The Division of Workers’ Compensation diligently polices compliance with California law that requires all employers, no matter how small, to cover their employees with a workers’ comp policy.
Many small business owners make the mistake of not securing a policy after they hire their first employee. Some wrongly believe they need at least five employees before they need to secure coverage.
But in California there is no minimum and if you go without coverage and an employee is injured on the job, your firm could be held liable for all of the medical costs and any lost pay from missing work.
Also, if you are taking on independent contractors and they are primarily working for you, under California law you maybe should be classifying them as employees.
We hope in this article to clear up any confusion you may have about workers’ compensation if you are a small employer.
The hypothetical
If you are running your own business, you are not required to purchase workers’ compensation coverage for yourself. The same holds true if you are a sole proprietor and you work with your spouse in running the business.
You can cover yourself, though. In California, workers’ comp is optional where the partners of a partnership (or sole shareholders of a corporation) are the only ones performing work.
However, there are benefits to being covered under workers’ comp. If either of you were to get injured while working at the store, you could receive benefits to pay for your medical bills and for time off work.
But what if your nephew comes to work for you over the summer? Are you required to cover him for workplace injuries?
Yes. First off, even though your nephew is a family member, he is still considered your employee. In California, an employee is anyone that you “engage or permit to work.”
As a result, you should treat him in the same way that you would treat someone that you hired through a formal job application process.
You might be thinking: Can’t I avoid getting worker’s comp insurance if I classify my nephew as an independent contractor? While it’s true that you don’t need to have workers’ comp insurance for independent contractors, it is unlikely that your nephew would qualify as one.
To be independent contractors under California’s “ABC test,” workers must (A) work independently, (B) do work that is different from what the business does, and (C) offer their work to other businesses or the public. All three conditions must be met.
In this case, because your nephew is working at your shop, under your supervision and according to your rules, he will probably be considered an employee.
The penalties
In short, California law requires any business with one or more employees to carry workers’ comp insurance. There are serious consequences for failing to have the required coverage.
Here is the list of woes that you could face:
- Misdemeanor — Operating without workers’ compensation insurance is a misdemeanor in California, according to California Labor Code section 3700.5. This crime is punishable by fines of up to $10,000, or by imprisonment in a county jail for up to one year, or both.
- State fines — The state can impose fines on your business in addition to the criminal charges. These can range up to $100,000 for an illegally uninsured business.
- Stop orders — If the Division of Labor Standards Enforcement determines your business is operating illegally without workers’ compensation insurance, it can issue a stop order against your business and prohibit you from using employee labor until insurance is secured.
Failure to act on the stop order is punishable by imprisonment in a county jail for up to 60 days and/or by a fine of up to $10,000. - Additional fines — State Labor Code section 3722(a) states that the Division of Labor Standards Enforcement will impose a penalty of $1,000 per employee on payroll at the time a stop order is issued and served, up to a maximum of $100,000.
- Workers’ Compensation Appeals Board — If a claim goes before the Workers’ Compensation Appeals Board and your business is found to be illegally uninsured, you may be assessed further fines up to $10,000 per employee on payroll at the time of injury, with a maximum penalty of $100,000.
- Employer liability — In addition to all the fines and penalties, your business is fully liable for all medical costs and bills relating to an employee’s illness or injury if you operate without workers’ compensation insurance.