A new law has made changes to the officer exclusion for workers’ compensation in California but it could cause problems for policies that do not incept on Jan. 1.
Starting in 2017, an officer can be only excluded from workers’ comp coverage if he or she owns 15% or more of the company’s stock. That’s changed from the current rules that set no ownership levels for officers and directors that want to claim a workers’ comp exclusion, which has created confusion as well as an opportunity for fraud.
However, the law is written in such a way that it also applies to policies that are in effect as of 2017 and not just those incepting on Jan. 1. In other words, your policy incepts at another point in the year, if you have owners or officers who are claiming this exemption, you will need to bring your policy into compliance before the start of the year.
Current law
To be eligible for a workers’ comp exclusion:
- The employee must be an executive officer of the corporation (president, vice president, secretary, assistant secretary, treasurer, assistant treasurer, for example).
- The employee must own some stock in the corporation.
- The company must be a “closed corporation.” That means that all of the company stock must be owned by the executive officers and directors, and no one else.
The problem with current law
The election process to opt out of coverage is not very clear under current law. Beyond one limited statutory reference and very little regulatory guidance, insurers and LLCs are left to figure it out for themselves.
The Association of California Insurance Companies, one of the supporters of the bill – AB 2883 – argues that this lack of clarity has led to abuses that have hurt injured workers and driven fraudulent activity.
There have been cases of some companies making a janitor the “vice president of janitorial services” in order to avoid paying for their workers’ comp coverage.
What’s new for 2017
AB 2883 requires:
- That an officer or member of the board of directors own at least 15% of the stock of the corporation in order to opt out of workers’ compensation coverage.
- That the officer or member of the board of directors sign a waiver stating that the individual is a qualifying officer or member.
- That a general partner of a partnership or a managing member of a LLC execute a waiver to opt out of workers’ compensation coverage.
- That with this 15% ownership requirement, there can never be more than six people excluded.
- That the waiver will remain in effect until a written withdrawal is received by the insurance company, and waivers are not transferable to a new insurance company.
- That grantors of revocable trusts are no longer deemed to be shareholders and will not qualify for exclusion.