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CALIFORNIA CORPORATE & SECURITIES LAW

Is A Corporate Director An Employee Subject To Workers’ Compensation?

 

Corporate lawyers tend to believe that directors and officers are not ineluctably employees.  Thus, it may come as a surprise that California’s workers’ compensation law has for some time defined an “employee” to include officers and directors:

All officers and members of boards of directors of quasi-public or private corporations while rendering actual service for the corporations for pay; provided that, where the officers and directors of the private corporation are the sole shareholders thereof, the corporation and the officers and directors shall come under the compensation provisions of this division only by election as provided in subdivision (a) of Section 4151.

Cal. Labor Code § 3351(c).  Apparently, the proviso led to some abuses with corporations bestowing officer titles on lower level employees to reduce workers’ compensation insurance costs.  For example, one corporation reportedly designated a janitor as its vice president – sanitation services.  In an attempt to address these concerns, the legislature this year enacted AB 2883.  This legislation, among other things, amends Section 3351(c) as follows (deletions in strikethrough and red, additions in blue):

(c) All officers and members of boards of directors of quasi-public or private corporations while rendering actual service for the corporations for pay; provided that, where the officers and directors of the private corporation are the sole shareholders thereof, the corporation and the officers and directors shall come under the compensation provisions of this division only by election as provided in subdivision (a) of Section 4151. pay. An officer or member of a board of directors may elect to be excluded from coverage in accordance with subdivision (p) of Section 3352. 

Section 3352(p), which is new, provides:

An officer or member of the board of directors, as described in subdivision (c) of Section 3351, if he or she owns at least 15 percent of the issued and outstanding stock of the corporation and executes a written waiver of his or her rights under this chapter stating under penalty of perjury that the person is a qualifying officer or director. The waiver shall be effective upon the date of receipt and acceptance by the corporation’s insurance carrier and shall remain effective until the officer or member of the board of directors provides the insurance carrier with a written withdrawal of the waiver.

Although the statute retains the requirement that directors and officers perform “actual services” for “pay”, it does not define “pay”.  I don’t know of any publicly traded corporation that does not compensate its directors and I doubt any would take the position that their directors do not perform any “actual services”.  Are director fees “pay” within the meaning of the statute?

Surprisingly, the Ninth Circuit Court of Appeals more than 70 years ago held that a director need not be paid to be an employee under the California Insurance Code:

It is our opinion that the including provision of the section of the Labor Code [§ 3351] does not limit the character of employee under the provisions of the Insurance Code and make invalid a policy insuring as an employee a director actually rendering valuable service to the corporation though without compensation.

John Hancock Mut. Life Ins. Co. v. Dorman, 108 F.2d 220, 223 (9th Cir. 1939) (death and disability policy).

Was this bill a camel?

A wag once quipped that “a camel is a horse designed by a committee”.  AB 2883 is what is known as a “committee bill”.  Instead of an individual author or authors, the bill was introduced by the Assembly Committee on Insurance.  It seems to have attracted no opposition, it passed through every committee and both houses without attracting a single “no” vote. Now that the bill is taking effect, it is garnering more attention and concern. Thus, the legislature may further tinker with the statutes in the new session.  In the meantime, the Department of Insurance has issued this notice to insurers writing workers’ compensation coverage.

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