New Coverage Rule for Workers’ Compensation in California

The New Year brings with it resolutions, football games, and of course, the implementation of new laws in California. In fact, California enacted 900 new laws for 2017, and one of those will increase costs for many businesses in the state. In Assembly Bill number 2883, the state government amended the Labor Code to increase the number of people who must be covered under workers’ compensation insurance.

While increasing the number of people covered by workers’ compensation benefits sounds like a good idea, it may end up becoming an unnecessary and detrimental cost for many businesses. For example, those who will be forced to pay for workers’ compensation insurance under the new law do not necessarily want or need its coverage. Such individuals include partners in medicine, law, and other professional services that feel workers’ compensation benefits will not outweigh their costs. The new law will also increase costs for corporate officers, principals, and other high-level employees of companies, including board members and directors.

Purpose of New Rule

Before this amendment, any individual falling under the statutory definition of “employee” was required to be protected under workers’ compensation insurance. Employee was defined broadly, and included officers and board members of quasi-public and private corporations, but the Labor Code also provided important exceptions. For example, officers and directors of private corporations who were company shareholders were not required to be covered. This included partners in companies that were owned by the partners themselves.

The purpose of the new law is to increase coverage and require companies to provide benefits to more employees by limiting statutory exceptions. In fact, the only coverage exception under the new law applies to owners, directors, and officers of companies who:

  • own 15% or more of the company; or
  • are general partners or managing members of a limited liability company.

Even these individuals, however, are not automatically exempt from the new law. To become exempt, such high-level employees will have to execute a written waiver of the rights afforded.

The reason why the legislature made the coverage rule so strict under this new law is not entirely clear. There may have been some employees who were slipping through the cracks of coverage under the old law, but using such a heavy-handed approach will become a costly headache for many businesses. It will particularly upset those having to pay for new coverage that do not want or need this coverage.

Cost to Businesses

The cost of this law is significant, particularly because of the cost of workers’ compensation in California. While the national median is $1.85 per $100 of payroll, California has the highest workers’ compensation costs in the nation, at approximately $3.48 per $100 of payroll. Accordingly, insuring a company’s directors and officers who make large amounts of money is going to be even more costly. Thus, the implementation of new coverage under this law will inevitably lead to big costs for many businesses down the road.

As you contemplate what your company’s needs are regarding compliance with this new coverage rule and other new laws, consider contacting us at the Royse Law Firm. Our team of employment and labor law specialists will be able to help you execute the waivers required to exempt high-level employees from workers’ compensation coverage, as well as advise you regarding further compliance matters. Contact us today.

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Roger Royse

Roger Royse, the founder of the Royse Law Firm, works with companies ranging from newly formed tech startups to publicly traded multinationals in a variety of industries. Roger regularly advises on complex tax structuring, high stakes business negotiations and large international financial transactions. Practicing business and tax law since 1984, Roger’s background includes work with prominent San Francisco Bay area law firms, as well as Milbank, Tweed, Hadley and McCloy in New York City.
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