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Written by: John Tomei
Are all workers who perform services for an employer, including owner, partner, member, or executive officer, covered as “employees” under the North Carolina Workers’ Compensation Act to the extent they may be seeking workers’ compensation benefits?
How are those “employees,” if they are an owner, partner, member, or executive officer, included in or excluded from a standard Workers’ Compensation and Employers Liability Insurance Policy in North Carolina?
The answer to the first question is covered by the provisions of the Act itself and, more specifically, its definition of an “Employee” under N.C.G.S. § 97-2(2). This issue often arises in the context of sole proprietors, partners of a business, or members of a limited liability company (LLC), as well as executive officers of a corporation (including nonprofit corporations), who may be seeking workers’ compensation benefits for themselves following an injury. Thus, a threshold determination is the nature of the employer’s organization and its treatment under the Act. The answer to the second question is addressed by the language in the policy provisions.
N.C.G.S. § 92-2(2) provides, in part, the following:
Any sole proprietor or partner of a business or any member of a limited liability company may elect to be included as an employee under the workers’ compensation coverage of such business if he or she is actively engaged in the operation of the business and if the insurer is notified of his election to be so included. Any such sole proprietor or partner or member of a limited liability company shall, upon such election, be entitled to employee benefits and be subject to employee responsibilities prescribed in this Article.
What this means for employers is that under the Act, a sole proprietor, partner of a business, or any member of a limited liability company (LLC) is presumed to be excluded from coverage, unless:
As with many situations in the workers’ compensation and insurance coverage worlds, submission of proper documentation to the carrier is crucial.
N.C.G.S. § 97-2(2) further provides, in part, the following:
Except as otherwise provided herein, every executive officer elected or appointed and empowered in accordance with the charter and bylaws of a corporation shall be considered as an employee of such corporation under this Article. Any such executive officer of a corporation may, notwithstanding any other provision of this Article, be exempt from the coverage of the corporation’s insurance contract by such corporation’s specifically excluding such executive officer in such contract of insurance, and the exclusion to remove such executive officer from the coverage shall continue for the period such contract of insurance is in effect, and during such period such executive officers thus exempted from the coverage of the insurance contract shall not be employees of such corporation under this Article.
North Carolina case law has held that, where a corporate employer with less than the minimum number of employees to be subject to the Act procures a policy of workers’ compensation insurance, such employer is presumed to have accepted the provisions of the Act. Consequently, that policy covers its executive officers notwithstanding the premium on the policy being based on the compensation of a single non-executive employee and the parties intending to cover that employee only, unless notice of non-acceptance by the executive officer or officers is duly filed with the Industrial Commission. Laughridge v. South Mountain Pulpwood Co., 266 N.C. 769, 147 S.E. 2d 213 (1966).
For corporate executives, this portion of the Act dictates that, generally, executive officers of a corporation are considered to be employees of such corporations for workers’ compensation purposes, but they may specifically exempt and exclude themselves from workers’ compensation coverage. Keeping that in mind, for that exemption to be effective, they must notify the carrier in writing that they are exempting themselves from coverage.
Similar to the requirements for sole proprietors, partners of a business, or members of a limited liability company, submission of necessary documentation by for-profit corporations to the carrier is vital.
With regard to nonprofit corporations, N.C.G.S. § 97-2(2) further provides the following:
“Employee” shall not include any person elected or appointed and empowered as an executive officer, director, or committee member under the charter, articles, or bylaws of a nonprofit corporation subject to Chapter 47A, 47C, 47F, 55A, or 59B of the General Statutes, or any organization exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, who performs only voluntary service for the nonprofit corporation, provided that the person receives no remuneration for the voluntary service other than reasonable reimbursement for expenses incurred in connection with the voluntary service.
When a nonprofit corporation, as described herein, employs one or more persons who do receive remuneration other than reasonable reimbursement for expenses, then any volunteer officers, directors, or committee members excluded from the definition of “employee” by operation of this paragraph shall be counted as employees for the sole purpose of determining the number of persons regularly employed in the same business or establishment pursuant to G.S. § 97-2(1). Other than for the limited purpose of determining the number of persons regularly employed in the same business or establishment, such volunteer nonprofit officers, directors, or committee members shall not be “employees” under the Act. Nothing herein shall prohibit a nonprofit corporation as described G.S. § 97-2 herein from voluntarily electing to provide for workers’ compensation benefits in the manner provided in G.S. § 97-93 for volunteer officers, directors, or committee members excluded from the definition of “employee” by operation of this paragraph.
Where does the Act leave us with regard to nonprofit corporations? For those nonprofit corporations which fall under specified North Carolina General Statutes or which are otherwise exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, their executive officers, directors or committee members are not considered to be “Employees” under the Act. However, those persons must be volunteers and cannot receive remuneration for the services they provide, other than reasonable reimbursement for expenses incurred in connection with their voluntary service.
If, on the other hand, an organization employs one or more persons who do receive remuneration, then any volunteer officers, directors or committee members, are nonetheless counted as employees for the sole purpose of determining the number of persons regularly employed so as to be subject to the Act under N.C.G.S. § 97-2(1).
Note to non-profit employers: The Act does not prohibit a nonprofit corporation from voluntarily electing to provide workers’ compensation benefits for its volunteer officers, directors or committee members who would otherwise be excluded as “Employees” under the Act.
How are these types of employees included in or excluded from a standard Workers’ Compensation and Employers Liability Insurance Policy in North Carolina?
The standard Workers’ Compensation and Employers Liability Insurance Policy in North Carolina does not specifically address the question of whether or how sole proprietors, partners or corporate officers are included or excluded as “employees” under a workers’ compensation policy.
Nevertheless, the Policy specifically states, under “H. Statutory Provisions,” that “this insurance conforms to the parts of the workers’ compensation law that apply to… [b]enefits payable by this insurance…“ Further, the Policy provides that “[t]erms of this insurance that conflict with the workers’ compensation law are changed by the statement to conform to that law.”
As a result of these conformation clauses in the Policy, the provisions of the Act are included in the Policy as to its treatment of sole proprietors, partners and corporate officers as “employees.” Consistent with that inclusion, the standard Workers’ Compensation and Employers Liability Insurance Policy in North Carolina has an Endorsement which provides for the exclusion of partners, officers and others from coverage as employees of an insured. Similarly, another Endorsement provides for the inclusion of sole proprietors, partners, officers and others as employees of an insured.
These Endorsements, along with the standard North Carolina Workers Compensation and Employers Liability Policy, can be found at the North Carolina Rate Bureau’s website.
North Carolina workers’ compensation policy provisions are consistent with the Act as to sole proprietors, partners, corporate officers, and others, and their inclusion or exclusion from coverage as “employees” of their insured entities under a policy. Even so, these persons need to remember to abide by the Act’s requirements as to their inclusion or exclusion as “employees,” including the submission of proper documentation as such, when applying for and receiving a policy of workers’ compensation coverage in North Carolina.
Jumping through these necessary hoops will then enable a carrier to include the proper Endorsement(s) when a policy is issued, and avoid any later disputes between a carrier and insured.