April 12, 2017
I was recently asked to advise a specialty welding company in the oil-gas industry that had a run of work accidents to its employees (including one severe injury) whether it could forgo purchasing workers’ compensation insurance altogether and go “naked.” The company faced ever-increasing premiums for workers’ compensation coverage and an exclusion from bidding with a large contractor because its experience rating exceeded the contractor’s bid criteria. I discussed this very topic in general at a recent seminar. You can watch the video of that here. Basic advice is:
By law, companies with four (4) or fewer employees do not have to purchase workers’ compensation insurance. Also, to get down to four (4) employees, a company does not have to automatically fire an employee either.
Employers whose owners act as employees may elect – by proper written action – to be exempt from workers’ compensation law. Owners are sole proprietors, partners in a partnership, or employees that own at least fifteen percent (15%) of the stock in that corporation. The sole proprietor, partner or employee must voluntarily agree in writing to be exempt as well. If a person is properly exempted from coverage, then that same person is not counted toward the threshold level of five (5) employees.
One key to properly reducing the number of “regular employees” is that the company conducts a proper meeting with recorded minutes of the election and obtains a signed notice by each exempted employee stating agreement with the election. By making a proper election, these companies are now “exempt” from having to purchase the workers’ compensation insurance for all of its employees. It is important to get the exemption process correct. If the employer is not truly exempt and failed to obtain the required insurance, then executive officers of the employer can be personally liable to pay an injured employee’s workers’ compensation benefits.
If a company can be exempt, should it forgo workers’ compensation insurance? The real question is can the company tolerate the extra risk to save the money. Some contractors will require a company to have workers’ compensation coverage regardless of exemption. An exempt company can buy workers’ compensation insurance, and an injured employee can only recover workers’ compensation benefits through the insurance from the employer. This limitation to only sue for workers’ compensation benefits is called the “exclusive remedy” of the employee. If the company does not buy workers’ compensation insurance, the employee is not limited to that exclusive remedy. The employee could sue the company for tort liability, also known as “common-law damages.” Common-law damages include the company paying for medical expenses, the full amount of lost wages, and for pain, suffering and mental distress. However, workers’ compensation benefits are limited to medical treatment and a fixed amount of partial lost wages.
In order to recover these common-law damages, the injured employee must first prove the employer is actually at fault for causing the injury. Without workers’ compensation insurance, the employer has a duty to provide the employee with a reasonably safe place to work and reasonably safe tools and appliances with which to complete the assigned tasks. The employer also has a duty to hire reasonably competent employees and provide reasonable training. The employer is not an insurer of the employee’s safety, and if the injury was not caused by the fault of the employer failing to provide a safe work place, then the employee does not recover anything. Being a safe employer and not paying for insurance or the costs of an employee’s injury sounds great in theory, but there is a catch.
A company’s comprehensive general liability policy is not intended to cover the company from the lawsuits brought by injured employees. Insurance usually covers both the money awarded to a person suing as well as the costs of defending that lawsuit in court. If the employer is exempt from buying workers’ compensation insurance, and even if it is a safe, conscientious employer, if sued the company will incur attorney’s fees and court costs proving it was not at fault for the employee’s accident.
If an employer is exempt, it has an option to not buy worker’s compensation insurance. But it must consider not only the risk of a lawsuit, it must consider the risks of incurring a lawsuit and successfully defending against it. Challenging economic times and the proliferation of smaller business will bring this question up more frequently. Knowing the realm of consequences is necessary for a business decide if it is time to take on more risk and save the costs.