How to Know When You Need to Pay for Workers’ Compensation Insurance

There are so many things you need to know when you are a business owner… like what color to use for your logo, where to get stationery, and whether to stock the company fridge with Diet Cokes or Diet collar, workers comp, workers compensation, California,

It’s enough to make your head spin.

Here’s a tougher decision — if you are using employees or independent contractors as your business grows, how do you know when you need to pay for workers’ compensation insurance?  Here’s your answer below.

— John

Guest Submission by Anitha Cadambi. You can find out more about submitting a guest post here.

Did you know? An employer needs workers’ compensation coverage for any employee it hires, even if it’s just one employee, and even if it’s just temporary employment.

Does this Apply to Out of State Employers?

Yes. Out-of-state employers may need workers’ compensation coverage if an employee is regularly employed in California or a contract of employment is entered into in California.

Will I be Penalized for Failing to Carry Insurance?

The California Labor Code makes the failure to carry workers’ compensation insurance a misdemeanor punishable by either a fine of up to $10,000 or imprisonment in the county jail up to one year, or both.

The Division of Labor Standards Enforcement can even issue a stop order against me for failing to carry workers’ compensation insurance. This order prohibits the use of employee labor until coverage is obtained. Check out to make sure that that you, and/or your business are protected from fines that are associated with not complying with the US labor law posters.

Do I Still Need to Pay an Employee Who is Injured on the Job if I am Uninsured?

In the event that a work related injury occurs at a business that is uninsured, an employee can still sue either under the Workers Compensation Act or by civil suit.

The State Uninsured Employers Benefits Trust Fund (UEBTF) is a special fund used to pay the claims of employees who get injured or become ill while working for an illegally uninsured employer. The UEBTF pursues reimbursement of expenditures from the responsible employer through all available avenues, including filing liens against their property.

However, payments are not made automatically, and usually a detailed fact finding procedure is followed before a claim is awarded.

But wait……..Who Is an Employee?

The California Labor Code broadly defines an “employee” as every person in the service of an employer under an appointment or contract of hire or apprenticeship, express or implied, oral or written, whether lawfully or unlawfully employed. (Note: the Labor Code has excluded certain individuals from the definition of employee.)

Two Important Points to Take From This Definition:

If I only hire independent contractors, I do not need workers’ compensation insurance.

Remember to verify that your employee is in fact an independent contractor; otherwise you will be responsible for workers’ compensation benefits. (An interesting discussion on employee v. independent contractor can be found on the California Department of Industrial Relations website).

The definition includes undocumented workers.

Finally…. whether you choose to have workers’ compensation insurance or not, your employee can still contact their local Department of Industrial Relations, Division of Labor Standards Enforcement (DLSE) office and report your uninsured status.

Anitha CadambiAnitha Cadambi is a 2011 LL.M graduate from USC’s Gould School of Law who recently passed the New York Bar Exam. She has an LL.B from the University of Pune, India. She can be reached at [email protected]

Twitter: @AnithaCadambi


(This post was inspired by Adam C. Aparicio, Attorney at Law ).


  1. I just opened an auto body shop here in Las Vegas NV, My question is if i have no employees and I am just renting out the spray booth to people am I required to have workers comp insurance even if they are just renting the spray booth to paint and they are not my employees


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