California has the most expensive workers’ compensation rates in the United States. California Workers Compensation premiums can be so expensive that business owners try to find creative ways to avoid paying workers compensation insurance for their employee labor. The common practice is turning employees into 1099 contractors with the thought that since they are no longer employees the business owner is no longer responsible for workers comp. Business owners have to be very careful when doing this. State Compensation Fund sends a document with all of their quotes defining a true Independent Contractor vs a 1099 that is technically an employee. Some of the determining factors laid out by SCIF to determine if the 1099 is an employee or an Independent Contractor:
- Does the business have the right to direct and control? If yes, 100% Employee.
- If the trade requires a license, Independent Contractor must have their own license. Employees use the business owner’s license to complete the work.
- Who provides the instruments/tools to perform the work?
- Has the Independent Contractor chosen the burdens/benefits of self-employment?
Another commonly used band aid business owners try to implement to avoid paying california workers compensation insurance premiums for employees is to give the employees a percentage of ownership then exclude them from coverage by having them sign the appropriate exclusion form. California business owners commonly give employees 1% ownership then exclude them from coverage to avoid paying workers compensation insurance. The state of CA has passed a new law effective 01/01/2017 that now requires a minimum ownership percentage before a CA business owner can qualify to be excluded from workers’ compensation insurance. Effective 01/01/2017 California business owners must own at least 15% of Corporate stock to qualify to be excluded. If a business owner meets the 15% minimum, they must sign the appropriate workers’ compensation exclusion form and file it with the insurance company.
All existing Corporations with a workers’ compensation policy must sign a new exclusion form with their insurance company by 01/01/2017. Otherwise the insurance carrier must INCLUDE the business owner from 01/01/2017 until a new exclusion form is signed and filed with the insurance provider. It’s best to circle back to your insurance agent to gather the updated exclusion form. If your insurance agent is not aware of this rule change or how to solve the problem, look for another agent such as myself. Workers Compensation Insurance is typically your biggest insurance expense, you deserve an agent that understands this type of insurance.