Workers' Comp Exemption Bill Moves Through Legislature

SACRAMENTO, CA, Aug. 24, 2017 - A measure that exempts corporate officers and professional corporation principals from being required to carry workers’ compensation policies is moving through the Legislature, but remains very much a work in progress.

IIABCal-supported SB 189, sponsored by Senator Steven Bradford (Dem-Gardena), is intended to fix AB 2883, which was signed into law last year. It has resulted in major unforeseen, burdensome implementation implications to workers’ compensation insurance companies, agents and brokers.

AB 2883 establishes that a person who owns at least 15% of issued outstanding stock may execute a waiver of his or her rights to workers’ compensation coverage. AB 2883 attempted to curtail specific types of workers' compensation fraud.

"It addressed situations whereby employers would attempt to wrongly classify employees as owners or board members in order to skirt workers' compensation requirements, as well as situations where employees opted out of coverage without a formal written waiver and later claimed coverage," IIABCal Lobbyist John Norwood said. "Stakeholders have identified specific challenges to the way AB 2883 impacts certain small businesses, such as partnerships and professional corporations.

"For instance, it required a minimum 15% ownership stake in order to qualify for a waiver," Norwood said. "Professional corporations, such as medical practices, and owners of small, privately held companies have noted challenges with this structure, which in some cases requires them to purchase workers' compensation insurance they are unlikely to claim against."

As approved by the Assembly Appropriations Committee this week, SB 189 changes this ownership threshold from 15% to 10%, or 1% of the issued and outstanding stock of the corporation if that officer’s or member’s parent, grandparent, sibling, spouse, or child owns at least 10% of the issued and outstanding stock of the corporation and that officer or member is covered by a healthcare service plan or a health insurance policy, and executes a written waiver.

The bill also allows members of professional corporations to request to be excluded from workers’ compensation coverage so long as they are licensed and practicing in the professional corporation and the professional corporation maintains health insurance on its employees.

This week’s amendments also provides a grace period so that written waivers that are executed on or after January 1, 2018, and are accepted by the insurance carrier on or before December 31, 2018, are deemed to be accepted by the insurance carrier as of January 1, 2018.

Additional provisions authorize a trustee of a revocable trust that holds a business entity in trust, to the extent the trustee meets the ownership threshold, to opt out of workers’ compensation coverage; provides that a waiver of workers’ compensation coverage can be made effective up to 15 days prior to the filing of the affidavit; and, states that once the employee waives coverage there is a conclusive presumption that the person is not covered by workers’ compensation coverage.

"AB 2883 is an insurer administrative nightmare and the issue area may be around for attempted fixes in future years," Norwood said. "It is anticipated additional professional groups will come forward for an exemption because the current language is not legally applicable."

IIABCal is pursuing all avenues that will lead to a workable resolution. In this regard, IIABCal has successfully incorporated a provision that declares that an insurer, agent or broker has no duty to verify the underlying facts contained in the workers’ compensation waivers.

SB 189 passed the Assembly Appropriations Committee unanimously and is pending action on the Assembly Floor. While it is expected to ultimately reach Governor Jerry Brown’s desk, legislative staff coordinating negotiations between stakeholders has agreed to hold it for some time to see if the workers’ compensation waiver administration burdens can be reduced.

Amends Made To SB 189 (Bradford)

During the time immediately preceding the recess, Senate Bill 189 (Bradford) went through a series of amendments. Entering the summer recess, the bill made the following changes:

(1) Ownership of issued and outstanding shares in corporations was reduced from 15 percent (current law) to 10 percent. This would be effective January 1, 2018.

(2) Ownership interests held in trust were reinstated for purposes of eligibility to execute waivers.

(3) Special rules for professional corporations (PCs) were developed so that owners would not have to meet a specific percentage of ownership. However, PCs owners would have to have health insurance and notify all other owners to execute a waiver. The percentage ownership change and health insurance requirement would be effective July 1, 2018.

(4) An insurer or a producer is under no obligation to verify the accuracy of the waiver.

(5) The person executing the waiver is conclusively presumed not to be covered under workers’ compensation.

(6) An insurer could backdate acceptance of the waiver up to 15 days prior to receipt.

(7) Various provisions were added to coordinate the effective date of new provisions with the inception dates of insurance policies.

Amendments dated August 21, 2017:

Corporations. Effective January 1, 2018, corporate officers or directors may execute a waiver of workers’ compensation rights and benefits if they own at least 10 percent of the issued and outstanding stock of the corporation. This is the general rule. (No change from prior version of bill)

For some corporations, there are different special rules:

(1) Professional Corporations (PC). The owners of a PC no longer have an ownership threshold requirement to execute a waiver, which means any ownership is sufficient. However, the owner must have health insurance and the waiver must be delivered to all PC owners. The PC must also keep a copy of the waiver(s) on file. (Deletes the July 1, 2018 delayed effective date of the ownership threshold and health insurance requirements. Would become effective January 1, 2018 if chaptered)

(2) Family Ownership. An officer/director of a corporation need have only 1 percent of issued and outstanding stock to execute a waiver if that officer’s or director’s parent, grandparent, sibling, spouse, or child owns at least 10 percent of the issued and outstanding stock of the corporation and the officer or director has health insurance. (New Language)

Note that for ownership interests held by family members that would allow an officer/director to have less than 10 percent of issued and outstanding shares to execute a waiver, the language does not say that the ownership by the family members could be held in trust. That would seem to be an oversight.

The language also suggests that an individual family member must own 10 percent, rather than family members cumulatively owning 10 percent. Not sure if that is the intent.

(3) Cooperative Corporations. The officers and directors of a cooperative corporation no longer have an ownership threshold requirement to execute a waiver, which means any ownership is sufficient. However, the officers/directors must have health insurance and the waiver must be delivered to all other officers/directors. The Cooperative Corporation must also keep a copy of the waiver(s) on file. (New Language)

(4) Sole Shareholders. A sole shareholder would no longer have to execute a waiver. The amendments reinstate the law for these shareholders as existed prior to AB 2883 (Insurance Committee) and would make them subject to workers’ compensation rights and benefits only if they filed the document accepting workers’ compensation required by Labor Code Sec. 4151. (New Language)

Partnerships and LLCs. There are no new changes in the substantive provisions from prior versions of the bill.

“Grace Period”. The Leg Counsel digest mentions a “grace period” which really addresses when waivers become effective. For all entities (corporations, partnerships, and LLCs), “…a written waiver that is executed on or after January 1, 2018, pursuant to this subdivision, and that is accepted by the insurance carrier on or before December 31, 2018, shall be deemed to be accepted by the insurance carrier as of January 1, 2018.” (New Language)

The new language would seem to say that anyone can execute a waiver as of January 1, 2018 regardless of policy inception date. This likely would only be an issue for corporations. In other words, if a person who could not execute a waiver prior to January 1, 2018 is eligible execute one on January 1, 2018, s/he could do so regardless of policy inception date and it would be effective January 1, 2018. This could be significantly disruptive.

This language deletes the prior language regarding effective dates for insurance policy purposes.

Waiver valid until withdrawn. Language is retained.

Backdating. Language is deleted, likely due to the “grace period” language.

No duty to verify. Language is retained.

Conclusive presumption. Language is retained.

Ownership held in trust. Language is retained.