Workers' comp in California: is your business protected?

It's a normal Tuesday. A helper falls off a ladder on a roofing job and can't get up. Your first worry is him. The second: is your insurance current, and does it cover what you really do today?

This guide is for contractors in California with employees. You will see how workers' compensation insurance ("Work Comp") works, what mistakes put it at risk, and what to review with your agent.

This is general information, not legal or insurance advice. Your case may vary, so confirm it with your insurance agent, an attorney, or the DIR.

In short

• In California, employers must carry workers' compensation. If they don't, they can face stop-work orders, fines, and criminal consequences.
• The premium is based on your payroll and the type of work (classification). If they change, tell your agent.
• The policy audit compares what you reported with what actually happened.
• Misclassifying an employee as a 1099 can be costly. The classification depends on the law, not just on what the parties agree to.
• No policy "covers everything." Ask what it covers and what it doesn't.

What workers' compensation insurance is

It is insurance that pays for medical care and part of the lost wages when an employee is injured or gets sick because of work. The DIR/DWC explains the general rules for employers in California. You can find more details on their employer information page.

The benefits are set by state law, not by your policy. But the policy also includes an "employer's liability" part that does have limits. Ask your agent what yours are.

What happens if you have no coverage

If you have employees and do not have the policy, the State can order you to stop work until you get one. They can also fine you for each employee, and in some cases there are criminal charges. Amounts change, so check them with the DIR.

Also, if your license is with the CSLB (the contractors state license board), the CSLB requires proof of workers' comp or an exemption form if you have no employees. Without that, your license can be suspended.

Common mistakes that put your coverage at risk

Reporting a payroll or job different from reality

The insurance company calculates your premium based on your payroll and the type of work. Example: you reported 3 office staff and now you have 2 office staff and 4 roofers. The risk changed. Tell your agent when your team or tasks change, to avoid disputes over a claim.

Getting over the fear of the policy audit

At the end of the year, the insurance company may ask for your payroll records and payments to subcontractors. It is a reconciliation: it compares what you paid with what you should have paid. Depending on the result, you pay the difference or get money back.

That is why it matters to keep your books up to date. If you do not provide what they ask for, the insurer can make adjustments and charge you more.

Misclassifying your workers as 1099

Paying a helper as a "subcontractor" to avoid insurance and payroll is a big risk. In California, the general rule is that a worker is presumed to be an employee unless the legal test is met. The DIR explains the difference between an employee and an independent contractor.

It is not decided only by schedule, tools, or supervision. There is a three-part test (called the "ABC test") and special rules for construction. If you get it wrong, you can face fines and injury costs, among other things. Before hiring someone as a 1099, check with an employment attorney. Also read 5 key points to determine whether someone is an employee.

Not learning from your claims

If there are several accidents, look at them as information. Two falls from the same ladder point to an equipment or training problem. Fixing it protects your people and is a good safety practice.

What to do now

• Pull out your policy and check that it is current, with the dates and the classification of your workers.
• Ask your agent: "With my payroll and my tasks today, what does my policy cover and what does it not?"
• Notify them when you hire, change the type of work, or your payroll grows.
• Separate payments to employees and to subcontractors in your books.
• Ask each subcontractor for their license and proof of insurance.

When to talk to a professional

Talk to your insurance agent about coverage and classifications. Talk to an employment attorney about employees versus independent contractors and about any serious accident. For taxes and payroll, use a tax preparer, CPA, or enrolled agent and a payroll provider.

How ODC helps you

With bookkeeping for contractors we keep your payroll and subcontractor payments organized, which is what they ask for in an audit. For insurance and protection, see our business protection page. ODC does not sell insurance or give legal advice.

References

1. California DIR/DWC: FAQs for employers — general workers' comp obligations in California
2. California DIR/DWC: Employer information — information for employers
3. California DIR: Independent contractor versus employee — how to tell an employee from an independent contractor
4. CSLB: Workers' compensation requirements — workers' comp requirements for licensees

This article is for information and education only. It is not legal, tax or bookkeeping advice. We are a bookkeeping service: for tax matters, consult a tax preparer, CPA or enrolled agent.