California is one of several states that ushered in 2017 by adding new laws governing small businesses. One of the most talked-about measures implemented in the Golden State is an update to the existing workers’ compensation laws.

Assembly Bill 2883 sets new guidelines for defining “employees”and who qualifies as an excluded employee. The bill, which took effect January 1, 2017, has the potential to make carrying workers’ compensation insurance coverage more expensive for some small business owners.

What Assembly Bill 2883 Requires

The new rules affect all business workers’ compensation policies, including policies already in force. The bill requires businesses to extend workers’ compensation coverage to employees who were excluded under the old law. That includes certain officers and directors of private corporations and working members of partnerships and limited liability companies (LLCs). Previously, these individuals only opted into a company workers’ compensation policy.

Going forward, officers, directors and partners are to be covered under the business’s plan. The exception is if they meet the definition of an excluded employee. An exemption from coverage is for officers or members of the board of directors who own at least 15 percent of the issued and outstanding stock of the corporation, or a general partner or managing member of an LLC. By law, exemption qualifiers are to complete a written waiver of his or her right to workers’ compensation coverage. Then it goes to the company’s insurer for filing.

The Assembly Bill’s purpose is to end abusive practices associated with the wording of the old workers’ compensation law. Because the definition of an excluded employee was broad, it created a loophole of sorts. This loophole allowed companies to list everyone in the organization as an officer or director. The companies would then avoid having to pay anything for workers’ compensation coverage.

Is Your Small Business in Compliance with the New Law?

There are two specific ways that the updated guidelines represent a stumbling block for California-based businesses. First, the law took effect at the beginning of the year. It affects in-force policies as well as new policies purchased after January 1st. If you have a policy in place for your small business and one or more of your members qualifies for an exemption but you don’t have a waiver on file with your insurance company, you may technically be in violation of the law.

While Assembly Bill 2883 doesn’t specify a penalty for non-compliance, your insurance company could decide to invalidate any claims filed against your policy. That could create financial headaches if an employee decides to sue in connection with an injury.

How the New Law May Affect a Small Business’ Bottom Line

Along with invalidating claims, the more immediate impact of the new regulations is the potential for an increase in workers’ compensation premiums. According to the Oregon Department of Consumer and Business Services, California already ranks as the most expensive state in the nation in terms of workers’ compensation coverage rates. As of 2016, the premium coverage rate was $3.24 per $100 of payroll, nearly four times higher than North Dakota, which boasts the lowest rates overall.

If your business has employees who were previously exempt but no longer meet the standard for an exemption, adding them to your existing policy likely means paying more in premium costs. This may not be as damaging for larger corporations. However it could have a more noticeable effect on your operating expenses as a smaller business. Paired with the recent minimum wage increase, which raised the minimum wage rate to $10.50 per hour for businesses with 26 or more employees, the new law represents a tangible threat to small business owners’ profitability.

Unfortunately, there’s no work-around for the workers’ compensation law currently, outside of applying for an exemption. If that’s not an option for your business, examining at your current coverage is certainly something to consider. Shopping around for a more favorable rate with a different insurer could help lessen the sting to your bottom line.