September/October 2003
Workers’ compensation insurance originated in the late 1800s when the Industrial Revolution caused many countries, including the United States, to address the frequency and severity of injuries resulting from the increase in factory workers, as well as the heavy machinery and complex processes to which they were exposed.
In 1910, New York created the first compulsory system in the United States, followed in 1911 by Massachusetts, which expanded New York’s efforts by creating the first industrial accident board to administer both the system and a state fund to pay benefits.
Over time, various workers’ comp systems have evolved, and each state has adopted statutes that govern which employees must be covered, which are exempt, and which can choose to be exempt. Many of these statutes are based on the size of the employer (such as the total number of employees or number of employees of a particular type, like domestic or farm workers).
One of the common classes of workers that may or may not be subject to workers’ comp coverage is a company’s leadership, such as the executive officers, partners, and sole proprietors.
If you are an employer, it is critical for you to know and understand the law and rules in your state—especially the distinctions between executive officers and partners/sole proprietors.
Who’s In, Who’s Out, Who Gets to Choose?
In many states, there’s no choice for executive officers—they are subject to coverage and, as such, their payroll will be included in the premium calculation. Currently, the states included in this category are California, Delaware, Hawaii, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New York, Ohio, Oklahoma, Oregon, Virginia, Washington, and Wisconsin, plus the District of Columbia.
Even in those states, though, there are some exceptions, so be sure to talk with your agent about the statute that applies to your company’s situation. For instance, in many states, executive officers are automatically covered, and a special form must be signed for them to be exempt from coverage. If, in fact, they choose to be exempt, their payroll will not be included in the premium calculation. These states include Alabama, Alaska, Arizona, Arkansas, Colorado, Connecticut, Florida, Georgia, Idaho, Illinois, Indiana, Kentucky, Michigan, Minnesota, New Mexico, North Carolina, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, and West Virginia.
As of current information, the only states that don’t require executive officers to be subject to coverage are North Dakota and Wyoming (though in Wyo-ming executive officers may choose to be covered).
By contrast, most states don’t require workers’ comp coverage for partners or sole proprietors. In many states, however, partners or sole proprietors can purchase such coverage and thus be afforded the same protection provided by the workers’ comp policy and statutes.
What Difference Does It Make?
Workers’ compensation was designed to pay for medical treatment, including rehabilitation, and lost wages for your employees who are hurt on the job, regardless of fault. It was meant to ensure that employees who are injured or disabled on the job are provided with state-mandated benefits, without the need for litigation.
Where allowed by law, many executive officers choose to be exempt. This has been done primarily to save money. By exempting themselves from the policy, their payroll is not included in the calculation of their workers’ comp premium. In most states, the payroll of executive officers is subject to a minimum and a maximum amount, while sole proprietors and partners are subject to a fixed payroll figure. This limits the salary that can be included for rating purposes.
Though the earnings of executive officers must be assigned to the specific classifications for the work they perform, in many cases that work may fall under a category other than the “governing” classification at your operation. Their primary responsibility, for instance, might actually involve sales or office management. Both of these classifications bear rates that are substantially below the “governing” classification, thus the ultimate cost of insuring this class of employee becomes nominal.
Should small corporations cover their executive officers, or should a sole proprietor or partners cover themselves? Though many executive officers, sole proprietors, and partners may think their job duties expose them to less of a chance of getting injured than someone in a riskier position, the biggest risk in not having coverage is that the injured party ends up with no medical insurance. Most personal health and group insurance policies exclude coverage for any medical expense that is the result of a work-related injury or illness. So ultimately the injured party ends up self-insuring their medical coverage.
Thus, the only way to provide insurance protection is through the purchase of workers’ compensation coverage, and it usually ends up being an inexpensive way of ensuring protection for those included in these categories. •
—Monica McNally, senior vice president
of RecycleGuard/Willis of New Hampshire Inc. (Portsmouth, N.H.)
Workers’ compensation insurance originated in the late 1800s when the Industrial Revolution caused many countries, including the United States, to address the frequency and severity of injuries resulting from the increase in factory workers, as well as the heavy machinery and complex processes to which they were exposed.