If you missed the quiet passage of legislation changing California’s workers comp law last summer, you were not the only one.
The fallout from the Aug. 26 signing of Assembly Bill 2883 eventually became the defining topic of discussion during the fourth quarter among insurance agencies, carriers and most notably business owners who now find it more challenging to exclude themselves from their own workers comp policies. Most industry insiders got their first heads-up in mid-October, just a couple months ahead of the Jan. 1 effective date.
At the heart of the bill is a revamping of the definition of an employee within the Labor Code, particularly with respect to the laws governing workers compensation insurance. In a nutshell, the legislation requires all officers, members and partners to be covered under the workers compensation policy unless more restrictive qualifications are met.
To compound the matter, language delaying the application of the bill for in-force policies was omitted from the text. This omission, coupled with the narrower definition of who can be excluded from coverage, caused a massive disruption for the industry as a whole.
Let’s take a look at the old and new rules for exclusion of owners from workers comp coverage:
If your business is set up as a corporation, you must be an officer or director owning at least 15 percent of issued and outstanding stock on Jan. 1, 2017 to qualify for exclusion.
You must also execute a waiver of your rights to workers comp coverage, certifying under penalty of perjury that you are a qualifying officer or director with the requisite stock ownership.
Under the prior version of the Labor Code, an officer or director could be excluded from coverage with any amount of stock, as long as the corporation was tightly held.
The new version of the law is less restrictive in that corporations must no longer be tightly held for officers and directors to qualify for exclusion from the workers comp policy.
Partnerships and LLCs
If your business is organized as a partnership or LLC, you must now be a general partner of a partnership or a managing member of an LLC to qualify for exclusion (no minimum amount of ownership required).
The previous version of the Labor Code excluded all types of members and partners unless an election was made to become subject to coverage.
Members and partners must also execute a waiver of coverage under penalty of perjury.
Taking a closer look
An examination of the text provides additional insight into the changes made by AB2883. For instance, an officer or director who does not render actual services for the corporation for pay would not meet the definition of employee and therefore be excluded on that basis regardless of the amount of corporate stock held.
Likewise, a member or partner who does not receive wages, irrespective of profits, would not meet the definition of employee regardless of whether the individual is qualified for exclusion as a managing member or general partner.
In other words, the employee status of an officer, member or partner is contingent upon pay. In those cases, no waiver of coverage is necessary because the officer, partner or member does not meet the definition of employee.
What led to the passage of AB2883?
The bill was supported by the American Insurance Association and the Association of California Insurance Companies, who contended the election process for opting out of coverage was not clear and led to abuses of the system.
In a handful of cases, certain employers gamed the system by claiming that employees with no real stake in the entity were officers, then excluding them from coverage.
In other instances, employers could allow a full policy period to elapse then request a retroactive exclusion of their officers or owners, effectively using the system to get free coverage for those individuals.
What this means for Central Valley businesses
As is often the case, small to middle-market businesses are experiencing the most devastating impact of the new legislation. Previously excludable individuals are covered as of Jan. 1, and premium for those individuals is accumulating.
In the worst cases, owners who do not perform strictly office work are being assigned to more costly classification codes. Many small businesses are seeing premiums double now that key employees are no longer excludable.
At a minimum, employers who exclude individuals from coverage now have additional paperwork to file with insurance carriers. Some entities have convened roundtable discussions with their insurance agents, accountants and lawyers to restructure corporate shares or reorganize the business to accommodate for continued exclusion of key employees.
Nelson Aldrich is underwriter with Winton Ireland, Strom & Green Insurance Agency with headquarters in Modesto. You can reach him at [email protected]