SHOULD THE MANDATE OF WORKER'S COMPENSATION INSURANCE IMPACT WHETHER A SMALL BUSINESS IS AN LLC OR CORPORATION?
By: By: Kevin T. Kutyla, Esq. and Lee Ann M. Pounds, Esq.
In today’s world many small businesses have the entrepreneur as its only employee. In essence, the management and the employee are one and the same. Therefore, the traditional rationale for mandated workers’ compensation insurance coverage no longer serves its past purpose. Rather, many one-employee businesses see the expense of workers’ compensation insurance coverage as an unnecessary and unproductive cost being forced upon them by the State with no ascertainable benefit. Efforts to persuade the New Jersey Department of Labor and Workforce Development (“Department of Labor” or “Department”), the state administrative agency who enforces the mandate of workers’ compensation coverage, of this economic and business reality have been unsuccessful, except where a corporation agrees to reorganize itself as an limited liability company (“LLC”).
Small business owners who are the company’s only employee want the freedom to assess the risk of injury to one’s self and plan accordingly by use of comprehensive medical insurance plans, disability insurance or cash reserves. Yet if the business owner serves as an employee of a corporation in New Jersey, the business commits a criminal offense if it knowingly fails to obtain workers’ compensation insurance or else meet the stringent self-insurance requirements of N.J.S.A. 34:15-78. Under N.J.S.A. 34:15-79, if an employer knowingly fails to provide workers’ compensation benefits it can be charged with a crime in the fourth degree and subjected to fines of $1,000 for each ten-day period of non-compliance. In addition to criminal prosecution and fines, the Department of Labor may add penalties, fines or assessments for the business and/or corporate officers of employers who fail to provide workers’ compensation insurance coverage for employees.
For many small business owners this means potentially subjecting family members or close friends who serve as their corporate officers to possible civil and/or criminal liability. The Appellate Division of the New Jersey Superior Court has concluded that a corporate officer can be personally liable for an employer’s failure to provide workers’ compensation insurance coverage if that officer is actively involved in the corporate business. Macysyn v. Hensler, 329 N.J. Super. 476, 485-86 (App. Div. 2000). Active involvement has been interpreted as including those corporate officers who had actual responsibility for the maintaining of workers’ compensation insurance or any officer in a position to prevent the lapse of workers’ compensation insurance who failed to do so. Macysyn, 329 N.J. Super. at 485-86. While the Appellate Division in the Macysyn case determined there could be no personal liability for the wife of the business owner who served as the corporate secretary and simply acted as the custodian of the corporate seal receiving no salary and making no business decisions affecting the operation of the hardware store in any way, the same result may not apply should a spouse or family member obtain any compensation from the business or engages in any operational decisions.
For many small business owners this means potentially subjecting family members or close friends who serve as their corporate officers to possible civil and/or criminal liability. The Appellate Division of the New Jersey Superior Court has concluded that a corporate officer can be personally liable for an employer’s failure to provide workers’ compensation insurance coverage if that officer is actively involved in the corporate business. Macysyn v. Hensler, 329 N.J. Super. 476, 485-86 (App. Div. 2000). Active involvement has been interpreted as including those corporate officers who had actual responsibility for the maintaining of workers’ compensation insurance or any officer in a position to prevent the lapse of workers’ compensation insurance who failed to do so. Macysyn, 329 N.J. Super. at 485-86. While the Appellate Division in the Macysyn case determined there could be no personal liability for the wife of the business owner who served as the corporate secretary and simply acted as the custodian of the corporate seal receiving no salary and making no business decisions affecting the operation of the hardware store in any way, the same result may not apply should a spouse or family member obtain any compensation from the business or engages in any operational decisions.
N.J.S.A. 34:15-9 states that in every hiring situation, the law presumes that the parties have opted for the Workers’ Compensation system over the common law tort system, unless there is “an express statement in writing prior to any accident [stating] … that the provisions of the Workers’ Compensation statute are not intended to apply.” In 2001, the Appellate Division reviewed the attempt by a well-known newspaper publisher to exclude the occupational disease and disability claims of its mailroom employees, apparently because many of those employees had filed workers’ compensation claims in the past against a previous employer. In Peck supra, the Appellate Division resoundingly invalidated the written opt-out agreement for a variety of stated reasons.
The employer in Peck incorporated the exclusion into its collective bargaining agreement, and additionally made each mailroom employee sign an individual exclusion on two separate occasions. The parties agreed that signing the exclusion was a condition of employment, and anyone failing to sign would be fired.
In affirming the decision of the Workers’ Compensation Court, the Appellate Division found the language of the exclusion difficult for laypeople to understand and, therefore, held that it was not a valid waiver of the employees’ rights under the Workers’ Compensation statute. The Appellate Division also found that because employees were faced with termination if they failed to sign, the agreement was invalid because it was procured under duress and undue influence.
Finally, the Appellate Division invalidated the exclusion on the ground that those employees who had already been exposed to the occupational hazard could not thereafter waive their rights to Workers’ Compensation benefits simply because the occupational disease or disability had not yet manifested itself.
It is clear that based on the Peck decision, any lawyer seeking to draft a written exclusion for Workers’ Compensation benefits has an uphill battle to create an exclusion that the courts will uphold as valid.
An example of such a situation that occurred recently involved a one-man construction business who received a letter from the Department of Labor, stating that he was not in compliance with the law because he did not have Workers’ Compensation insurance. This business owner’s attorney attempted to draft a written exclusion, but the Department of Labor determined the exclusion to be invalid and unenforceable.
The Department took the position that this corporation could only opt out of the workers’ compensation system if it obtained liability insurance satisfying the requirement of N.J.S.A. 34:15-72. Moreover, the Department took the position that such insurance was not available in New Jersey, therefore leaving no foreseeable way for this small business to opt out of its obligation to carry workers’ compensation insurance.
After some wrangling between the employer’s attorney and the Department of Labor, the Department of Labor declared that if a business became a single-member LLC, rather than a corporation, then the workers’ compensation requirements were different, and the LLC could compensate its member and choose not to obtain workers’ compensation coverage. No authority was cited for this position.
Thus, it is important for attorneys to advise their small business clients at the time of business formation or in relation to existing one-employee corporations of this distinction made by the Department. Although the validity of the Department’s position in this respect is questionable, no attorney wants her client to be the test case. Furthermore, if a business owner can exercise freedom over the risk analysis and financial decisions related to their own potential injury on the job and not be required to obtain costly workers’ compensation coverage, many may view the lawyer’s assistance in recommending the LLC as an important step toward the success of the company.
Kevin T. Kutyla, Esq. is a partner at the law firm of Gruber, Colabella, Liuzza, Kutyla & Ullmann, with offices in Hopatcong and Newton.
Lee Ann M. Pounds, Esq. is a solo practitioner in Morristown, representing primarily small business owners.