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I am a California Small Business Owner.
Am I Required to have Workers' Compensation Insurance?



Note: This blog post, originally published in March 2015, has been revised to include a brief discussion of whether an employer must maintain workers' compensation insurance for independent contractors. 

Some Background - What is Workers' Comp Insurance All About?

Workers' Compensation Insurance is a social bargain that was struck in California (and in most other states) at the beginning of the twentieth century. As with all bargains, there is a trade-off involved. Employers are required to maintain no-fault insurance against injuries and work-related illnesses that occur in the work place, and in exchange employees agree not to sue their employers should such injuries or work-related illnesses occur. In California, the workers' compensation system is managed by the Division of Workers' Compensation, which oversees the administration of claims and operates a workers' compensation court system that helps resolve disputes. Workers' compensation benefits include medical care, temporary disability benefits, permanent disability benefits, supplemental job displacement benefits (for necessary retraining or skill enhancement), and death benefits.

Am I Required to Have Workers' Comp Insurance for all my employees?

Yes. California law requires that all California employers maintain workers' compensation insurance, even if you have only one employee, and even if that employee works part-time or is temporary. The only exception is for a sole proprietor of a business who is also the only employee of the business. (However, in the special case of roofers, even a sole proprietor with no other employees is required to have workers' compensation insurance). An out-of-state employer may be required to maintain workers' comp insurance if an employee is regularly employed in California or if a contract to engage in employment is entered into in California.
 
What about Independent Contractors - Am I Required to Have Workers' Comp Insurance for them?

The short answer is "no," but there is a caveat. Be sure that the person in question is in fact an independent contractor and not an employee. Ultimately it is the California Division of Labor Standards Enforcement (DLSE) or the California courts that will determine whether a person is properly treated as an independent contractor or as an employee. Your determination of that status, even if you have the person in question sign an agreement stating that he/she is an independent contractor and not an employee, can be challenged. There are a number of reasons why an employer may prefer to treat someone performing services for the employer's business as an independent contractor and not as an employee. For example, payroll taxes need not be paid on an independent contractor; laws and rules pertaining to overtime pay and other workplace protections will not apply; and the employer does not have to maintain workers' comp insurance for independent contractors. But, again, caution is appropriate. On the question of whether a person is an independent contractor or an employee for workers' comp purposes, the DLSE will make the final determination if the status is challenged. (Other agencies may make the final determination for other purposes, including employee-related taxes). In determining whether a worker is an employee or an independent contractor for workers' comp purposes, the DLSE is required by law to start with the presumption that the worker is an employee, but that presumption is rebuttable, and the determination will ultimately depend upon a multi-factor "economic realities" test. This standard is too complex to be discussed here, but the primary factor that the DLSE or the courts will look at is whether the employer (or the principal) has control or the right to control the worker both as to the work done and the manner and means under which the work is performed. In conclusion, you are not required to maintain workers' comp insurance for independent contractors. But be cautious about too aggressively treating workers as independent contractors rather than employees.

What Happens if I Don't Have Workers' Comp Insurance?

The penalties can be severe. Failure to have workers' comp insurance is a criminal offense, punishable by a fine of not less than $10,000, imprisonment of up to one year, or both. In addition to criminal penalties, the state may issue fines of up to $100,000 against employers who illegally fail to provide workers' comp insurance. The state may also issue a stop order, preventing an uninsured employer from using workers until proper insurance is obtained. Finally, if your employee is injured or gets sick because of work and the employer is not insured, the employer may be required to pay all bills related to the injury or illness. And if an employee goes before the Workers' Compensation Appeals Board and is found to have been injured when the employer did not have the required insurance, the Board may order additional penalties of $2,000 per uninsured employee. In short, the penalties for failure to maintain workers' compensation insurance are serious. Please don't place your business at risk by failing to be insured.

Where Do I Get Workers Comp Insurance? 

You can purchase workers' compensation through an insurance broker or agent from any of the privately licensed insurance companies authorized to sell workers' comp insurance in California. A list of authorized insurers can be found at the California Department of Insurance website, or you can contact me for information on insurers and with other questions you may have about coverage. In analyzing different policies from different insurers you will want to consider costs, of course, but also services provided, ease of access to adjusters and handling of claims, the insurer's familiarity with your industry, the doctors in its network, and other factors. An agent can help you weigh all of these factors. You will find my contact information at the bottom of this post. If you cannot find an insurer who is willing to cover your business, the State Compensation Insurance Fund is an insurer of last resort and is required to provide you with coverage. It is theoretically possible to self-insure, but the standards are strict (net worth of at least $5,000,000, net income of at least $500,000 per year, and a security deposit) and for practical purposes self-insurance is out of the reach of most small businesses. In some cases, groups of similarly situated employers in the same business line can pool resources to self-insure, but administrative requirements (in addition to financial requirements) present real difficulties to group self-insurance.  

Conclusion

Unless you are the sole proprietor of your business and you are its only employee, you must maintain workers' compensation insurance. Don't try to operate without it. In shopping around for coverage, do your due diligence. Check with friends and colleagues who operate small businesses, especially in the same field as your own. If you are a member of a trade association or a chamber of commerce, those groups might have some suggestions for you. You can also find useful information on various website set up by the California Department of Insurance. And, of course, feel free to contact me. I am a licensed California insurance agent and can help you find the workers' compensation coverage that best suits you and your employees.

Alex Pfeifer
Pfeifer Insurance Brokers
650 762-8070
alex@pfeiferins.com
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