No Work Comp? What Employers Need to Know!

As my readers are now aware from my article posted on August 19th – Work Comp: Porn Performers EEs vs. ICs, performers are indeed employees in the state of California for purposes of worker safety laws. California, as many other states do, requires that all employers within its borders secure workers’ compensation insurance coverage. However, what happens if an employer is uninsured for workers’ compensation in the state of California ?  California has rather harsh penalties for failure to secure workers’ compensation insurance, the California Labor Code reads in relevant part;

3700.5. (a) The failure to secure the payment of compensation as required by this article by one who knew, or because of his or her knowledge or experience should be reasonably expected to have known, of the obligation to secure the payment of compensation, is a misdemeanor punishable by imprisonment in the county jail for up to one year, or by a fine of up to double the amount of premium, as determined by the court, that would otherwise have been due to secure the payment of compensation during the time compensation was not secured, but not less than ten thousand dollars ($10,000), or by both that imprisonment and fine.

(b) A second or subsequent conviction shall be punished by imprisonment in the county jail for a period not to exceed one year, by a fine of triple the amount of premium, or by both that imprisonment and fine, as determined by the court, that would otherwise have been due to secure the payment of compensation during the time payment was not secured, but not less than fifty thousand dollars ($50,000).

In addition to possible imprisonment and fines, the state of California can issue penalties of up to one hundred thousands dollars ($100,000) against the employer in addition to the amounts listed above even for a first offense. The uninsured employer will also be subject to a stop order being levied against it by the Director of Industrial Relations. A stop order is basically an order/finding by the Director that such employer will immediately shut down and will not conduct any business utilizing employees until such time that the employer has secured workers’ compensation insurance and presents evidence of a policy to the Director. Also, the Director will issue an additional fine of one thousand five hundred dollars per employee not legally insured;

3722. (a) At the time the stop order is issued and served pursuant to Section 3710.1, the director shall also issue and serve a penalty assessment order requiring the uninsured employer to pay to the director, for deposit in the State Treasury to the credit of the Uninsured Employers Fund, the sum of one thousand five hundred dollars ($1,500) per employee employed at the time the order is issued and served, as an additional penalty for being uninsured at that time or issue and serve a penalty assessment order pursuant to subdivision (b).

(b) At any time that the director determines that an employer has been uninsured for a period in excess of one week during the calendar year preceding the determination, the director shall issue and serve a penalty assessment order requiring the uninsured employer to pay to the director, for deposit in the State Treasury to the credit of the Uninsured Employers Fund, the greater of (1) twice the amount the employer would have paid in workers’ compensation premiums during the period the employer was uninsured, determined according to subdivision (c), or (2) the sum of one thousand five hundred dollars ($1,500) per employee employed during the period the employer was uninsured. A penalty assessment issued and served by the director pursuant to this subdivision shall be in lieu of, and not in addition to, any other penalty issued and served by the director pursuant to subdivision (a).

I have seen the Director of Industrial Relations chain and paid lock businesses, not allowing entry until all insurance is secured and fines paid. This is not a situation that should be taken lightly. The state of California can be very aggressive in regards to prosecuting uninsured employers.

Beyond the regulatory scheme of imposing fines and possible incarceration, there are also possible negative effects in regards to a claim filed by an injured employee. In situations where an employer is insured for workers’ compensation, an injured employee’s ONLY remedy is to file a workers’ compensation claim. In instances of uninsured employers, an injured employee has several choices as to how to handle their claim for injury.

First, the injured employee may certainly still file a workers’ compensation claim with the Workers’ Compensation Appeals Board as they would do if the employer was insured. The injured employee may also file a civil lawsuit in addition to the workers’ compensation claim. Finally, if the employer does not defend and/or pay benefits on the workers’ compensation claim, the Uninsured Employer’s Benefits Trust Fund will step in and do so on the behalf of the employer. If the UEBTF does in fact provide benefits on the behalf of the employer to the injured employee, they will then seek ALL possible means of reimbursement from the employer, including pursuing civil actions and the filing of liens against property.

Furthemore, the employer simply filing for bankruptcy will not stop the UEBTF from pursuing their recovery actions directly against the owners of the uninsured employer. Any owner with at least a 15% share of ownership will be personally responsible to reimburse the UEBTF for all benefits paid the the injured employee. And the state can collect all of the benefits from just one owner. Be extremely careful of whom your partners are. The California Labor Code reads in relevant part;

3717. (a) A findings and award that is the subject of a demand on the Uninsured Employers Fund or an approved compromise and release or stipulated findings and award entered into by the director pursuant to subdivision (e) of Section 3715, or a decision and order of the rehabilitation unit of the Division of Workers’ Compensation, that has become final, shall constitute a liquidated claim for damages against an employer in the amount so ascertained and fixed by the appeals board, and the appeals board shall certify the same to the director who may institute a civil action against the employer in the name of the director, as administrator of the Uninsured Employers Fund, for the collection of the award, or may obtain a judgment against the employer pursuant to Section 5806. In the event that the appeals board finds that a corporation is the employer of an injured employee, and that the corporation has not secured the payment of compensation as required by this chapter, the following persons shall be jointly and severally liable with the corporation to the director in the action:

(1) All persons who are a parent, as defined in Section 175 of the Corporations Code, of the corporation. (2) All persons who are substantial shareholders, as defined in subdivision (b), of the corporation or its parent…

(b) As used in this section, “substantial shareholder” means a shareholder who owns at least 15 percent of the total value of all classes of stock, or, if no stock has been issued, who owns at least 15 percent of the beneficial interests in the corporation.

In conclusion, penalties, fines and incarceration are all possible ramifications for not securing workers’ compensation insurance. Furthermore, employers that do not have workers’ compensation insurance are also putting their personal finances at stake in the form of civil judgments and liens enforced, not by an injured employee, but rather by the state of California through the UEBTF. If you’re an employer in the state of California and do not have workers’ compensation insurance it is imperative that you immediately seek such coverage before either (a) a work related injury occurs and/or (b) the Department of Industrial Relations does a spot inspection and issues a work stoppage order.

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