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Changes to CA Workers’ Compensation Law: Assembly Bill 2883

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Workers’ compensation insurance exists to protect employees who suffer job-related illnesses and injuries. After suffering such an incident, an employee files for workers’ compensation to cover the costs of medical care and wages lost during time the employee must spend out of work. The state of California dictates that every employer must carry workers’ compensation insurance, even if the company only has one employee.

Workers’ compensation insurance premiums are largely considered a necessity of doing business, but the passing and signing of Assembly Bill 2883 into law has some employers and members of the workers’ compensation insurance industry worried.

Assembly Bill 2883

The recent passage of Assembly Bill 2883 includes some significant changes to the way California Workers’ Compensation laws function. Beginning January 1, 2017, all workers’ compensation insurance policies must cover several types of employees and individuals who were previously exceptions. Before AB 2883 passed, workers’ compensation insurance laws did not require that most directors, company officers, and partners be covered.

The definition of an exempt employee has been narrowed drastically in an effort to provide workers’ compensation benefits to more employees. To qualify as exempt, partners, company officers, and company directors must refuse workers’ compensation coverage by filing a waiver with their company’s insurance provider.

Why Was This Law Created?

Under previous workers’ compensation laws, a company’s workers’ compensation insurance policy only needed to cover certain types of employees. Typically, company directors and officers were exempt from the workers’ compensation requirement, and some companies went so far as to list every employee as some type of director or officer to avoid paying for workers’ compensation.

The new law is expected to result in higher premiums for workers’ compensation insurance policies, which is not good news for business owners. Many think this change offers no direct benefit and simply compounds the cost of existing insurance policies. The new law requires any officers, partners, or directors to be covered unless those individuals own no less than 15% of the company’s stock. General managing partners of a limited liability company also would be exempt. However, to obtain this exemption, those individuals must execute the necessary waiver.

Critics of the new law say that the 15% threshold is going to hurt some middle-market businesses, most of which are privately owned by one or two founders. In many of these companies, long-term employees hold a percentage of the company’s stock. Previously, anyone owning a percentage of a company would be exempt from workers’ compensation coverage. Now, anyone who owns less than 15% must be covered. This means that employers must pay a much higher premium for these employees, because they typically earn higher salaries.

Originally, the law was supposed to apply only to any policies created or renewed after January 1, 2017. However, during the drafting process, the wording defined a much broader range of policies and will affect those in force as of January 1, 2017. This was an unintentional effect, and state legislators are working to address this discrepancy. Unless the law is altered to state clearly that it affects only new policies and renewals made on or after January 1, most of the corporations, LLCs, and partnerships that do not currently have workers’ compensation insurance will be defined as uninsured.

The effects of this law remain to be seen, but it appears as if state lawmakers are working toward restructuring it to reduce the burden it places on currently uninsured companies. Many worry that the new classification system for determining exemptions will cause undue strain on growing businesses and force them to restructure their companies or shoulder the additional premium costs.