Contractors Workers Compensation Insurance In California: A Quick Guide

Welcome to our quick guide to Workers Compensation for Contractors in California. Under California Labor Code Section 3700, all businesses with one or more employees, must carry workers’ compensation coverage. So workers’ compensation in California is not a matter of if but rather how you will set up your coverage.

‍Here is what we'll cover:

• Contracting is accident prone
• What does workers’ compensation cover?
• How much does workers’ comp cost?
• Protection from being sued
• Where can I get workers’ comp?
• Penalties for not having workers’ compensation coverage
• Proper classification code assignment
• General guidelines for filing a claim
• Employee protections around workers’ comp claims
• How to save thousands on your workers comp

With contractors, accidents and injuries are prone to happen

Everyone knows that contracting is inherently risky, but let’s look at some data. According to the US Bureau of Labor Statistics Survey of Occupational Injuries and Illnesses Data, here are the average incidence rates of total cases of nonfatal occupational injuries in the construction industry in 2018:

• Total all sizes: 2.9 (7.41% above private industry in aggregate)
• 1 - 10 employees: 2.1 (61.54% above)
• 11 - 49 employees: 3.2 (28% above)
• 250 - 249 employees: 3.4 (equal)
• 250 - 999 employees: 2.4 (17.24% below)
• 1,000+ employees: 1.7 (39.29% below)

As you can see, smaller contractors are particularly risky and risk level can vary by company size. But we also know that some trades are more risky than others.

‍Framing contractors (NAICS 238130)

• Total all sizes: 6.6 (127.59% above construction in aggregate)
• 1 - 10 employees: 4.5 (114.29% above)
• 11 - 49 employees: 2.4 (25% below)
• 250 - 249 employees: 8.2 (141.18% above)
• 250 - 999 employees: 13.9 (479.17% above)
• 1,000+ employees: 13.3 (682.35% above)

Plumbing, heating, and air-conditioning contractors (NAICS 238220)

• Total all sizes: 3.5 (20.69% above construction in aggregate)
• 11 - 49 employees: 3.4 (6.25% above)
• 250 - 249 employees: 4.5 (32.35% above)
• 250 - 999 employees: 3.2 (33.33% above)
• 1,000+ employees: 2 (17.65% above)

Electrical contractors and other wiring installation contractors (NAICS 238210)

• Total all sizes: 2.4 (17.24% below construction in aggregate)
• 11 - 49 employees: 2.5 (21.88% below)
• 250 - 249 employees: 2.8 (17.65% below)
• 250 - 999 employees: 1.7 (29.17% below)
• 1,000+ employees: 1.4 (17.65% below)

Regardless of what trade your company operates in, having workers’ compensation coverage is the law. That being said if you operate in a safer trade, you are more likely to pay less for workers' comp.

What does workers’ compensation cover?

Companies carry workers’ compensation benefits to cover medical expenses if a worker gets injured on the job. This injury could be caused by a single event or repeated events/exposures.Aside from medical expenses, other potential benefits for injured workers covered by workers’ compensation insurance are temporary disability benefits, permanent disability benefits, supplemental job displacement benefit and death benefits. (Source: DIR)Only workplace injuries that arise out of and in the normal course of business are compensable (Source: WCIRB). There are circumstances which can preclude a worker from receiving workers compensation benefits such as violating workplace safety rules. When workplace injuries occur and claims arise, it’s important to follow the process given to you by your insurance company.

How much does workers’ comp cost?

Cost for workers’ compensation can vary widely, mainly depending on how risky the jobs of your employees are. Each occupation is assigned a risk classification based on two factors: frequency of injury and likelihood of severe injuries.Other pricing factors include:

• Number of employees/payroll
• Company’s history of work-related injuries (experience modification)

Workers’ comp protects your business from being sued by injured employees

Since California has a no-fault workers’ compensation system, employers are protected from being sued by injured employees. In return, employees don’t have to prove that their employer was at fault for the injury–just that the injury was work-related (Source: Nolo). In fact, it is for this very reason that the CA workers’ compensation was originally established, according to the California Applicants’ Attorneys Association (CAAA).

Where can contractors get workers’ compensation insurance in California?

As a business, you have three options for obtaining workers compensation insurance. An insurance broker can assist you with purchasing the workers’ compensation plan that is best for your business.

• State Fund: Competes with private workers’ compensation insurance companies for business and also operates as the insurer of last resort if private companies are not willing to offer workers’ compensation insurance. State Fund operates on a non-profit basis and was established in 1914 for the California State Legislature. (Visit website)
• Licensed Insurance Company: You can obtain a workers’ compensation policy from a private company that is licensed to sell workers’ compensation insurance in California. Here is a database of insurance providers maintained by the California Department of Insurance (CDI)
• Self-insurance: Self-insurance requires state approval, a net worth of at least $5 million, net income of $500,000 per year and posting of a security deposit. Self-insured employers are required to provide the same scope of benefits as an insurance company. In 2017, 7,161 CA employers were active self-insurers and 1 in 4 CA workers were covered by self-insurance (Source: Office of Self-Insurance Plans OSIP). Group self-insurance is an option, in which several small employers in the same homogeneous industry pool their workers’ compensation liabilities (Source: DIR)

Penalties for not carrying workers’ compensation coverage

The penalties for not carrying workers’ compensation in California are very serious and can include jail time in California.

