Have state governments in United States of America prosecuted limited liability companies for not buying worker's compensation insurance?

Question

Have state governments prosecuted companies for not buying worker's compensation insurance?

Though employees would prosecute in the event of an accident, what else enforces companies to buy it?

Does Hybrid work scenario change anything?

Answer 1

Short Answer

Most states take failure to get worker's compensation insurance quite seriously and impose significant penalties, sometimes criminal, on a regular basis, for failing to do so.

Long Answer

The consequences of not obtaining worker's compensation insurance are a matter of state law that varies a great deal from state to state.

State governments routinely impose fines on limited liability companies for not buying worker's compensation insurance (the amount of the fines vary significantly from state to state). This probably happens hundreds or thousands of times a year in a typical large U.S. state. It probably happens more often than a tax audit of an LLC or small business entity.

It is rarely a criminal offense, however, (or at least rarely prosecuted criminally even if it could be) for an employer to negligently fail to obtain worker's compensation insurance without more serious related aggravating conduct, like fraudulently telling the state that worker's compensation had been obtained using fake documents when it hadn't been done.

But there are a few states that are important exceptions to this general rule and impose criminal penalties for failing to obtain worker's compensation, or impose quite large fines for failure to do so. These include:

California: In California, it is a criminal offense to not provide workers’ compensation for your employees. It’s punishable by up to a year in jail and a fine of no less than $10,000 – or both. Illegally uninsured employers could face a penalty of up to $100,000.

Illinois: An employer who did not provide workers’ comp when it was required must pay $500 for each day of noncompliance, with a minimum fine of $10,000.

New York: Illegally uninsured employers could be charged with a misdemeanor or a felony. Fines range from $1,000 to $50,000, in addition to a penalty of $2,000 for every 10 days without coverage.

Pennsylvania: In Pennsylvania, intentional noncompliance is a felony of the third degree. It can result in a fine of $15,000 and up to seven years in jail.

More examples of states with particularly severe penalties can be found here.

Criminal prosecutions for not having worker's compensation insurance in place are not nearly as common as civil fines for failure to do so, but are still routine and would happen many times each year in most states that have criminal penalties for failure to do so.

Usually, when an employee is injured on the job in an accident that would otherwise be covered by worker's compensation insurance, an employer who did not obtain worker's compensation insurance has strict liability for all of the injuries, economic and non-economic that the employee suffered. In contrast, if the employer has worker's compensation insurance, the employee isn't ordinarily allowed to sue the employer at all for on the job injuries - this is exclusively the insurance company's problem.

This most often happens when a property owner (often an LLC) acts as their own general contractor and hires workers who are misclassified as independent contractors rather than employees to do construction work on the property and one of those workers is injured on the job.

But, the remedies for an employee who is injured when an employer fails to obtain worker's compensation insurance differ materially from one state to another state.

Some states impose personal liability on the people in the company responsible for obtaining worker's compensation who fail to do so, or treat failure to obtain worker's compensation insurance as a ground for piercing the corporate veil (i.e. disregarding the limited liability protections associated with the entity form).

Does Hybrid work scenario change anything?

Not really.

Usually even a part-time employee is covered by worker's compensation. The standard of proof for showing that someone is an independent contract who needs to get their own worker's compensation rather than an employee is frequently higher for worker's compensation purposes than it is, for example, for income tax purposes.

Most state worker's compensation laws provide that certain top level owner-manager type individuals in a business entity who are also employees of the business, can expressly waive worker's compensation coverage, usually by signing and filing a waiver form. Of course, if the only uncovered employees are people who have legally waived coverage, then there is no penalty for failure to have worker's compensation insurance.