Rules for Owners Who Want Coverage Exemption

IF YOU OWN your business and have employees, you are likely exempt from having to cover yourself under your workers’ compensation policy in California.

But what if you have multiple owners? There are rules promulgated by state law that set out the parameters for when owners can be excluded from the workers’ comp policy, and you need to understand the law so you don’t fall afoul of it.

The law limits the number of individuals in an organization who could claim an exemption from workers’ comp coverage, including:

An officer or member of the board of directors may elect to waive coverage if either:

  • He or she owns at least 10% of the issued and outstanding
    stock, or
  • He or she owns at least 1% of the issued and outstanding stock of the corporation and if his or her parent, grandparent, sibling, spouse or child owns at least 10% of the issued and outstanding stock and is covered by a health insurance policy or health care service plan.

The waiver must be signed by the person requesting to be excluded from coverage.

Certain business owners who meet the statutory requirements may also elect to exclude themselves from workers’ compensation insurance coverage, including:

Sole shareholders of a private corporation

Sole shareholders of private corporations can waive coverage.

General partners or LLC managing members

A general partner of a partnership or a managing member of a limited liability company can waive coverage.

Professional corporations

An owner of a professional corporation who is a practitioner rendering professional services for which the professional corporation is organized, may waive coverage.

Cooperative corporations

Officers and board members of cooperative corporations can opt out of coverage by signing a waiver. In order to opt out, they must have health care coverage and a disability insurance policy.

The takeaway

It’s important that you comply with the ownership waiver rules. If your workers’ compensation insurer audits your policy and concludes that someone who owns less than 10% of the company is claiming an exemption, it may bill you for the premium you should have paid.