• Penalty 1: Failure to have an active workers’ compensation policy 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. (Source: CA Labor Code Section 3700.5)
• Stop Order: If the California Division of Labor Standards discovers that an employer is operating without workers’ compensation, they will issue a stop order which is a legal demand to cease all employee labor (See CSLB on Stop Orders). Failure to comply with the Stop Order is a misdemeanor criminal offense, punishable by up to 60 days in county jail or by a fine of up to $10,000, or both.
• Penalty 2: The Division of Labor Standards Enforcement will also assess a penalty 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 (Source: CA Labor Code Section 3722(b))
• Injured worker and no workers’ comp: Additionally, if an injured worker files a workers' compensation claim that goes before the Workers’ Compensation Appeals Board and a judge finds the employer had not secured insurance as required by law, when the dispute is resolved the uninsured employer may be assessed a penalty of $10,000 per employee on the payroll at the time of injury if the worker's case was found to be compensable, or $2,000 per employee on the payroll at the time of injury if the worker's case was non-compensable, up to a maximum of $100,000. (Source: CA Labor Code Section (d) and (f))

Basically, there is no world in which it’s worth it to operate a business with employees in California and not carry workers’ compensation insurance. The penalties are extremely steep and failure to comply can put your business reputation at risk.

Proper classification code assignment

According to the WCIRB, “The primary purpose of the classification system is to facilitate the accurate collection of data so that the cost of workers' compensation insurance can be distributed as equitably as possible.”

Each trade and sometimes subset of trade, for example framing vs trim/finish carpentry has a classification code which determines how much workers’ compensation will cost for that worker.As expected riskier trades have more expensive insurance rates. Since it is possible for a company to employ construction workers who will work under different class codes, a company may have multiple of them. It is important to use the correct code for each worker as failure to do so is considered fraud and can seriously complicate the workers’ compensation claims process if an injury arises.

General guidelines for filing a workers’ comp claim

If one of your employees is injured on the job, it’s important to remain calm and follow a pre-established protocol. This means you should have a pre-established protocol for handling worker injuries (both emergency and non-emergency) and have a very specific direction from your insurance provider for how to file a claim. Proper documentation and swiftness are very important for workers’ compensation claims.If a worker is injured and needs emergency care, call 911 or go to the emergency room right away. If emergency treatment is not required, make sure first aid is given and the worker sees a doctor if necessary.In general, this is how the process will go:

• Provide a workers’ compensation claim form to injured worker within one working day after the work-related injury is reported Worker needs to thoroughly fill out the form so that the claim can be properly processed
• Fill out the employer section of the form and give it to the claims administrator. It is your responsibility as the employer to get the claim to the insurance company/administrator (Source: Gerald D. Brody & Associates)
• Return a copy of the completed form to the employee within one working day of receipt
• For non-emergency care, the claims administrator is required to authorize treatment within one working day after you file a claim form. While investigating your claim, he or she must authorize necessary treatment up to $10,000 (Source: DIR).
• If an emergency occurs and a worker must be treated by the nearest health care provider, the insurance company will pay for the medical bills (if the claim is approved).
• Healthcare provider: A worker may be treated by a medical provider network (MPN), health care organization (HCO) or a predesignated physician depending on your insurance policy’s medical arrangement

Throughout the process, it’s important to stay in close communication with the injured worker, medical provider, and insurance company. Save all messages and documentation.

Employee protections around workers’ comp claims

Labor Code section 132a prohibits employers from discriminating or retaliating against an employee who has sustained a workplace injury or filed a claim for workers’ compensation benefits (Source: Klinedinst). According to the State Fund’s interpretation of the Labor Code, it is illegal to fire or punish an employee because they:

• File a workers’ comp claim
• Intend to file a workers’ comp claim
• Settle a workers’ comp claim
• Testify or intend to testify in another workers’ comp investigation

Saving thousands on your workers comp

Most contractors are paying too much for their workers comp, and they don't realize they could be saving thousands. The trick is that you are supposed to be paying for comp codes based on the work your employees are actually doing. For example, if they are doing flooring, and separately carpentry and demolition work you can claim many codes for the one employee. Many contractors don't bother optimizing this and just claim the one code for each employee.

The challenge is that this can be difficult to track. The good news is that there is a solution! Construction time tracking software make's it easy to track employee hours and record how much time they spent on each task within a job. When it comes time to submit your workers comp payroll reports, you can use this data to split employee hours across multiple workers comp codes.

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