Workers’ Compensation – Executive Officers: Include or Exclude?

click here for pdf

By Jeff Cavignac, CPCU, RPLU, ARM

One area that has always been confusing is under what circumstances an executive officer can be excluded from coverage under a workers’ compensation policy and probably more importantly, whether or not they should be excluded from coverage.

The Workers’ Compensation Insurance Rating Bureau (WCIRB) Manual defines executive officers as “those officers of a corporation commonly known and styled as president, any vice president*, secretary, assistant secretary, treasurer or assistant treasurer, and shall include, in addition thereto, any other executive officers enumerated in and empowered by the Charter or any regularly-adopted by-laws of the corporation and who are elected or appointed and empowered by the directors or set forth in the operating agreement of a limited liability company” (Section V.j. of the California Workers’ Compensation Uniform Statistical Reporting Plan).

Currently, to be excluded from coverage, an employee must be an officer as described above and secondly one hundred percent (100%) of the stock must be owned by the executive officers and directors of the company.  In other words, an officer of a closed corporation (all stock owned by executive officers active in the company) can elect not to be covered by workers’ compensation insurance if they own just one share of stock.

This is changing effective January 1, 2017.  Assembly Bill 2883 now requires that, in addition to being an executive officer as described above, the officer wanting to be excluded must own at least fifteen percent (15%) of the issued and outstanding stock of the corporation.  Interestingly, AB 2883 has eliminated the requirement that 100% of the stock must be held by titled officers or directors in order for a corporate officer or director to be eligible for exclusion.  In order to be excluded, the executive officer must execute a written waiver of his or her rights under the Labor Code stating under penalty of perjury that the person is a qualifying officer or director and is desirous of opting out of workers’ compensation.  If this affects you, you will receive, directly from your insurance company, the appropriate forms to complete in order to do so.

Of particular concern is that this is effective January 1, 2017 for all policies currently in force.  In other words, it does not exempt in-force policies. So even if you are in the middle of a policy term, if you want to remain excluded you will need to execute the waiver form provided by your insurance company.  If you do not, then you will be covered by workers’ compensation effective January 1, 2017 and charged accordingly.

A general partner of a partnership or a managing member of an LLC is also eligible to elect exclusion from the workers’ compensation policy. Note that the fifteen percent (15%) ownership requirement does not apply to general partners and managing members.

Back to the question. Assuming both conditions above are met and the individual has the option to be excluded from workers’ compensation coverage, should they opt to be excluded?

The main reason an officer would opt out is to save money.  Currently (2017) the maximum payroll for an executive officer is $122,200 (the minimum is $48,100).  In other words, if an officer earns more than that, the most that will be used in calculating the premium to include them will be that maximum.  Assuming that the officer is in the sales class and the rate for that class is $1.00 per $1,000 of payroll, then the cost to include the officer for coverage under the workers’ compensation policy would be $1,222 per year.

A secondary reason is to avoid having an officer’s injury adversely affect the company’s experience modification.  We had an engineering firm whose CEO broke his hip when he slipped while touring a job site.  This single accident increased the firm’s experience modification from 80% to 118%.

If the decision is made to opt out, it is imperative that the officer’s health insurance policy provide 24/7 coverage for them.  Most policies do, but in some circumstances, this may not be the case.

If, for example, they have health insurance through their own company’s group insurance policy, they can usually arrange to be covered for work-related injuries under that policy, and that policy will provide 24-hour coverage.  In the event an executive officer is insured under their spouse’s health insurance policy, this may not be the case.  Any executive officer electing to be excluded must make certain that their health insurance policy covers them for work-related injury.

Even if they are covered under their own health insurance policy, the workers’ compensation policy does provide additional benefits that their health insurance program will not.  These include:

  1. Unlimited Health Insurance benefits for the injury with no deductible.
  2. Disability Coverage subject to statutory minimums and maximums.  The maximum weekly temporary disability benefit is dependent upon the date of injury and varies by wages earned at the time of injury.  There is a cap of two years of payments during a five-year period.  Partial permanent disability benefits are payable for life and total permanent disability payments can be as high as the weekly temporary disability benefit.
  3. Burial Benefit. The burial benefit is $10,000.00.
  4. Death Benefit for family. The standard death benefit is $250,000.00 but it can be less for partial dependents (according to financial proof) and can be up to $320,000.00 for three or more total dependents (according to financial proof). Minor children are entitled to the employee’s temporary disability rate until age eighteen (18), regardless of the cap.

Bottom Line:  The requirements to exclude executive officers have become more stringent.  Regardless, due to the benefits mentioned above and the relatively modest costs to cover the officers, it is recommended that executive officers be covered under the workers’ compensation policy.  If the decision is made to exclude eligible officers, it is imperative that their health insurance coverage extend to work- related injuries.

*Vice Presidents:  There is some confusion over a “vice president” who is not recognized in nor empowered by the “…Charter or regularly-adopted by-laws of the corporation….” Often companies have numerous “vice presidents;” many, if not most, of whom are not “enumerated and empowered by the Charter….”

Unfortunately, in the opinion of most insurance underwriters, unless the vice president is specifically referenced in one of the corporate documents, he/she is not subject to either the maximum payroll cap or the option of being excluded.  When dealing with vice presidents that are not empowered by the charter or the by-laws, check with the insurance company to get agreement that they can either be capped or excluded. It is better to agree on this up front rather than find it out at the time of audit.

Officers that are Active and Unpaid or Inactive and Paid

Confusion also arises out of the treatment of officers that are either active and unpaid, or inactive and paid. This problem is really one of determining the employee’s status. In order to qualify for workers’ compensation, an individual must be an employee as defined by the California Labor Code.

Under the California Labor Code, a corporate officer not “rendering actual service for pay” would not be held to be an “employee.” Other court rulings have held “executive officer remuneration shall not be included provided that such officer, because of age or other reasons, ceases to perform any duties and does not come on the premises, except perhaps to attend directors’ meetings” or “that an officer is elected for the value of his name or stock holdings, but has no duties.”

Other times, there are officers who are active but not paid. In this case, there is no doubt that hey are employees. The manual provides for a minimum payroll charge for active officers, and they should be included in the appropriate classification.

Lastly, there are inactive and unpaid officers. People in this position clearly do not fall under the definition of “employee,” and would not be covered for workers’ compensation.