Do I need workers' compensation insurance for my family-owned business in California?

Question:

My husband and I own a small grocery store in California. We don't have any employees, but our nephew helps out at the store. He usually comes in the afternoon and closes up for us. The other day, he told me that he had a close call at the shop—he slipped on some water and almost fell. Luckily, he caught himself and wasn't hurt.

But this got me thinking, what would happen if he did get hurt? Am I supposed to carry workers' compensation insurance for him? What about for ourselves?

Answer:

In answer to your first question, yes, you should carry workers' compensation insurance for your nephew. California law requires every employer in the state with at least one employee to have this insurance.

Your nephew is considered your employee because you arranged to have him do the work for you. (Cal. Labor Code §§ 3351, 3357 (2023).) As a result, you should treat him in the same way that you would treat someone that you hired through a formal job application process.

You might be thinking: Can't we avoid getting worker's comp insurance if we classify our nephew as an independent contractor? While it's true that you don't need insurance for independent contractors, it's unlikely that your nephew would qualify as an independent contractor.

In this case, because your nephew is working at your shop, under your supervision, and according to your rules, he will probably be considered an employee. For more information, see our article on how government agencies classify workers as independent contractors or employees.

If the state finds out that you don't have the necessary workers' comp insurance, you could face serious consequences including fines ($1,500 per employee or twice the amount you would've paid in insurance premiums, whichever is more) and even misdemeanor charges. (Cal. Labor Code §§ 3700, 3700.5, 3722 (2023).) Also, if your nephew got hurt at the store, he (or his parents) could file a personal injury lawsuit against you (see our article on when you can sue outside of workers' compensation).

In answer to your second question, the workers' comp policy may not have to cover you and your husband. But it could depend on whether your business is a sole proprietorship (which can be owned by a married couple in California), a partnership, or a limited liability company (LLC).

The rules about insurance requirements and waivers for working partners or general managers can be complicated. If you have questions, you can ask your insurance broker, contact the California Department of Workers' Compensation Information and Assistance Unit, or speak with a California lawyer who's experienced in workers' compensation.

On a related note, because your nephew is an employee, you should make sure that you are complying with minimum wage, overtime, tax withholding, and other state and federal laws that apply to employees. To learn more, read our article on what to do when you hire your first employee.