This article should have probably been written a few months ago. I actually did partially write about it here. In that article I didn’t mention that AB 2883 was the law behind the change, nor did I mention all the types of business entities affected by it. So that’s what I’ll do here. Here’s the simplified summarized version of law AB 2883 that went into effect on January 1st, 2017.
So what is this AB 2883 that we all keep hearing so much about?
This is a law that changes the rules on who can be excluded in a workers comp policy.
To start, there are four common types of legal entities that businesses operate as; Sole Proprietorships, Partnerships, Limited Liability Companies (LLCs), and Corporations.
In a Sole Proprietorship, only the individual owner and (usually) the spouse can be excluded. AB 2883 makes no changes to sole proprietorships. So if you are operating as a sole proprietor, don’t worry: this law has no effect on you. If you have more questions on the rules of exclusion for sole proprietorships, go ahead and click here to read my article on it.
Next we have Partnerships. In the old days, any partner could be excluded. Now, because of AB 2883, only general partners are eligible to be excluded. Anyone that’s any other type of partner besides a general partner will have to be covered based on his/her actual payroll.
After partnerships we have LLCs, which are similar to partnerships in how they’re treated. In the old days, any member of the LLC could be excluded. Now, because of AB 2883, only managing members are eligible to be excluded. Anyone that’s any other type of member besides a managing member will have to be covered based on his/her actual payroll.
Lastly, we have Corporations. In the old days, any owner/officer could be excluded regardless of how many shares he/she owned (as long as all the other conditions are met, which you can read about here). Now, because of AB 2883, you have to own at least 15% of the corporation in order to be excluded. Any owner/officer that owns less than 15% will have to be covered based on his/her actual payroll.
That’s essentially it! It’s a fairly simply law, although the ramifications can be huge, and especially disastrous for those that are caught unaware.
You may wonder how your insurance company is going to know who owns what and what title he has. That’s a fine question. Every insurance company should have already sent you a form which all your company owners/officers will sign confirming their titles (and ownership percentages if you’re a corporation). If you’re a business owner with a workers comp policy and haven’t signed the form, call your insurance company or agent right away.
Some may be wondering, “What is the point of this law? Why did it go into force?” You may also notice that this law seems to make it more difficult to exclude owners which results in a higher chance of paying significantly more on your workers comp. Unfortunately, when new laws get passed no one really tells us why, but I have my own theory: workers comp is meant to cover employees and exclude owners. As workers comp rates rise, many employers will find ways to keep their premiums as low as possible, and one such way of doing so is by turning certain employees into owners by giving them titles and tiny amounts of ownership, thus allowing them to be excluded. For example, if I own a corporation and I have 10 employees, why not give each employee 1% ownership and title them “Vice President” so I don’t have to get a workers comp policy at all? My guess is AB 2883 is intended to stop these types of situations.
One last thing: since this law went into effect as of January 1st, 2017, your policy will be subject to it as of January 1st, 2017. For example, let’s say one of your owners Art Vandelay was excluded under the old rules but under AB 2883 is no longer eligible to be excluded. Art Vandelay will be begin to be covered as of January 1st, 2017 based on his actual payroll. Your policy paperwork may still say that Art Vandelay is excluded, but it doesn’t matter. The law changed and he’s no longer eligible to be excluded. You may be on a fixed billing plan and not pay anything different after January 1st, 2017, but at final audit time, your auditor will include all post-January 1st, 2017 payroll for Mr Vandelay.
That’s AB 2883 in a nutshell. Good luck out there, business owners!