On August 26, Governor Brown signed a new law (AB 2883) into effect that limits how certain individuals can be excluded from coverage on a workers’ compensation insurance policy. This new law caught insurers by surprise as it was not publicized and they are now in the process of determining how to implement it. Insurers will be required to send notification of the new law and its requirements to policyholders by no later than November 15, 2016.
Effective January 1, 2017, AB 2883, makes the following changes:
Corporations: Officers/Shareholders must now have a 15% ownership interest in order to be eligible for exclusion.
Partnerships: Only general partners are eligible for exclusion.
LLCs: Only managing members are eligible for exclusion.
The new law would impact corporations that have currently elected to exclude <15% shareholders/officers from WC coverage. The new law will require that effective 1/01/17, these shareholders be included for coverage – subject to a minimum annual compensation of $45,500 and a maximum annual compensation of $117,000.
This could be a significant hardship if a currently-excluded shareholders performs work in the field and will be classified as such under the new law. For example, currently, if a 10% shareholder is excluded and earns $100,000 in annual compensation, there is no WC premium. Under the new law, this employee would have to be included for coverage and assuming an average net WC rate of $7.50/$100 of payroll, the annual premium for this employee would $7,500. This cost would be multiplied times the number of similar shareholders.
Similarly, under a partnership with an appointed “managing partner” only that “managing partner” can be excluded from coverage. With construction entity partnerships, it is most common that all partners are appointed as “managing partners” – but this is not necessarily the case all the time.
Same thing with LLCs. Only the “managing members” can be excluded from coverage – and often all LLC members are appointed as “managing members” (or might be shortly in order to avoid the new law).
The thought behind only allowing “managing partners” or LLC “managing members” to elect exclusion is to prevent entities from appointing employees as non-influential “partners” or LLC “members” in order to avoid WC coverage/premium.
As of January 1, 2017, policyholders will be required to sign a waiver under the penalty of perjury that all excluded individuals meet the new criteria.
We will keep you posted as to future developments but welcome any questions that you may have in the meanwhile.