All employers are required by law to carry Workers Compensation Insurance for the benefit of their employees for all job related accidents or illness. All employees, either full time or part time, including relatives, are automatically covered under a Workers Compensation Insurance policy. The premium is calculated as a percentage of gross annual wages. The coverages provided are statutorily mandated by the State. These include all medical expenses, temporary and/or permanent disability, job retraining and a death benefit. If the employer does not have a Workers Compensation Insurance policy in force at the time of the accident or illness, they become personally liable for all the benefits that would have been payable under a policy.

The premium for a Workers Compensation Insurance policy is based on gross annual payroll, not the number of employees. At the beginning of the policy term you must provide the insurance company with an estimate of what your gross payroll will be for the coming year. The insurance company will then bill you for the estimated premium based on your payroll estimate multiplied by the rate per $100 of payroll they are charging. At the end of the policy term, the insurance company will conduct an audit of your payroll to determine what the actual payroll was for the year. If your actual payroll was higher than your original estimate, they will bill you for additional premium. If your actual payroll was less than your estimate, they will return the unearned premium to you.

From the State of California Department of Industrial Relations website:
Q. Do I have to have Workers’ Compensation Insurance?
A. Yes, every California employer using employee labor, including family members, must purchase Workers’ Compensation Insurance (Labor Code Section 3700). If you fail to have Workers’ Compensation Insurance for your employees, it can be expensive as the DLSE is required to issue and serve a stop order/penalty assessment prohibiting further use of employee labor until you do purchase Workers’ Compensation Insurance. The penalty assessed for failure to have Workers’ Compensation Insurance is $1000 per employee employed at the time the citation is issued. The citation amount increases to $1,500 per employee effective January 1, 2010. However, there are exceptions for partnerships, if the only persons performing labor are the partners and corporations where the corporate officers are the sole shareholders; in which case, the corporation, officers and directors come under the Workers’ Compensation provisions only by election.

Q. My niece helps in my business for a few hours a day, but I don’t consider her an employee. Is that correct?
A. No, under the labor law she is considered an employee. An employee is defined as someone you engage or permit to work. Even though your niece is part of your family, she is considered an employee and you, as the employer, must provide Workers’ Compensation Insurance to cover her in case of a work-related injury. In addition, you are also required to pay the minimum wage unless the employee is your spouse, parent or child and you are a sole proprietor or partnership. Corporations do not have children and therefore, no family relationship to the officers of the corporation can be exempt from these requirements.