I have been writing my clients recently that may be affected by Assembly Bill 2883 which made changes to the rules regarding the exclusion from the requirement of workers compensation coverage of owners of the company who are also officers or directors, in the case of a corporation, or managers, in the case of a limited liability company. Starting January 1, 2017, officers, members of the board of directors and managers, while rendering actual service for the corporation for pay, will be covered employees unless the officer, member of the board of directors or manager owns at least 15 percent of the issued and outstanding stock of corporation or membership unit interests and they execute a written waiver of his or her rights under the Labor Code stating under penalty of perjury that the person is a qualifying officer, director or manager. 2015 rules set no minimum ownership percentage for officers, directors or managers that desired to exclude themselves from the requirement of coverage and the associated policy premium.
In addition, the law is written in such a way that it also applies to policies that are in effect as of January 1, 2017, and not just those incepting on or after January 1. In other words, if your policy commenced in 2016, and if you have owners who are claiming this exemption, you will need to bring your policy into compliance at the start of the year.
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 under penalty of perjury a waiver of rights stating that the individual is a qualifying officer or member. The waiver must be filed with the employer’s insurer.
- That a general partner of a partnership or a managing member of a LLC execute a waiver to opt out of workers’ compensation coverage. The waiver must be filed with the employer’s insurer.
- 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 the exclusion.
In attempting to identify a solution to this problem, my research led me to the California Transfer on Death Act. This statute mandates that owners of securities, which includes shares of stock and membership units, be permitted to include in their registration, provisions for transfer of the units in the event of the death of an owner, whether that be pursuant to a Buy-Sell Agreement or to a specified recipient. In order to exempt your ownership interest from the requirement of workers’ compensation insurance, you must own at least 15% of the company. The typical tasks necessary to resolve the issues discussed above include:
Although the new legislation will assist in resolving the perceived fraud whereby unscrupulous business owners would issue fractional ownership interests in their company to employees and appoint them to an officer position to avoid having to pay workers compensation premiums, it created an entirely new problem that has not been well publicized. In that the new law does not permit the business owner to hold their shares or membership units in their living trust to remain compliant with the statute, the individual ownership of the company can result in a probate in the event of the death of an owner, or the inability to appoint a replacement member of the board, officer or manager in the event the owner is incapacitated. The bottom line is that if your shares of stock or membership units in your corporation or limited liability company are owned by your Living Trust, you no longer qualify to be excluded from the requirement of coverage of Workers’ Compensation insurance coverage. As most business owners have health insurance coverage, the added business expense of their coverage under the company’s workers’ compensation policy is a duplicative and unnecessary expense.
- The transfer the ownership interests in the company from the Trust to the individual owner(s);
- Preparation of a Transfer on Death Agreement, including beneficiary designation;
- Update Share or Membership Certificates and Stock Transfer Ledger;
- Preparation of appropriate Resolutions approving the actions above.
If this situation applies to your company and you would like to exclude the owners from your workers’ compensation insurance policy, give us a call, we’re here to help!