Workers Comp Coverage for Executive Officers and Other Principals

Most business owners are aware that workers compensation insurance is compulsory for employees. Employers must protect their employees against job-related injuries by purchasing a workers compensation policy. But what about corporate officers, partners, and sole proprietors? Must they be covered as well?

Executive Officers

In most states, executive officers are considered employees of the corporate entity. Like other employees, they are automatically covered by workers compensation laws. However, many states permit at least some executive officers to opt out of coverage. The laws vary from state to state but here is a general overview.

• A number of states permit officers to exclude themselves from workers compensation coverage if the company has less than a specified number of officers, such as two or four. If the business has at least the stated number of officers, all must be covered. Some states permit officers to opt out of coverage only if the company has no other employees. If the company employs other workers, all officers must be covered.
• Some states permit all officers to exempt themselves from coverage. Others allow only a specified number of officers to opt out.
• Special rules may apply to officers of closely-held private corporations. Workers compensation laws in some states specifically exclude executive officers who are the sole shareholders of the company's stock. In other states, such officers are automatically covered under the laws but may choose to opt out.
• Special rules may apply to non-profit companies. Some states do not require executives to be covered if they are not compensated for their services. Depending on the state, the executives may opt out or the organization may decide not to cover them.
• A few states have enacted special rules that apply to executives in the construction industry.
• Executive officer exemptions may need to be renewed periodically, such as every two years.

States that allow executive officers to opt out of (or in some cases, opt into) workers compensation coverage have devised forms for this purpose. These forms should be available from your insurer. Officers who wish to reject workers compensation coverage must complete the form and return it to the insurance company. The insurer will forward the form to your state workers compensation authority.

Sole Proprietors, Partners, and Members

In contrast to executive officers, other company principals like sole proprietors, partners, and members of limited liability companies are typically excluded under state workers compensation laws. Nevertheless, such individuals may be permitted to elect coverage by completing a state-designated form. The form must be sent to the insurer, which will then forward it to the applicable state workers compensation authority.

Some states exclude partners and sole proprietors but cover members of limited liability companies. Some states automatically cover family members of sole proprietors and partners even though the sole proprietors and partners themselves are excluded. To opt out of coverage, family members must complete a form and forward it to the insurer.

Classifications

When executive officers are covered under the employer's workers compensation policy, either by choice or a statute, they are generally assigned the classification that best describes their duties. For example, suppose that Winsome Wines has four executive officers, all of whom work in the company's winery business. The officers will likely be assigned the same classification as winery employees.

Some executive officers perform mainly clerical duties in an office. These individuals may be assigned a separate classification, Executive Officers NOC (NOC means not otherwise classified).

When sole proprietors, partners, or members are covered under a workers compensation policy, they should be classified and rated based on their job functions. In most cases, these individuals will be classified in the same manner as the firm's employees.

Minimum and Maximum Payrolls

Workers compensation premiums are calculated based on rates and payroll. When executive officers, sole proprietors, partners, or members are covered by the policy, the payrolls assigned to these individuals are usually determined by state law. Many states specify minimum and maximum payrolls for company principals. If the actual payroll is less than the specified minimum, the minimum payroll will be used for rating purposes.

For example, suppose a workers compensation law specifies a minimum annual payroll of $52,000 for each executive officer. The maximum payroll is $125,000. If an officer earns less than $52,000, the insurer will calculate a premium for that officer based on a payroll of $52,000. If the officer's annual salary is $150,000, the premium for that officer will be calculated based on a payroll of $125,000. Because the officer's actual salary ($150,000) exceeds the $125,000 maximum, the maximum payroll applies.

Likewise, suppose that Max, a sole proprietor, has opted to be covered under his company's workers compensation policy. Max takes a $50,000 annual salary. However, the law in his state specifies a flat amount of $45,000 for a sole proprietor's payroll. Even though Max's actual payroll is $50,000, the mandated $45,000 is used for rating purposes.

Cost of Missing Forms

Workers compensation policies are subject to an annual audit. When conducting the audit, the auditor will ensure that any company principals who have opted in or out of coverage have signed the required forms. If one or more forms are missing, the auditor will add or subtract payroll accordingly. For example, suppose your firm has three executive officers, all of whom have elected to be excluded from workers compensation insurance. Unfortunately, none has signed the state-required form. The auditor will include payroll for the three officers when calculating your final premium.

Elect or Reject Coverage With Care

Finally, workers compensation insurance provides medical, disability, and other benefits to injured workers. When deciding whether to opt in or out of workers compensation coverage, executive officers and other principals should evaluate other possible sources of benefits. Examples are health, disability, and accident insurance.

For instance, executive officers may reject workers compensation coverage because they assume they are covered for work-related injuries under company-sponsored health and disability insurance. Yet, this assumption may be wrong. Some health and disability policies exclude injuries that occur on the job.