Governor Signs New Legislation Affecting Corporate Officers and Directors

AB 2883 started life innocently enough, and was initially designed to require CHSWC to perform a feasibility study on the development of a paperless RFA system.  But by mid-summer, under a “gut and amend” procedure we see so often in workers’ compensation legislation, the bill was redesigned to address a loophole that some employers had exploited for premium fraud.  AB 2883 was signed into law by Governor Brown on August 16, 2016, and is expected to take effect January 1, 2017.

Under prior law, Labor Code §3351(c), officers and directors of private corporations were automatically exempted from workers’ compensation coverage if they were the sole shareholders of the corporation.  Such officers and directors of a closely held corporation could only “opt in” to workers’ compensation coverage; otherwise, their payrolls were excluded from premium calculations.

This rule led to situations ripe for abuse.  It was not uncommon for carriers to receive requests for premium refunds from policyholders who alleged that certain employees should have been exempted from coverage and premium calculation because they had never “opted in.”  Sometimes, low-level employees with new claims were suddenly (and unknowingly) designated as corporate executives with fractional shares of ownership (the Legislature heard testimony about a Vice President of Dishwashing) in order to avoid payment of otherwise legitimate claims.

Under AB 2883, all employees of private corporations, partnerships, or LLCs, including officers and directors, are automatically covered under workers’ compensation and may only “opt out” under certain circumstances.  The requirements to “opt out” include ownership of at least 15% of the corporation, and execution of an affirmative, written waiver of rights that includes a statement that the individual is a qualifying executive.  The waiver is deemed effective upon receipt and acceptance by the carrier.

As with any new legislation, this bill is not without unintended consequences.  Foremost among these concerns is the fact that officers and directors will now automatically be covered for injuries unless specific “opt out” procedures are followed.  Companies without any employees (i.e., single shareholders) may suddenly find that workers’ compensation insurance is now required.  And because the legislation apparently applies to policies currently in existence, corporate counsel will need to consider carefully how to address situations where a current policy properly exempts an employee who is no longer eligible for exemption under the revised statute.  Notifications to policyholders may also be necessary.

A copy of the Legislative Analysis for AB 2883 is attached to this Memo.  For the final version of the bill signed by the governor, click here. 

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