A common failure of some businesses in the United States is to attempt to avoid the expense of payroll taxes and worker’s compensation insurance by either misclassifying employees as contractors or simply paying the workers “off the books” in cash or other compensation.
Often such practices “creep up” on the employer. He or she needs to expand the work force in a hurry, hires extra people for a project then simply keeps them working permanently but does not provide the various fringe benefits required by law.
Another source of problems occurs with employers mischaracterizing the employee as an independent contractor and not withholding the various costs (including payroll taxes) which the law requires. That failure can result in additional substantial tax penalties in addition to the sanctions described in this article.
California imposes extremely severe sanctions on employers who violate the requirement to provide appropriate Worker’s Compensation insurance. This article outlines the penalties such employers face. The reader should first review our article on Worker’s Compensation-The Basics.
The Basic Sanctions:
Failure to have worker’s compensation coverage for employees is a criminal offense.
If the Division of Labor Standards Enforcement of the State (“DLSE”) determines that an employer is operating without appropriate workers’ compensation coverage they will issue a “stop order.” The order prohibits the use of or any hiring of any employee until full coverage is obtained. Failure to observe a stop order is a misdemeanor punishable by imprisonment in the county jail for up to sixty days and a fine of up to ten thousand dollars or both. The DLSE may also assess a penalty of one thousand dollars per employee who is on the payroll at the time the stop order is used up to a total of one hundred thousand dollars.
Worse, if an employee becomes ill or is injured due to work and the employer is not insured, the employer is responsible for paying all bills and expenses related to the illness or injury. The employee can also file a civil action against the employer in addition to filing a workers’ compensation claim.
Beginning in 2011, additional sanctions are available to the DLSE. Pursuant to Section 3710 of the Labor Code, at the time a stop order is issued and served, the director may also issue a penalty assessment order requiring the employer to pay to the director the greater of (1) twice the amount the employer would have paid in workers’ compensation insurance premiums during the time the employer was uninsured or (2) one thousand five hundred dollars per employee.
Additionally, if an injured worker files a workers’ compensation claim that goes before the Workers’ Compensation Appeals Board and the judge finds that the employer had not secured insurance as required by law, the uninsured employer may be assessed a penalty of ten thousand dollars per employee who was on the payroll at the time if the injury if the work’s case was found to be compensable or two thousand dollars per employee who was on the payroll at the time of the injury if the worker’s case was noncompensable, up to a maximum of one hundred thousand dollars. (See California Labor Code Section 3722 (b).)
Such penalties are almost certainly not deductible as a business expense.
Common Sense:
Workers’ compensation insurance is not just required, but is an intelligent means to reduce the danger of injuries on the job for the employer. Civil actions outside the workers’ compensation arena often result not only in much higher expense for the employer in defense, but have damages for pain and suffering that may not arise in workers compensation claims. It is a foolish as well as illegal to avoid paying the workers’ compensation expenses for employees in California and is often an error made by neophytes to the world of business in California. Do not make that error.