1. Identify Executive Officers, Sole Proprietors, and Partners
2. Develop the correct premium exposure for Executive Officers, Sole Proprietors, and Partners.
3. Apply the proper classification.
The Manual defines executive officers of a corporation or unincorporated association as the "President, Vice President, Secretary, Treasurer or any other officer appointed in accordance with the charter or by-laws of such entity."
It is important for the auditor to determine whether an individual employee has executive officer status because, in most jurisdictions, a maximum payroll inclusion applies for officers; a ruling which is different for non-officer employees. This presents no problem on the vast majority of accounts audited. The auditor is furnished the name of 3 to 5 executive officers and the inclusion rule is applied to these individuals without verification of their executive officer status.
However, the auditor is occasionally faced with an insured who regards a considerable number of its employees as executive officers. This is especially true of banks and professional corporations in the medical, legal, or accounting fields. On accounts such as these, it is not the title of the individual (such as Vice President, Assistant Treasurer, etc.) that alone determines whether that individual is an executive officer in an auditing sense. The auditor must investigate further. Generally, an employee with a title such as executive director, administrator, office manager, assistant to the President or controller is not an executive officer unless investigation reveals to the auditor that actual executive officer status has been established for that individual. A corporation’s charter, by-laws and corporate minutes are key documents.
Most states include officers for coverage but may allow them, by law, to elect not to be covered. While requirements vary, most require an endorsement to the policy which lists the officers to be excluded. Executive officers covered under the policy have the same status as the other employees. The status of executive officers can be found in greater detail in the provisions of the appropriate state laws. (A list of states where executive officers may be excluded and procedures for their exclusion can be found in reference table 1 - Election of Coverages of the users guide.)
The auditor should also be aware of those states where certain executives would not be covered by the policy unless they are specifically added by endorsement. In Texas, the executive officer(s) must be endorsed on the policy in order to be afforded coverage. In Oregon and Minnesota, executive officers of closed corporations are excluded unless endorsed on. In Idaho and Oklahoma, an officer who owns 10% or more stock of the corporation will be excluded unless endorsed on.
1) The minimum individual payroll for an executive officer is shown on the state rate pages or in the state special rules provisions.
2) The maximum individual payroll per executive officer is shown on the state rate pages or in the state special rules provisions.
3) The limitations described apply to the average weekly payroll of each executive officer for the number of weeks employed during the policy period.
There are interpretations provided in Rule 2-E of the Basic Manual that deal with the treatment of executive officer payroll. To summarize those interpretations:
1) Do not include the payroll of an executive officer when:
- That officer because of age or for other reasons, ceases to perform any duties and does not come on the premises, except perhaps to attend directors’ meetings.
2) Do include the payroll of an executive officer (subject to minimums and maximums) when:
- That executive because of age or for other reasons, ceases to perform any duties, but, nevertheless, frequently visits the premises of the risk.
- That officer frequently visits the premises of the risk for business conferences, directors’ meetings or similar duties, although also an officer or employee of another risk in the operations of which he takes an active interest.
3) Determine payroll under the following conditions as follows:
- Where the officer draws no salary in fact, but a regular salary is credited to him or her on the books, the amount so credited shall be included in the payroll of the risk as his or her payroll.
- Where the officer draws no salary in fact, but a regular salary is credited to him or her on the books and subsequently charged back to such officer, the amount so credited shall be included in the payroll of the risk as his or her payroll regardless of such charge off.
- Where the officer draws no regular salary but draws such various sums as his or her needs or the conditions of the business dictate, the actual amount drawn shall be included in the payroll of the risk as his or her payroll.
- Where the officer receives no salary in fact, either drawn or credited, or where the records presented to the auditor fail to disclose the salary, the amount to be included in the payroll of the risk shall be the applicable manual minimum per week.
- For the purpose of applying the payroll limitation rule, bonuses paid during the policy term will be considered as earned during the policy term and prorated for the period of employment during the policy term.
ASSIGNMENT OF PAYROLL
Classification assignment for executive officers is determined by the principal operations in which the officer is engaged. This differs from employee classification procedures which require payroll to be assigned to the highest rated classification to which they are exposed, regardless of the amount of time exposed.
