss your options in negotiating your lien.

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