Uninsured = Uninformed, California Workers’ Compensation

“Times are hard”, especially if you are a small business person.

Workers’ compensation costs are high in California, and premium payments can be discouraging, especially if you are a small business person.

Besides, if you consider your workers’ independent contractors and/or give them a 1099 IRS form, would that not result in important savings (not to have to pay a premium), especially if you are a small business person?

So goes the popular thinking of the typical uninsured employer in the State of California and possibly in every other state. The result is immediate gratification by way of premium dollar savings balanced against long term risk. The fact is, however, that most uninsured employers are unaware of the substantial risk that being an uninsured employer is. Here follows just a short summary of what some of those risks are with one caveat: there are more criminal risks than meet the eye.

The Law

The Labor Code of the State of California requires that every employer who has employees in California be insured for workers’ compensation (Labor Code Section 3700).

Any employer who fails to secure its liability for compensation by either obtaining a policy of insurance or, under very limited circumstances, a Certificate of Self Insurance is deemed to be an illegally uninsured employer.

Labor Code Section 3700.5 exposes an uninsured employer to misdemeanor prosecution. The offense is punishable by imprisonment in County jail for as long as one year or by a fine as much as double the amount of the premium that would have been due to secure the payment of compensation during the period it was absent, but not less than $10,000.00 or both. Additionally, if an employer has a second or subsequent violation, the employer is subject to imprisonment for a period not to exceed one year, a fine triple the amount of the premium, but not less than $50,000.00 or both.

Even though Workers’ Compensation is considered to be the exclusive remedy of the injured employee, if any employer fails to secure the payment of compensation, an injured employee or his or her dependents may bring an action at law in the California civil courts against such employer for damages (Labor Code Section 3706). (A civil award is often far in excess of the remedies which are available to an employee who files a claim within the jurisdiction of the Workers’ Compensation Appeals Board. The employee’s remedies are much more limited within the jurisdiction of the Workers’ Compensation Appeals Board.)

If the worker files a civil lawsuit, the Labor Code places the burden on the employer to prove that it is not negligent in the civil action, and the employer is presumed to be negligent, and the burden of proof is on the employer to rebut the presumption of negligence (Labor Code Section 3708). This places a very heavy burden on the employer.

Additionally, when a civil case is filed against an uninsured employer, the employer is precluded from using the common law defenses available in a civil action and cannot raise the common law defenses of contributory negligence, the assumption of risk, or the fellow servant role (Labor Code Section 3708.). This operates to place an uninsured employer at a severe disadvantage in civil court since it stands liable for all consequences of whatever negligence is involved with no regard for the injured party’s negligence.

Labor Code Section 3709 also provides that an employee is entitled to have his or her attorney’s fees paid by the employer in an amount fixed by the court. This is an additional penalty and expense to the employer as well as a significant departure from the usual practice since attorneys in civil and workers’ compensation courts typically take a percentage from their client’s awards. The attorney fees for civil matters are typical twice the percentage that they are within the jurisdiction of the Workers’ Compensation Appeals Board i.e. 33 1/2% vs 15%.

An employee may also attach the property of an employer to satisfy a civil damage award (Labor Code Section 3707). An employee can obtain a civil award and go through a process that could allow him or her to come against property owned out of State, although that is rare.

An uninsured employer also faces the possibility of the issuance of a Stop Order by the Director of Industrial Relations prohibiting the use of employee labor. What this means is that the uninsured employer must cease and desist the use of employee labor until it obtains the required workers’ compensation coverage. Additionally, the employer is penalized $100.00 per person employed at the time the Stop Order is issued.

Labor Code Section 3722 also indicates that the Director must issue and serve a Penalty Assessment Order at the time of the issuance and service of a Stop Order. The uninsured employer must pay $1,500.00 per employee employed at the time the order is issued and served. Additionally, there are penalties for any employer found to have been without insurance for a period of more than one week within a calendar year.

Labor Code Section 4554 also indicates that a failure to secure payment of compensation is prima facie evidence of willfulness. If it is determined that you were willfully uninsured, Labor Code Section 4555 indicates that the Appeals Board may award a reasonable attorney’s fee in addition to the amount of compensation recoverable. As we discussed, typically the applicant attorneys deduct 15% from the settlement amount or the Award. However, for cases involving an uninsured employer, the attorney fee is added onto the Award that the uninsured employer will have to pay.

Other dangers exist. Failure to make the appropriate withholding of payments could result in adverse consequences from the IRS and the Franchise Tax Board as well as failure to be listed as an employer with the Employment Development Department could lead to other adverse circumstances.

The problems arise either when the claim comes in and there is no separate workers’ compensation insurance in place or when the employer is caught in an unannounced sweep of businesses undertaken by the District Attorney’s office or by a field inspector for the Labor Commissioner.

Sadly, most uninsured employers believe that their liability insurance will be sufficient to save them. Not so. There is no help or sympathy, even if you are a small business person.