Does My Business Need to Pay for Workers Compensation in California?

Generally, your California business will need to have workers comp insurance that covers all employees, but these regulations can get incredibly nuanced and tend to change on a regular basis.  For example, the California legislator has made some notable changes to their workers compensation regulations through two separate 2017 bills. These bills redefine the term “employee”, and consequently affect who’s included in a California employer’s workers comp coverage.  

When it comes to workers compensation, employees can either be excluded from or included in the state-mandated insurance coverage. This determination isn’t made by business owners or managers; whether or not an employee is excluded is determined by state-specific regulations.  

As a business owner in California, you should always assume that your employees (including yourself) must be covered by workers comp insurance, then follow-up by consulting an experienced attorney or qualified insurance professional. Even in small businesses or those that are considered “safe” work environments, workers compensation insurance is probably required. Again, always assume the insurance is required, then consult a knowledgeable professional. The penalty for not carrying insurance can be devastating, especially for small businesses.  

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What is Workers Compensation?

In brief, workers compensation is a type of state-run insurance coverage that’s meant to protect employers in the case of a workplace-related illness, injury, or death. In the event of a claim, the workers comp insurance will reimburse the claimant for lost-wages and medical expenses. In return, the claimant is generally required to forfeit their right to sue the employer.  

Premiums for workers comp are paid by employers to the state (and in some instances, the federal government as well). The exact premium rates depend on a number of factors, such as the type of work, the gross payroll, and the employer’s previous record of worker injury/illness.

Workers comp insurance is largely mandatory for U.S. employers, meaning that owners are obliged to make regular premium payments to a private insurer or a state-fund. Since some types of employees rarely claim workers comp, many businesses make continued premium payments with no direct return.  In other words, workers comp can be a notable business expense with no foreseeable benefit for certain types of employers.

For this reason, owners are always looking to claim some workers as “excluded” from workers compensation coverage. Importantly, the definition of an “excluded” employee varies dramatically state-by-state.  

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Which Employees can be Excluded According to California Law?

The California legislator has recently redefined the term “employee”, and by doing so, consequently redefined which employees are excluded from workers compensation coverage. These changes largely affect any California businesses that includes or excludes high-level employees (such as board members, directors, managing members, general partners, or officers) from their workers comp coverage.  

Namely, the new legislation will automatically include these high-ranking individuals in the workers comp coverages and the resulting premium calculations. These employees, however, can opt out under certain circumstances and with the correct documentation. For example, a qualified board member can file a waiver of coverage to be excluded from the business’s workers comp coverage and its subsequent premium calculations, so long as the member owns at least 10% of the stock and is covered by a separate health care policy.

This isn’t the only situation where high-level employees can opt out. Pursuant to the California labor code, the following individuals can be excluded from coverage:

• Officers and directors who own at least 10% of the stock and are covered by a separate health insurance policy
• Officers and directors who own at least 1% of the stock, are covered by a separate health insurance policy, and whose parent, grandparent, sibling, spouse, or child owns at least 10% of the company stock
• An owner and practitioner of a professional corporation who is covered by a separate health insurance policy
• Officers or directors of a private corporation who are the sole shareholder
• A qualified general partner (in a Partnership) or qualified managing member (in an LLC)
• Sole proprietors that don’t employ any workers

Under these circumstances, qualified employees can exclude themselves by waiving their rights (in writing, of course) under the California Labor Code, removing themselves from the state-mandated coverages and the premium calculations. Other than these exceptions, all other employees are required to be covered by workers compensation insurance provided by a commercial insurer or by the state-administered fund.

Importantly when it comes to workers compensation, California has relatively few exceptions compared to other states. For example, some states excuse businesses with less than three workers, while others have special rules for farm-workers or construction companies. Generally, all working Californians are subject to workers comp coverage. In other words, paying workers comp is generally unavoidable in California, with the exception of high-ranking employees, which—in accordance to the 2017 laws—can be excluded under certain circumstances and with the correct documentation.

It’s critical to know the local regulations, as they differ state-by-state and the consequences for failing to carry compulsory coverage can include monetary penalties or even criminal charges.  For general partners, LLC managing members, directors, or corporate officers, the changes to California labor law will likely affect you. It’s strongly advised that you speak with a knowledgeable attorney to ensure you’re in compliance with these new regulations.