Workers’ Compensation – Exempt Employees

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by Christopher J. Boggs, CPCU, ARM, ALCM

Employee-employer relationships regarding workers’ compensation are complicated by the IRS, industrial commissions, the courts and state statute. Each has its own definition or applies a different test to define “employee.”

Prior articles discussed the difference between an independent contractor and an employee; the responsibility placed on upper tier contractors when lower tier contractors do not provide workers’ compensation benefits for their direct employees; and the importance of contracts and contractual risk transfer in managing some of these relationships. This and the following article will re-cap some previously covered information and apply it to “employment situations” exempt from the requirement of workers’ compensation protection.

Who Is An Employee and How Many Are Required?

Thirty-seven states and the District of Columbia require every employer with one employee or more to provide workers’ compensation coverage. Only 13 states allow employers to forego coverage until they surpass a certain threshold number of employees; once eclipsed, it becomes necessary for employers in those states to provide protection. A few of the “threshold” states lower the threshold number if the employer falls within a contractor classification.

“Employee” and “employer” were defined in an earlier article. Remember, as a general rule, the “employer” is not required to be protected by workers’ compensation but “employees” must be protected as per individual state’s statute. The determination often revolves around the entity’s legal structure.

Sole Proprietorships: A sole proprietor (individual owner) is the employer. The individual owner, in nearly every state, does not count towards the number of employees. A sole proprietor with no employees is not required to carry workers’ compensation. Any employees other than the individual owner, whether full or part time, change this requirement. Generally, even when a sole proprietor is required to protect his employees, the individual owner is only protected if a coverage election form is specifically completed; and not every state allows the proprietor the option of coverage. A few states extend coverage to the sole proprietor, but allow the individual to exclude himself from coverage by filing a rejection form.

Partnerships: Partners, like sole proprietors, are the employer and as such do not count towards the number of employees. This is not true in every state, but the majority treat partners and sole proprietors the same regarding calculation and the option to elect (and in a few states, reject) coverage.

Corporations: Corporations are “legal persons” (defined previously) and are considered the employer. The corporation itself does not qualify for workers’ compensation coverage since it is, in reality, a fictitious person. Corporate officers are considered “employees” of this fictitious person and count towards the total number of employees. Most states allow certain corporate officers to exclude themselves from workers’ compensation protection by completion of a rejection form. Some limit the number or position titles of officers that can be excluded. Not-for-profit corporations are viewed differently in a few states in that the corporate officers (usually volunteers) are not included as employees and do not count towards the total number of employees.

Limited Liability Company: Limited Liability Companies (LLC’s) are subject to a wider range of views regarding the inclusion or exclusion of the owners than do the previously defined entity types. Twenty-three states treat members and managers as the “employers,” specifically excluding them from the employee count and coverage; and 20 view the LLC as the “employer” and treat members and managers as corporate officers and thus employees. Eight states combine these extremes classifying the members and managers as “employees” or “employers” based on specific criteria such as: how the entity chooses to be taxed, the number of members/managers, the operation classification (managers or members included as an employee if construction class or “high hazard class,” excluded otherwise), or the percentage of ownership.

Professional Associations: Professional associations (PA’s) as a business entity are limited to a few professions such as physicians, dentists, attorneys, architects and other such professional organizations. States’ view of professional associations is more diverse than the disparity over LLC’s. Many states treat them like corporations making the organizers corporate officers and thus employees. Other states regard these entities like LLCs and treat the PA the same way; while some states put these entities in their own class. Adding to the confusion, different insurance carriers in the same state might view PA’s differently; one might consider them like partnerships while another carrier might treat them like corporations.

Professional associations are more like corporations from a legal standpoint than any of the other business types presented. While the existence rights and provisions of a PA may not be the same in every state, in most jurisdictions:
• Professional Associations like corporations are created by the filing of Articles of Incorporation;
• Professional Associations and corporations can exist apart from the individuals that formed it (they exist as a legal person) meaning they can own property, sue, be sued and incur debt. And they can live beyond the founders; and
• Both Professional Associations and corporations can sell stock.

Individual state statute must be consulted to decide if the founders are considered “employees” or “employers.” If there is disagreement among insurers, legal assistance may be required or the respective department of insurance may need to be consulted.

Workers’ compensation protection is not required when the number of employees falls below the requisite number. Knowing the threshold and the definition of an employee in a particular state is paramount when placing workers’ compensation for multi-state clients. As mentioned above, only 13 states allow a threshold greater than one “employee.” Ignoring any reduction in the threshold when a contractor code applies or any other reduction provisions (radiation, etc) apply, these states are:
• Alabama (4);
• Arkansas (3);
• Florida (4);
• Georgia (3);
• Michigan (3);
• Mississippi (5);
• Missouri (5);
• New Mexico (3);
• North Carolina (3);
• South Carolina (4);
• Tennessee (5);
• Virginia (3);
• Wisconsin (3);
• All other states require protection be provided if there is even one employee.

The next article will detail other “employments” that are exempted from most workers’ compensation statutes.



All terms in this glossary and the glossary itself is taken from the book “The Insurance Professional’s Practical Guide to Workers’ Compensation: From History through Audit.” The book is available now to add to your insurance library.


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Comments

  • August 7, 2008 at 2:22 pm
    Kathy Nicotra says:

    Chris, I loved this article. All we need to know at a glance! Kathy

  • December 29, 2009 at 1:57 pm
    Lynne Pelletier, CIC says:

    Am trying to refresh and then print the following article.. cannot get it to pop up.. can you help??

    Work Comp. & Extraterritorial Issues – When To Add A ’3.A.’ State

    Tks
    Lynhne

  • March 28, 2011 at 1:21 am
    sue hong says:

    Is a family member of an owner who works as an employee and have shares of the corporation (construction company) exempt from the w/c requirement in CA?

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