January 1, 2017 Changes to Employees Excluded from Workers’ Compensation Coverage: Now the Boss May Need Coverage Too
California Assembly Bill 2883 has introduced significant changes into who is subject to coverage under workers’ compensation policies in California. The bill amends California Labor Code § 3351″Employees” and § 3352 “Persons excluded from definition of employee.” Beginning January 1, 2017, officers and directors of private corporations, as well as certain members of limited liability companies (LLC) and partnerships are required to be covered under the employer’s workers’ compensation policy.
Previously an officer, director, or partner would have to opt-in to the workers’ compensation coverage of the employer. This was often not done as it could represent a significant cost to the employer, particularly where an employer classification meant a high workers’ compensation rate.
California Assembly Bill 2883 changed that by removing many employees who are officers, directors, or partners from those who may be excluded from coverage. There remains a narrow opt-out procedure which requires that the officer, director, or partner sign a waiver under penalty of perjury that they are opting out of coverage. However, this waiver must be submitted to the employer’s insurance carrier who must also approve the waiver.
Those who may elect to opt-out is further limited depending on the type of business structure. To opt-out, an officer or member of the board of directors of a quasi-public or private corporation must own at least 15% of the issued and outstanding stock of the corporation. (CA Lab Code § 3552(p)). To opt-out in a partnership or LLC, the individual must be a general partner. (CA Lab Code § 3552(q)). To opt out in an LLC, the individual must be a managing member of the LLC. (CA Lab Code § 3552(q)). This further limits those eligible for the opt-out.
It is important to note that there is no grandfather provision to this change. The new requirements now apply to the previously excluded class of officers, directors, and partners, on all currently in-force policies. On October 17, 2016, the Department of Insurance issued a notice to all insurers with guidelines and expected actions to be taken by the insurance carriers. Where the change in the law affects current policies then carriers should have already notified their insured of the changes.
However, the law also affects businesses which previously carried no workers’ compensation coverage because their “employees” where all previously excluded as officers, directors, or partners. Those individuals may no longer be excluded under the revisions to Labor Code § 3351 and § 3352. If workers’ compensation coverage has not been secured for those employees whose excluded status has changed, the employer may now be an illegally uninsured employer. If they have not already, any employers with “employees” who were previously excluded should immediately take steps to ensure that all proper coverage is in place.