The San Diego District Attorney’s Office placed a quarter-page ad in The San Diego Union-Tribune on March 22. Underneath the photo of a chef was a smaller, menacing image of a flaming grill. In large text, the ad read: “DOES YOUR EMPLOYER HAVE WORKERS’ COMP? IT’S THE LAW!” The reader was directed for further information to the toll-free number of the DA’s insurance fraud hotline and the DA’s website.

Labor Code section 3700 requires virtually every private sector employer with one or more employees, including employees who are family members, to carry workers’ compensation insurance issued by an insurer authorized to write compensation insurance in California. There is a narrow exception for employers certified by the Department of Industrial Relations to be self-insured.

Scope of the problem

DA Communications Director Tanya Sierra said the number of unlawfully uninsured California employers is probably unknowable “since new businesses start and existing businesses close all the time.”

Nicki Demakis, managing partner of San Diego-based workers’ compensation defense firm Trovillion, Inveiss, Demakis & Hansen said by email that two categories of California employers are more likely than others to be uninsured. The first category is such trades as “handypersons, roofing and small construction outfits” that may misclassify their workers as independent contractors to avoid having to secure workers’ compensation insurance. The heightened risk of injury from work in these industries results in higher premiums many firms cannot afford.

The second area of widespread noncompliance, said Demakis, relates to “domestic workers/household employees. Most homeowners don’t realize they could be classified as ‘employers’ under California law dependent upon the hours worked and pay threshold being met of folks they have working for them. Common examples of these would be nannies, caregivers and housekeepers.” Homeowners employing such individuals should “contact their broker and ask for a domestic worker endorsement” to their homeowners’ insurance policy.

Fines, prison for noncompliance

Labor Code section 3700.5 makes it a misdemeanor to fail to carry workers’ compensation insurance “by one who knew or because of his or her knowledge or experience” reasonably should have known of the obligation to carry insurance, subjecting the offender to a fine of at least $10,000, up to one year in county jail, or both.

Under Labor Code section 3722, the Division of Labor Standards Enforcement (DLSE) will also assess a penalty of the greater of (1) twice the amount the employer would have paid in workers’ compensation premiums during the period the employer was uninsured, or (2) the sum of one $1,500 per employee employed during the period the employer was uninsured.

Stop order

The DLSE will shut down an illegally uninsured employer until compliant workers’ compensation insurance is secured. An employer subject to a stop order must pay its employees for up to 10 days for time lost until the employer obtains insurance.

It is a crime for an employer, officer or anyone having control over the workplace to disobey a stop order, punishable by up to 60 days in county jail, a fine of up to $10,000, or both.

Financial responsibilities to injured worker

Workers’ compensation benefits are the exclusive remedy available to employees who suffer work-related injuries or illnesses against properly insured employers. An illegally uninsured employer, however, must pay all bills for treating an employee’s work-related injury or illness. An employee may file a civil action against the employer for their injuries in addition to filing a workers’ compensation claim, paid through the state Uninsured Employers Benefits Trust Fund (UEBTF).

The UEBTF may seek reimbursement from the uninsured employer for benefits the fund pays out to the employee, including filing liens against the employer’s property.

Why this matters

In 1989, the California Supreme Court observed that the workers’ compensation system “seeks (1) to ensure that the cost of industrial injuries will be part of the cost of goods rather than a burden on society, (2) to guarantee prompt, limited compensation for an employee’s work injuries, regardless of fault, as an inevitable cost of production, (3) to spur increased industrial safety, and (4) in return, to insulate the employer from tort liability for his employees’ injuries.”

The risk of fines, prison and unlimited liability to injured workers — graphically illustrated by the DA’s recent ad — will lead all but the most reckless employers to secure the required workers’ compensation insurance.

Eaton is a partner with the San Diego law firm of Seltzer Caplan McMahon Vitek where his practice focuses on defending and advising employers. He also is an instructor at the San Diego State University Fowler College of Business where he teaches classes in business ethics and employment law. He may be reached at eaton@scmv.com.