New California Workers’ Comp Law on Excluded Employees Causing Headaches

By | October 17, 2016

In advance of a possible headache brewing for workers’ compensation providers, California Insurance Commissioner Dave Jones on Monday notified all workers’ comp insurers writing policies in the state about changes to procedures related to excluded employees created by a new law.

The new rules were created with the passage and signing of Assembly Bill 2883.

AB 2883 provides that all business workers’ comp insurance policies, including in-force policies, will be required to cover certain officers and directors of private corporations and working members of partnerships and limited liability companies that may have been previously excluded from coverage beginning on Jan. 1, 2017.

These provisions seem to have slipped by some insurer groups and others who watch for potentially bad legislation.

“AB 2883 is going to cause significant disruption for workers’ compensation insurers and employers,” Jones said in a statement. “We have issued a notice today to workers’ compensation insurers so that they know what the new law requires of them and we directed insurers to provide notice to employers so they are made aware of the new law. Unfortunately, AB 2883 did not include any language exempting in-force policies or delaying its effective date so as not to impact in-force policies.”

John Norwood, with lobbying firm Norwood & Associates, said not only does AB 2883 present implementation problems for insurers, it presents an errors and omissions issue for insurance agents and brokers, especially with those entities that today do not purchase a workers’ comp policy because only the owners are involved in the business.

“Literally everybody in the industry responsible for legislative issues missed the application issue relative to this bill, yours truly included in that list, and the same with all legislative and committee staff until after the governor signed the bill into law,” Norwood said. “There may be an opportunity to address the application issue early next legislative session but some coverage will be afforded to individuals with in-force policies if and until a fix-it bill can be passed through both houses of the Legislature and signed by the governor.

According to Jones, the Department of Industrial Relations, the American Insurers Association, and the Association of California Insurance Companies, all agree that this change in law applies to in-force policies.

Prior to the passage of the law, officers, directors and working partners were not required to be covered under the business’s workers’ comp policy unless they opted to be covered and were not listed on a limiting and restricting endorsement.

Going forward officers, directors and partners are required to be covered under the employer’s workers’ comp policy unless they meet a narrower definition of excluded employee. Under this narrower definition, officers, directors, and partners can only opt out of coverage by signing a waiver under penalty of perjury and filing the waiver with their employer’s insurer.

Insurance companies are required to identify and provide notice to each employer that may have employees that were previously excluded from coverage and are affected by the new law, and they are required to report the premium and loss experience associated of those who have not chosen to opt of the coverage.

Blake Longo, with Pasadena-based AJLongo Insurance Brokers, shot an email to his clients and business associates on Monday warning them of the changes.

Longo said he’s already been talking to some of his clients about it.

“They’re not happy about the change,” Longo said. “They don’t believe it adds any benefit to them and that it will certainly add extra costs.”

Longo said the changes will also make life tougher on brokers like him, because it will be brokers who businesses will first turn to if the new rules affect them.

“You are delivering the bad news and you’re delivering the additional premium,” he said. “That does not bring smiles to people’s faces.”

According to Norwood, the bill was originally worded to be a bill authorizing a study on paperless systems for the approval of treatment requests in the workers’ comp system.

However, that language was gutted and amended to address the issue of exemptions for officers and directors of corporations, partnerships and LLCs.

The bill’s new language was added because some insureds were allegedly abusing the exemption process under current law by listing everyone in their organization as an officer or director to avoid purchasing workers’ comp, Norwood explained.

“AB 2883 revises the exemption language to permit only officers and directors that that own at least 15 percent of the issued and outstanding stock of the company or an individual who is a general partner or a partnership or a managing member of a limited liability company to be exempt if they execute a waiver under penalty of perjury that they meet one of these qualifications,” Norwood said. “As such, the bill now makes everyone in such organizations unless they are eligible and sign a waiver.”

Longo thinks the 15 percent-threshold will hurt some middle-market business, which is the brunt of his clientele.

“Oftentimes those are the ones hit the hardest,” Longo said.

These companies are often privately held, with one or two owners working in the business, and it’s not unheard of for the business owners to give long-time employees a small percentage in the company to keep them around and reward them for their loyalty.

Using a small meat packing company as a hypothetical example, Longo described a scenario that could significantly drive up costs.

The owners, for example, make the production manager a 5 percent owner, and he would no longer be required to be included in a workers’ comp policy.

The new law takes away that option for the production manager to exclude himself, and because he has less than 15 percent ownership, he cannot opt out.

This could prove costly, because a meat packing company would likely fall into a high class codes, Longo said.

“Say you pay him around $75,000 a year, now you have to pay $11,000 in premium,” he added.

The biggest issue with AB 2883 is that it applies to all workers’ comp insurance policies that will be in effect on or after Jan. 1, 2017, including those policies in force any time after the first of the year.

Katie Pettibone, AIA’s vice president for state affairs, said her group is working with CDI and DIR to help address this.

“Publicly the bill was supposed apply to new policies and renewals after the effective date of January 1, 2017, thus there was no opposition,” Pettibone said. “However, there was ambiguity in the drafting and it appears the bill is going to be broader than just policies written after Jan. 1 or renewals – it will be applicable to in-force policies. Stakeholders have been working with the California Department of Insurance and Department of Industrial Relations to help address this unintended effect.”

Norwood said existing provisions in policy forms from the National Council on Compensation Insurance and the State Compensation Insurance Fund apply changes in law to all policies in force on the day a bill takes effect, unless the bill itself limits application to policies new or renewed on or after the effective date of the bill.

“Generally speaking, bills that pass the legislature during the year become effective at the beginning of the next calendar year,” Norwood said.

So now, corporations, partnerships and LLCs that do not purchase workers’ comp – possibly because they consist of the owners of the organization and have no employees under current law – will be illegally uninsured on the first of the year unless the owners sign and file the appropriate waiver, according to Norwood.


Topics Carriers California Agencies Legislation Workers' Compensation

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Latest Comments

  • November 16, 2017 at 5:28 pm
    Eric Lund says:
    This is yet another example of the terrible legislation being proffered by the State of California to further drive business away from our State. Absolutely ridiculous that an... read more
  • June 23, 2017 at 4:54 pm
    Ray Nicol says:
    How does this bill affect a Nevada Corp. with a foreign Corporation listing in California.We are a freight Broker and we carry a workers comp policy as a convenience for us. W... read more
  • June 6, 2017 at 7:16 pm
    J Crawford says:
    This is a perfect example of business owners taking advantage of the system, therefore the state has to step in and pass another regulation. In the example of the meat packing... read more

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