The only exceptions are:
The Executive Officer rule presents more than just the normal questions for trying to determine the applicable classification(s) when an executive officer has multiple duties. The National Council responded with the following correspondence when asked to clarify various aspects of this rule:
The use of the phrase, "Principal Operations", in the rule is purposeful and the mention of a percentage is specifically avoided. The wording found in this rule is intended to reflect the nature of the employment characteristics uniquely associated with executive officers. Generally, the majority of executive officers would confine their duties to clerical office functions and be classified under Code 88l0 or, if they frequently travel for business reasons, Code 8742 - "Salespersons-Outside". Executive officers may also spend a minor portion of their time in duties which are not clerical. This may be especially true at small business firms. The industry has felt that executive officers in certain circumstances should not be penalized. The assignment of an executive officer’s payroll to the principal operation permits a degree of flexibility when the executive officer has an occasional and infrequent exposure to a higher hazard operation within his or her business. There are instances when an executive officer has what must be considered more than an occasional exposure to some of the higher hazards of the business operation. These instances are provided for by two exceptions to the previously quoted rule. The exception concerning executive officers engaged in construction, erection or stevedoring operations is self-explanatory. The other exception indicates that an executive officer who regularly and frequently engages in duties which are ordinarily performed by a superintendent, foreman or worker shall have his or her payroll assigned to the governing classification.
The terms "regularly" and "frequently" must be used in conjunction when attempting to determine the extent to which an executive officer undertakes operations within the business sufficient to have the payroll assigned to the governing classification. If the exposure is not frequent and regular, the classification applicable to the executive’s principal operation is assigned. As you can see, the components making up the executive officers rule must be considered in relation to one another to make the proper payroll allocations. Phrases such as "Principal operations" or "regularly and frequently" cannot be - nor are they intended to be - defined by fixed percentages. The variables of the individual situation must be reviewed and decisions must be based upon the conditions prevailing in each case.
Next, you ask why Corporate Officers are "treated differently when, by law, corporate officers are employees of the corporation." Unfortunately, not all states consider corporate officers as employees. Some prohibit coverage to corporate officers; some indicate corporate officers are not subject to the act but may elect to be covered as if they were an employee of the corporation; and other states indicate the corporate officer is to be considered as an employee but may reject coverage. Therefore, the Workers’ Compensation laws of each state must be examined to determine the status of corporate officers.
You also made reference to Manual Rule 2-E.1 which states that if an executive officer "regularly and frequently engages in duties which are ordinarily performed by a superintendent, foreman or worker, shall be assigned to the governing classification" and asked for clarification of the term "worker". In this instance, the general definition of "worker" is applicable which is: a member of the working class - one that works at manual or industrial labor. Therefore, one may encounter construction workers, factory workers, office workers, etc. In this instance, it is a term used to describe non-supervisory employees - such as those who "work" for their employer - hence a "worker".
EXECUTIVE OFFICERS OF MULTIPLE ENTITIES
The treatment of executive officers of multiple entities has at times created a problem for the field auditor. How are we to handle the situation where an executive officer:
1) receives a salary from several corporations insured under one policy, or
2) has several policies issued to cover several corporations and the executive officer receives a salary from each of these corporations?
The following procedure shall apply in these instances: (Refer to Rule 2-E.1)
Where it is permissible to include more than one corporation on a single policy and such corporations are insured by a single carrier whether under one policy or more policies, the several corporations shall be considered as a unit with respect to the application of the Executive Officers Rule. In all other cases, the rule shall apply on a policy basis.
While normally not considered employees, most partners and sole proprietors can be covered under the law by statutory provision or by election. As with executive officers, once covered, they would have the same status as employees under the policy. Separate lists of states where partners and sole proprietors may be included can be found in reference table 1 - Election of Coverages of the Basic Manual Users Guide.
In order for coverage to be provided to a partner or sole proprietor, the policy should be endorsed to reflect their election of coverage. Several states have special rules concerning coverage of partners and/or sole proprietors. In Louisiana, partners and sole proprietors are covered under the law but may elect not be subject to the law. In New York, individuals or partners with employees may elect coverage by filing an election with the carrier. A notice of election is not required when the sole proprietorship or partnership has no employees. In such an instance, coverage is effected by obtaining a Workers’ Compensation policy.
ASSIGNMENT OF PAYROLL
The payroll of partners or sole proprietors shall be assigned to classifications and rates under the rules which apply to employees. It is important to note that the rule does not make reference to the procedures applicable to "Executive Officers," which, as we have seen, are somewhat different.
LIMITED LIABILITY COMPANIES
There is a different type of business entity known as a Limited Liability Company (LLC). The LLC business entity combines the characteristic of both partnerships and corporations. Some of the more important characteristics of LLC’s include:
1. An LLC is composed of members and managers who are granted statutory immunity from any debt, obligation or liability attached to the company.
2. Similar to partnerships, the income generated by an LLC is passed to members who are taxed individually instead of corporately.
3. As with corporations, only the company’s assets (not the owners’ personal assets) are at risk from lawsuits against the LLC.
All but three states have enacted legislation establishing a Limited Liability Company as a legal entity. To date, few have addressed the Workers’ Compensation implications that arise from this new type of entity.
If members of a limited liability company elect to be covered, insurers must use the WC 00 03 10 Sole Proprietors, Partners, Officers and Others Coverage Endorsement, and list the names of the members electing coverage under "Others." The basis of premium is the same as that used for sole proprietors and partners.
