California Starts New Year Attacking Small Business

Bruce Bialosky
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Posted: Jan 01, 2017 12:01 AM
California Starts New Year Attacking Small Business

With California in full revolt against the incoming Trump Administration swearing to go to war with the other 49 states, the elected Leftists who run the state struck again against small businesses in the state. The government enacted 900 (yes, you read that correctly) new laws for 2017. One they snuck under everyone’s nose is a revision of the very expensive worker’s comp system (AB-2883 Workers’ compensation: employees).

As you probably know worker’s compensation insurance is paid by employers to cover medical costs for an employee getting injured on the job. It is a sure bet, as you suspected, that California has the costliest worker’s comp rates at $3.24 per $100 of payroll. The next most costly state is New Jersey which is 10% lower ($2.92 per $100). To give you an idea what the insurance rate is in sane states the rate in North Dakota is about 25% of California ($.89 per $100) or Indiana at $1.06 of $100.

This cost has contributed to driving businesses out of state and having existing employers avoid paying the rates like the Plague. Because making claims in California are so easy and adjudication of claims is so pro-employee, rates often rise for employers after they make their initial payments. As an employer you want to avoid this cost especially for owners of your corporation or partnership (LLC). Owners would almost never use anything other than their personal medical policy to cover any medical costs so they could avoid this secondary medical system and the related costs. No more in California.

Without much fanfare the state’s elected officials have changed the rules for owners of business as to whether they need to incur the extra worker’s comp premiums for themselves or other owners (quite often family members). Supposedly, there was rampant abuse with business owners making people either partners, corporate officers or directors to avoid paying the country’s highest worker comp premiums. Instead of fixing the system or punishing the abusers, California elected officials decided to punish everyone – the typical Leftist solution. This time Republicans were complicit as the vote of the State Assembly was 78-2 and State Senate 37-2 in favor of the bill.

Here is what they changed. You now must be a 15% owner of your corporation, partnership or LLC to be exempt from the worker’s comp system. In addition, you have to sign a form, under the penalty of perjury, that you meet this rules and are exempt. If you are a general partner or managing member of an LLC, you are exempt. In fact, with a LLC which has become the most common form of business entity in California you have to not only be a 15% owner but also managing member of your LLC. This makes you more liable under other laws for the operation of the LLC.

Californians will not be aware of this until they go to renew their worker’s comp policies. Many owners may be notified by their insurance companies as the law takes effect January 1, 2017, but confusion reigns. The only reason I became aware of the new law was because my son and I are starting a new business. The insurance company for my wife’s company did not notify us.

Let me give you an idea of what is in store for everyone. Say ten partners start a business each owning 10%. They all get a salary which is referred to as a guaranteed payment because partner’s get paid differently than employees. Let us say they each have guaranteed payments of $100,000 (not big money in California). None of the partners would qualify to be exempt from worker’s comp. Based on the average rate for California of $3.24 per $100 the partnership would have a new expense of $32,400 for worker’s comp insurance for a plan that none of them want and they will probably never use. Quite a penalty for being a California located business and for the fact the legislature decided to penalize everyone for a few behaving badly.

I have clients who are members of medical partnerships or law partnerships that make much more money than that and will be subject to higher amounts of worker’s comp premiums used in the example above. These will be huge new costs for the owner/operators of businesses.

In fact, I contacted one business and initially they told me their insurance agent told them they could all sign waivers when they renew in June. I told them no, no, no. They had a new discussion with their agent and they have come to the reality of the fact they will be incurring a cost of $90,000 they did not previously have for coverage NONE of the new people covered will ever use.

It is extremely difficult to find out anything about this law as most businesses are clueless as well as the insurance companies. I called two insurance companies and they were almost no help. I worked my way up to the head underwriter at one fairly sizable insurance company. She was the first person I have spoken to who seemed to know what the new rules were.

She told me some officers and owners actually want to participate in the worker’s comp system which was news to me as everyone I know or have talked to does not see any benefit for them to the additional insurance. She also verified that the rules say that if you do not qualify for the waiver there is a minimum and a maximum for how much a previously exempt person would have to pay.

The previously exempt person would have to pay on a minimum of payroll of $48,100 and a maximum of $122,100. That means if you have $10,000 of payroll you still have to pay on the $48,100 minimum and if you have $300,000 you are capped at $122,200. At the average worker comp rates, you would have to pay a minimum of $1,558 and a maximum of $3,953 into a system the vast majority of people covered by this new law will never use.

Happy New Year to everyone in California. And to you in the other 49 states Happy New Year and say hello to your new California neighbors who will soon be coming your way.