If you own a business in California, you may be wondering: Do I really need workers’ compensation insurance?
For most businesses, the answer is yes. California law requires employers to provide workers’ compensation benefits to their employees—even if the business has only one employee. This requirement applies regardless of whether the employee works full-time or part-time.
But what if you’re a sole proprietor? What about an LLC? Do independent contractors count? And are there different rules for corporations or partnerships?
Here’s what California business owners need to know about workers’ comp requirements by business type.
California’s Basic Workers’ Comp Rule
California Labor Code Section 3700 generally requires every employer to provide workers’ compensation benefits to employees.
That means you don’t have to reach a certain number of employees before workers’ comp becomes mandatory. One employee is enough to trigger the requirement.
Workers’ compensation insurance helps provide benefits when an employee experiences a work-related injury or illness. Depending on the circumstances, benefits can include medical care, temporary disability payments, permanent disability benefits, supplemental job displacement benefits, and death benefits.
So, how does the rule apply to different types of businesses?
Sole Proprietors
If you’re a sole proprietor with no employees, you generally aren’t required to purchase workers’ compensation insurance for yourself.
However, sole proprietors may choose to purchase coverage for themselves. If you want yourself included in a workers’ comp policy, that inclusion needs to be clearly addressed in the policy or through an appropriate endorsement.
The situation changes as soon as you hire someone who qualifies as an employee. A sole proprietor with even one employee generally must provide workers’ compensation coverage.
Example:
A self-employed photographer operates alone and has no employees. Workers’ comp generally isn’t required for the photographer’s own coverage. If the photographer hires an employee to help with editing, scheduling, or photo shoots, workers’ compensation requirements generally apply.
LLCs
Forming an LLC does not automatically exempt a business from workers’ compensation requirements.
If an LLC has one or more employees, it generally must maintain workers’ compensation coverage. The important question is whether the people performing work for the business are legally considered employees—not simply what their job title or contract says.
California uses rules for determining whether a worker is an employee or an independent contractor. Simply calling someone an independent contractor or paying them with a Form 1099 does not, by itself, make them an independent contractor.
Corporations
Corporations with employees generally must carry workers’ compensation insurance.
There are also specific rules for corporate officers and directors. California allows certain officers and directors of corporations that are fully owned by those officers and directors to elect to exclude themselves from workers’ compensation coverage.
That doesn’t mean the corporation is exempt from workers’ comp altogether. If the corporation has other employees, those employees generally still need to be covered.
Example:
Two people own a corporation and are its only workers. Depending on the corporation’s ownership and structure, they may be able to elect exclusion from workers’ comp benefits for themselves. If they hire an employee, however, that employee generally must be covered.
Because corporate ownership and officer-exclusion rules can be specific, business owners should work with a licensed insurance professional to make sure their policy is structured correctly.
Partnerships
A partnership with no employees may have different coverage considerations for its partners than it would for employees.
Once a partnership hires employees, however, California’s general rule applies: employers with one or more employees must provide workers’ compensation coverage.
Partners should also discuss whether they want coverage for themselves with their insurance professional, since coverage options can depend on the business’s structure and policy.
Businesses With Part-Time Employees
Part-time doesn’t mean exempt.
California requires workers’ compensation coverage for employees, including part-time employees.
So if your business has:
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One full-time employee
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Three part-time employees
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Seasonal employees
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A combination of full-time and part-time employees
you generally need workers’ compensation insurance.
Even a very small payroll doesn’t necessarily mean a business is exempt.
What About Independent Contractors?
This is one of the areas where California business owners need to be particularly careful.
A worker isn’t automatically an independent contractor simply because:
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They sign an independent contractor agreement
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They receive a Form 1099
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They invoice the business
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They aren’t on traditional payroll
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The business calls them a contractor
California generally uses the ABC test to determine whether a worker is an employee or independent contractor, although exemptions and other legal standards can apply in certain circumstances.
Under the ABC test, a worker is generally presumed to be an employee unless the hiring entity can establish all three required conditions, including that the worker is free from the business’s control, performs work outside the usual course of the business, and is customarily engaged in an independently established trade or business.
If a worker is legally an employee, the business cannot avoid workers’ compensation obligations simply by labeling that person a contractor.
What About Family Members?
Family relationships don’t automatically eliminate workers’ compensation requirements.
California guidance specifically notes that family members performing work for a business can be considered employees.
For example, if a business owner has a family member regularly working in the business, the owner should not assume that the worker can simply be treated as an unpaid helper or exempt family member.
The exact circumstances matter, so it’s worth confirming the worker’s classification with a qualified professional.
What About Businesses With Only One Employee?
Yes—workers’ compensation may still be required.
This is one of the most important things for new business owners to understand.
California’s threshold isn’t “five employees” or “10 employees.” One employee is generally enough.
For example, a business owner who hires one administrative assistant, technician, salesperson, receptionist, or other employee generally needs to have workers’ compensation coverage in place.
And certain industries may have additional licensing or insurance requirements that make having appropriate workers’ comp coverage particularly important.
What Happens If a Business Doesn’t Have Workers’ Comp?
Going without required workers’ compensation coverage can create serious consequences.
California considers failure to maintain required workers’ compensation coverage a serious violation, and employers can face criminal and civil penalties. An uninsured employer can also become personally responsible for workers’ compensation benefits owed to an injured employee.
In other words, skipping coverage to save money can expose a business to substantially greater financial risk if an employee is injured.
Workers’ compensation insurance is also an employer expense. California prohibits employers from requiring employees to contribute toward the cost of the workers’ compensation insurance premium.
A Quick Look at California Workers’ Comp Requirements
Business situationWorkers’ comp generally required?Sole proprietor with no employeesGenerally noSole proprietor with one or more employeesYesLLC with employeesYesCorporation with employeesYesPartnership with employeesYesPart-time employeesYesSeasonal employeesYesMisclassified “independent contractors” who are legally employeesYesBusiness owner seeking coverage for themselvesDepends on business structure and policy
This table is a general guide, not a substitute for determining the legal classification of a particular worker or business owner.
How Do I Get Workers’ Comp Insurance in California?
California employers generally obtain workers’ compensation coverage through a licensed insurance company or the State Compensation Insurance Fund. Qualified employers may also be able to become self-insured with state approval.
When comparing policies, price is important—but it isn’t the only consideration. Business owners may also want to consider the insurer’s claims service, accessibility, provider network, and experience with businesses in their industry.
An experienced insurance professional can also help you determine which workers need to be covered and whether any owners, officers, or other individuals may be eligible for exclusion.
The Bottom Line for California Business Owners
If you’re wondering whether your California business needs workers’ compensation insurance, start with one simple question:
Do you have employees?
If the answer is yes, California generally requires you to carry workers’ compensation coverage—even if you have only one employee.
The more complicated question is determining who qualifies as an employee and whether owners, officers, partners, or other workers have special coverage or exclusion options.
Because California’s worker-classification rules can be complex, it’s a good idea to review your business structure and workforce with a licensed insurance professional. The right coverage can help protect both your employees and your business when an unexpected workplace injury or illness occurs.