More states may adopt procedures for dealing with this relatively new type of legal entity as it relates to Workers’ Compensation coverage. The conditions described above apply only in the jurisdictions mentioned. Please check the applicable state statutes and Workers’ Compensation laws when a situation is encountered in another jurisdiction.
LIMITED LIABILITY PARTNERSHIPS
The law restricts this form to professionals practicing in a general partnership. As with a Limited Liability Company, a partner of a Limited Liability Partnership (LLP) is liable only for his or her professional negligence or wrongful act or misconduct or that of any person acting under his or her direct supervision and control. Therefore, in an LLP, the partnership’s assets and the personal assets of a negligent or supervising partner will be available to the injured party, but the personal assets of another partner will not be available.
As with an LLC, the coverage status of the owners of an LLP for Workers’ Compensation purposes is determined by individual state statute/regulation. Currently, very few states have specifically addressed the coverage status, basis of premium, or classification treatment for owners of an LLP. Check the applicable state statutes and Workers’ Compensation laws when this type of entity is audited.
2) Members of Religious Orders
3) Church, Hospital or School Personnel
4) Student Nurses
6) Welfare Recipients
These individuals might still be covered by the Workers’ Compensation law or by a Voluntary Compensation endorsement. If coverage applies, there must be some means of determining a fair premium charge.
The matter of determining the remuneration of unsalaried relatives is a problem which arises from time to time. Whether to include an amount as remuneration for such relatives would depend upon whether the state in which they are working considers them employees. This can usually be determined by reference to the State Workers’ Compensation Law Digest.
Once it has been determined that an unsalaried relative is considered an employee, it is then necessary to determine how much to include as remuneration. A good rule of thumb would
be to include as remuneration for such unsalaried relatives an amount equal to that which would normally be received by a regular employee doing the same type of work.
Members of Religious Orders
Nuns and missionary priests of such Orders normally would not be considered as employees of their Order and they should be excluded from the audit adjustment unless specific coverage is afforded by endorsement. In such a case, the endorsement would spell out the remuneration to be taken.
Policy Covering Church, Hospital, School etc.
In a case such as this, where the insured is not a religious Order and nuns or missionary priests are assigned to one of these institutions from an Order, it is customary for the institution to pay directly to the Order an agreed upon amount for their services.
No remuneration is personally received by either the nun or the priest but it is felt that the audit adjustment should include the amounts paid the Order plus the value of board and lodging if they are furnished by the institution being insured. The reason for this approach is that the nuns and missionary priests are considered employees of the institution while they are assigned to it.
The situation surrounding priests (pastors and curates) assigned to parishes and chaplain priests assigned to institutions is slightly different. They usually receive a nominal salary for their services in addition to their maintenance. The audit adjustment should include their salary plus the value of board and lodging.
In some hospitals student nurses receive only room and board during their training. In other hospitals, the student nurse pays for tuition and for room and board while attending a school of nursing. There are a few hospitals where a nominal amount is paid to the student nurse during the apprenticeship period. It is first necessary to determine, under the specific conditions of their training, whether the student nurse would be considered an employee in the state involved.
If the student nurse is considered an employee, the auditor should include the actual remuneration, if any, plus board and lodging. If no remuneration is paid, nor any board and lodging, the auditor should include an amount equal to the starting salary for a beginning trained nurse. If the student nurse receives only board and lodging, the auditor should include the value of this plus an amount to equal the beginning salary for a trained nurse. Be sure to check the exception pages for your particular state.
If the student nurses are not considered employees, they may be included under the Act by means of the Voluntary Compensation endorsement. When this is done, underwriting should also indicate what the basis of premium shall be. Lacking such a definition, the auditor should include for each student nurse the amount a beginning trained nurse would receive.
These guidelines are applicable when coverage is provided to an insured using volunteer workers in states where such workers are entitled to benefits under Workers’ Compensation Law. Always check the Digest of Workers’ Compensation Laws in the state involved to determine if volunteer workers are considered employees under the law. Similarly, always check the State Exception sheets peculiar to that state for handling volunteers. The classifications applicable to volunteer workers will be the same as those applicable to paid employees of the insured involved in the same operations.
Except as otherwise provided (by endorsement or Manual rule such as that relating to volunteer firemen), premium will be based on the amount of remuneration normally received by regular employees doing the same or similar work. Volunteer workers can always be brought under the law by means of a Voluntary Compensation endorsement in a manner similar to the following:
"1 Group of Employees"
Volunteer workers’ remuneration shall be calculated at the wage paid regular employees for similar work, or a set amount per volunteer as stipulated by endorsement. The preceding information applies in most states, however, check State Exception pages.
