The state of California made workers’ comp mandatory, and you knew the costs would affect your business. Lucky for you, there were exceptions—in this case, exemptions. Under the old law, you could make multiple employees owners at small percentages and then waive the costly insurance premium. With the new law changes in 2017, THAT’S NOT GOING TO SLIDE ANYMORE! To forgo anyone’s worker’s comp insurance, they will now need to own 15% of your company.
If you DON’T bring your business into compliance, you could be facing mountains of fines built from past years. These amounts are significant enough that they could wipe out your small corporation. To avoid getting buried by the mountains of fines, there is one solution: get your business in line and document it in corporate records.
Understanding the Law Change
The first step in this process is knowing the old law, why it changed, and what it changed to. You are busy being contractors and working—you aren’t reading all the fine print in the law! So, we want to provide a basic understanding of what will change in the fine print, because it is impossible for you to make the best decision for your small business without this knowledge.
Exemptions Under the Old Law: Shareholders, Officers, Directors
There was a rule in the old law that allowed for an exception to getting worker’s comp. It first required that these individuals must be officers or directors of the corporation, shareholders, and these people must make up all the shareholders of the company. For small businesses, this could be relatively few individuals. All persons that meet these requirements could, together, make a group decision to waive workman’s compensation. This rule was intended to accommodate small businesses who had employees or family members that participated in the decision-making and did not want the insurance coverage and the steep cost associated with it. They typically purchased other types of health insurance to cover their particular needs.
In many situations, the solution to avoiding hefty fines or fees for not having workman’s comp insurance was to use the then permitted Corporate Officer and Director exclusion. The small business corporation would make their one or two employees owners at a small percentage by: issuing to them a few corporate shares, elect the employee as officers/directors of the corporation, and then waive worker’s compensation under this exclusion. And so, understandably, that’s what many companies did.
Abuse of the Old Law
Unfortunately, this easy solution became the loophole of a lifetime. Some people took this legitimate situation and debased it. Business owners thought, “Well if it works for that sort of a relationship, I have all these other employees out there it could work for. I am just going to make them all owners, officers, and directors at small percentages. I mean, they’re not going to run the company—they’re not going to make decisions—they’re not going to control it. But then I don’t have to pay worker’s comp which can save me a ton of money!” And it did: if you take a guy that would cost you a $15,000/year premium and you multiply that by 5 or 10 people—you’ve saved yourself a ton of money!
However, this is not what the law was set up to do. The state created it for legitimate situations: where there was a family-owned, relationship. What was clear in these circumstances was that the owner and employee made decisions together. So, in a way, these employees legitimately were acting as partners of the company and deserved ownership.
The abuse of this old law was significant enough that California needed to begin specifically looking for these fraud-related cases. Some companies actually made a business of doing this–much to the irritation of the California State Attorney General.They discovered so many companies using this loophole that they decided changes to the law was necessary to stop this practice.
New California Worker’s Compensation Exemption Changes: Must Own 15% of the Company or More in 2017!
Effective January 1st, 2017 the new law will change the Corporate Officer and Director Exclusion. Any employees that are officers, directors, employees, or shareholders of the company will need to be covered by worker’s comp. A business will only be allowed to waive worker’s compensation if the person is a shareholder, an officer/director, and meets a new requirement: they own 15% or more of the company. An even more important aspect of this law to your business is that this law applies to all worker’s compensation policies in effect on or after Jan 1, 2017. That means even if your policy was in compliance in 2016, it needs to change to adhere to this new law.
Problem with Your Business’ Corporate Records and the New Changes
Once this law changes, the state will ruthlessly start looking for violators. Everyone they find who doesn’t follow the law will be subject to the crippling penalties, interest, and other related punishments. There most likely be some review as to whether this was or was not an intentional act to get around the system, but the problem is everyone is going to fall into the scrutiny.
When the state of California comes around to check your company with an audit, they will want to see your corporate records. They are going to be looking at everything related to ownership: how you brought people into your company, under what conditions you gave these people ownership, and when you changed their ownership. They are going to want to see all complete, legitimate corporate documentation.
Correctly changing your corporate records is not an easy task, and if done incorrectly can leave you engulfed in faulty paperwork drowning among the state fines. And there is not a ‘go-to’ solution for this problem. You cannot get this paperwork on Legalzoom. You cannot get this paperwork on Rocketlawyer. You cannot get it from your insurance broker (because it is illegal for them to draft it). You can have your accountant try, but they aren’t going to understand it and will make mistakes.
That leaves you with a problem: Where do you find someone who knows the law, consults with you on the legal solutions for your small business, and can correctly document the changes you decide on?
Incorporation Attorney: Your Go-To Solution for Making Your Records Compliant
Trust someone who knows the law, knows small businesses, and can draft your corporate records into compliance. We help you decide whether bringing someone up to 15% ownership is best for your business or not in the legal world, and make sure your paperwork is complete for an audit or any other sort of legal action.
We do not fix or create fraudulent corporate records that bring you into compliance when you knew it was not. Instead, we draft corporate records around things that have occurred in your company; we memorialize the truth of what has happened. This way you can rest assured and KNOW we are not leaving any loopholes for litigation in your paperwork.
Fix Your Corporate Records in 2016: Avoid Fines and Litigation Before the Worker’s Compensation Changes in 2017
Our takeaway from this new law: even though you may be okay today, you need to get in compliance with the new law starting 12/31/2016. Make sure you work with someone who can understand your small, California business and the legal paperwork necessary—or be prepared to swim in fines from inadequate documentation come 2017. You have a limited time to fix your corporate records and make things align with the changes in the worker’s compensation laws, so start with us now!