Employee Misclassification – Shareholders and Officers
Avoid Employee Misclassification in naming shareholders and officers.
I received another question on the pitfalls of misclassifying employees. In California, there was a company that had been advising employers to exploit a loophole in the labor code to avoid their workers comp obligations by classifying workers as shareholders and corporate officers.
Premium Auditors are trained to look for and recognize shareholders and officers that should not be listed as such in your worker’s compensation policy or company records. In other words, this type of employee designation causes auditors to disallow any shareholders’ or officers’ exemptions from the payroll records. In the short term, this may have worked, but in the long term, the method failed often and left the employer with an unexpectedly large premium audit bill.
In most states, shareholders and corporate officers are exempted from the remuneration (payroll) figures for employers. Giving a rank-and-file employee a position title such as Vice President or any executive title does not guarantee an automatic exemption. If any company gives you advice to try this method, please avoid them at all costs. This is very illegal. The company in California that was giving this advice is being pursued very heavily by the California Attorney General.
We would never advise a company to try this method. The Workers Comp premium auditor will catch this at the end of the policy year, so the advice to try this method is worthless. The only money earned by this method is the advisory company getting paid for useless advice.
As we have mentioned in the last two posts, there is nothing wrong with questioning or disputing the workers comp classification codes or anything else in an employer’s workers compensation policy or premium audit. This is allowed by your Workers Comp policy.
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