In some jurisdictions, welfare recipients are required to "work out" their welfare payments when they are physically able to do so. In those states in which these workers must be voluntarily brought under the act, underwriting will issue a Voluntary Compensation endorsement.
In the schedule of this endorsement, the following wording will be inserted:
"1 Group of Employees"
Welfare recipients, whose remuneration for premium purposes shall be calculated at the wage paid regular employees for similar work.
In those states in which the act already contemplates coverage for these individuals, underwriting will issue a manuscript endorsement reading as follows:
"Basis of Premium"
It is agreed that the premium basis for employees who are also welfare recipients shall be calculated at the wage paid regular employees for similar work."
Where exposures for welfare recipients are discovered at audit and there are no guidelines contained in the policy as to the amount of remuneration to be used, the State Minimum Wage Rate should be used in determining payroll. The classification appropriate to the work performed shall be assigned.
Coverage of CETA Workers
Many states have enacted legislation concerning the inclusion of participants in the Comprehensive Employment and Training Act (C.E.T.A.) programs in Workers’ Compensation coverages. These statutes vary in approach as to how coverage is to be afforded; which party (the sponsoring agency or the employer) would be responsible for providing the coverage; and so forth.
When auditing risks which develop exposure for C.E.T.A. workers, refer to the rating bureau or board which has jurisdiction for the state being audited, as well as to your own company underwriting, commercial lines, and legal departments, for the current rules regarding coverage of C.E.T.A. Workers
Vocational Rehabilitation and Training-on-the-Job Program Compensation of Disabled Veterans
These programs have been instituted in private enterprises. It has been ruled that "actual wages paid by the private employer plus the reported value of any board and lodging, but subject to the State Average Weekly Wage as a minimum, constitutes the basis of premium for such veterans employed in private industry". Not included is any subsidy paid by the Government.
Voluntary Municipal Personnel
Voluntary municipal personnel includes volunteer firefighters, neighborhood patrol watches, volunteer rescue teams, etc. Status of coverage under the state Workers’ Compensation law may be determined by reviewing the Analysis of Workers’ Compensation Laws, published annually by the U.S. Chamber of Commerce. In the event that coverage is not extended by statute, these employees may be covered by attachment of the Voluntary Compensation Endorsement to the policy of the municipality or governmental subdivision. Check the State Exception pages for rulings and premium bases.
1) Domestic Workers – Residence – Full-time – applies to both inside and outside full-time domestic workers including but not limited to cook, butler, housekeeper, maid, laundry worker, companion, nurse, baby sitter, gardener, handyman or private chauffeur. For purposes of this definition, full-time domestic worker is defined as working more than 20 hours per work week.
2) Domestic Workers – Residence – Part-Time – applies to both inside and outside part-time domestic workers. Part-time is defined as working 20 hours or less per work week.
1) By the Standard Policy, or
2) By attaching the Standard Workers’ Compensation and Employers’ Liability Coverage for Residence Employees Endorsement (WC000314) to a Homeowner’s Policy, a Comprehensive Personal Liability Policy or to any policy which affords similar coverage.
In those states where domestic workers are not included and cannot be brought within the Workers’ Compensation law, voluntary compensation insurance for domestic workers may be provided by attaching the Standard Voluntary Compensation and Employers’ Liability Coverage for Residence Employees Endorsement (WC000312) to a Homeowners Policy, a comprehensive personal liability policy or to any policy which affords similar coverage. Note, one or more members of the same residence may be named as the insured, but only with respect to the employment of domestic workers in connection with a residence.
If commercial farm operations are conducted, Codes 0908 and 0913 do not apply to any operations at the farm location. Refer to the Farm Classifications.
Maintenance, Repair or Construction Operations
a. Codes 0908 and 0913 include ordinary repair or maintenance of the insured’s premises or equipment by domestic workers.
b. Building maintenance or repair by employees hired only for that purpose shall be assigned to Code 9015 - Buildings N.O.C.- operations by owner or lessee. (This would refer to private residences.)
c. Extraordinary repairs, alterations, new construction, erection or demolition or structures shall be assigned to construction or erection classifications.
RATES AND PREMIUM
The advisory loss costs and rates for Codes 0908 and 0913 are per capita premium charges. The insured is required to maintain a record of the names, duties and period of service of each domestic worker.
Full - time Domestic Workers
The estimated premium for Code 0913 will be computed on the estimated number of domestic workers during the policy period. Additional domestic workers employed during the policy period or if some domestic workers are no longer employed and are not replaced, the per capita premium charges will be prorated. Each pro rata charge will be based on the period of employment, but not less than twenty five percent of the per capita charge.
Occasional Domestic Workers
Occasional domestic workers are, inside or outside, who are employed part-time. Any domestic employed more than of the customary full-time shall be assigned and rated as a full-time domestic worker.