If you've recently partnered with an associate or a group of directors to form your own business incorporated under California's laws, you may have assumed that workers' compensation coverage would only become relevant once you and your partners hired your first employees.
However, a recent change to California's workers' compensation laws could require you to carry workers' compensation coverage on your fellow owners—and yourself—or risk liability. What are your rights and responsibilities under this law, and what can you do to minimize the risk of loss to your fledgling company? Read on to learn more about protecting yourself (and your business) following this statutory change.
What changes were recently made to California's workers' compensation laws?
Assembly Bill (AB) 2883 was enacted during the most recent legislative session. This law requires all business workers' compensation insurance policies—including policies that are currently in effect—to cover officers, directors, and other working members of limited liability companies (LLCs) and limited liability partnerships (LLPs) who were previously exempted from these coverage requirements.
In general, California businesses and employers have been required to carry workers' compensation insurance only on their employees. This insurance is designed to cover the costs associated with an on the job injury or illness, which can include everything from medical expenses and lost wages to pain and suffering damages.
Because workers' compensation policies are created to benefit the worker (by ensuring he or she will be compensated for injuries incurred at work) and the employer (by shifting the risk of these costs to a third party insurance company), lawmakers previously saw little reason to require employers to cover themselves or their partners, instead allowing businesses to self-insure for these claims. This has changed with the most recent legislative session.
What workers' compensation coverage are you required to carry as a California business owner?
One significant criticism of AB 2883 was that it made no provision for policies currently in effect—which could mean that business owners may go to sleep one evening well within the bounds of the state's workers' compensation laws and wake up the next morning in violation of these laws. Indeed, some policies even restrict coverage for business principals and owners, which could leave entrepreneurs scrambling for additional coverage to remain in compliance with state law.
Many business owners and lobbying groups have petitioned for an exemption for in-place policies, which would give these businesses some additional time to find (and fund) a new policy or make the necessary personnel or structural changes so that a new policy was no longer required.
However, it's unclear whether the California Assembly intends to delay implementation of this law even in response to the volume of complaints, and as it stands today, business partners and others who were previously exempted from workers' compensation policies are required to maintain coverage.
Although an insurance agent can help you find a policy that will work for your needs and budget among a multitude of options, you may also want to consult an attorney to determine exactly how this law could impact your specific business and partnership structure. You may find that, by simply amending your bylaws or altering the way profits are distributed, you'll be able to again exempt certain principals from coverage, lowering your costs without adding any liability risks.
For example, a business that has several partners in name only (whether to carry on a family name or assist with other tasks) may be able to remove these names from the legal partnership rolls without impacting business operations or requiring these individuals to be added to an existing workers' compensation policy.
To learn more about workers comp and how it relates to your business, contact services such as Shaw Leslie Law Office.