Workers comp in California: what small business owners actually need to know

California requires workers' compensation insurance for any business with employees — no minimum headcount, no exceptions. This post covers who needs it, what it costs, common mistakes, and the story of the uninsured roofer who fell off a building across the street from my office.

The Roofer Who Fell Off the Building

I'm going to start with this story because it's the best way to explain why workers' compensation matters.

I was in the office with Dan Balbo on a Saturday. Across the street from our office are two-story buildings with flat roofs. Three gentlemen were putting on a tar and gravel roof.

I kept telling Dan, "Those guys are coming so close to the edge. They have no safety straps. They have nothing." I was worried somebody was going to fall off.

Well, one of them did. Mid-afternoon on Saturday. Landed on his head. People were outside. We called 911. Multiple people called 911.

He was a fly-by-night contractor that did not have workers' comp.

If You Hire Contractors, This Is Your Problem Too

If you're a business owner or homeowner hiring a contractor — a roofer, a painter, a plumber, anyone doing physical work — you want a certificate of insurance from that contractor naming you as an additional insured. You want to see that the contractor has general liability (GL) and workers' comp.

If they don't have workers' comp and someone gets hurt on your property, guess who gets dragged into it? You.

Who Needs Workers' Comp in California

California law is straightforward: if you have employees, you need workers' comp. That includes:

There is no minimum headcount. One employee means you need workers' comp.

The Owner Exclusion: Savings vs. Risk

Here's where it gets nuanced for small business owners.

Sole proprietors can exclude themselves from workers' comp coverage. So can partners and corporate officers in certain cases. This is called an owner exclusion.

But here's the thing: if you exclude yourself and get hurt on the job, you have no coverage. Your health insurance may or may not cover a workplace injury. And if you can't work for three months, nobody's replacing that income.

I've seen business owners exclude themselves to save $1,500 a year and then get hurt and lose $30,000 in income. That math doesn't work.

The "If Any" Policy — Protection for Sole Proprietors

Some businesses — especially sole proprietors with no employees — carry what's called an "if any" workers' comp policy. It covers you if you accidentally hire someone, bring on a subcontractor who doesn't have their own coverage, or if the state determines someone you thought was a contractor is actually an employee.

In California, with AB5 and the rules around independent contractor classification, this matters more than ever. The state has been aggressive about reclassifying independent contractors as employees. If that happens and you don't have workers' comp, you're exposed.

Five Common Workers' Comp Mistakes

1. Not getting certificates from subcontractors. If your sub doesn't have workers' comp and gets hurt on your job, your policy may end up covering it — and your experience modifier goes up.

2. Misclassifying employees. Different job classifications have different rates. If you tell the carrier everyone is "clerical" but half your team is doing physical labor, you'll get hit on audit.

3. Ignoring the annual audit. Workers' comp is audited annually. Your premium is based on estimated payroll; the audit reconciles to actual payroll. If your payroll grew, you owe additional premium. If it shrank, you get money back. Don't ignore the audit notice.

4. Skipping return-to-work programs. Getting injured employees back to modified duty as soon as medically appropriate reduces your claim costs and keeps your experience modifier lower.

5. Excluding yourself without thinking it through. Saving $1,500/year isn't worth it if one injury costs you $30,000+ in lost income and medical bills.

What It Costs

Workers' comp rates vary dramatically by classification. A clerical office worker might cost $0.30 per $100 of payroll. A roofer might cost $30 per $100 of payroll. That's a hundredfold difference.

The rate is set by your classification code, your payroll, and your experience modifier (which reflects your claims history). Clean claims history means lower rates over time.

Key Takeaways

The Bottom Line

The guy across the street from my office didn't have workers' comp. I watched what happened. You don't want to be in that position — whether you're the business owner or the person hiring the contractor.

Paul Nadler has been a licensed insurance broker in California since 1976. He is the third-generation owner of Nadler Insurance in San Carlos. Let's review your workers' comp →