Does Your Property Owners Association Need Workers’ Compensation Insurance? Yes!

Background

The North Carolina Workers’ Compensation Act (“Act”) requires all employers with three or more employees to carry workers’ compensation insurance.  The purpose of this requirement is to ensure that employees injured by an accident while working have a safety net to cover lost wages and medical expenses.

The Act, however, has a very technical definition of “employer” which is anything but intuitive.  This leads to confusion as to whether or not non-profit owners associations are covered.  In particular, many residential, commercial, and mixed-used property and condominium owners associations (collectively, “POAs”), which often consider themselves to have fewer than three employees, question whether or not they are covered by the Act and are required to purchase insurance.  As explained in this article, there are good reasons to believe that all North Carolina POAs are subject to the Act, even if they may not have any traditional employees.

How Could the Act Come to Such a Seemingly Confusing Result?

The Act specifically defines “employee” to include “[e]very executive officer elected or appointed and empowered in accordance with the charter and bylaws of a corporation.”  Because POAs have elected board members pursuant to a charter or bylaws, these board members meet the technical definition of an “employee” under the Act.  Although there does not appear to be any clarifying administrative decisions or case law on point, it appears that POAs with three or more board members may be subject to the Act and required to purchase workers’ compensation insurance.  In fact, the North Carolina Industrial Commission (the government agency that administers North Carolina workers’ compensation matters) states clearly on its website:

If you are incorporated, including all forms of corporations and those which have non-profit status, you are required by law to carry coverage once you have a total of three (3) people in the corporation.  Everyone is included in the headcount, including corporate officers.

See “Questions and Answers for Business and Industry,” http://www.ic.nc.gov/ncic/pages/busandind.htm (accessed September 12, 2014) (emphasis in original).

Thus, all non-profit organizations with three or more corporate officers or directors, even if the officers and directors are volunteers and unpaid, clearly need to obtain workers’ compensation insurance.  Since both the North Carolina Planned Community Act (“Chapter 47F”) and the North Carolina Condominium Act (“Chapter 47C”) require every POA board of directors to consist of not less than three members, regardless of when the POA was formed, all POAs in North Carolina are required by statute to have workers’ compensation insurance.

The good news for North Carolina POAs is that workers’ compensation insurance rates are based on risk, which should be low for this type of entity.  Furthermore, the Act allows corporate officers to opt out of coverage.  This means that the corporate officer voluntarily agrees not to be covered by the workers’ compensation policy in the event of a workplace accident.  While an opt-out does not preclude the requirement to purchase insurance, it should lower costs.

So What is the Risk of Not Getting Workers’ Compensation Insurance?

First and foremost, there is the risk of the costs associated with a workers’ compensation injury.  Without insurance, the POA would have to pay an injured “worker” for two-thirds of the “worker’s” average weekly wages, as well as all medical expenses related to any work injury.  If the “worker” dies, the “worker’s” estate would receive certain payments.  While the risk of injury to a POA board member may seem minimal, unexpected slips, trips, falls, and other accidents occur frequently in the workplace.  Furthermore, it is not uncommon for POAs to have a maintenance employee who would face a much more significant risk of injury on a day-to-day basis or for POAs to hire what they believe to be independent contractors, only to find out after an injury that the “contractor” is deemed to meet the technical legal requirements of an employee, with the POA then finding itself on the hook for any injury sustained.

North Carolina POA board members should also take notice that the Act imposes a daily fine on employers for failing to purchase insurance.  This fine varies from $50 to $100 per day, based on the size of the employer.  Although the Industrial Commission generally does not assess such fines unless an uninsured claim is filed, these fines could reach back for years and become substantial.

Now It Gets Personal

Of greater concern to North Carolina POA board members and officers is the fact that “any person who, with the ability and authority to bring an employer in compliance” with the requirements of purchasing insurance and who “willfully fails” to do so is guilty of a Class H felony.  Furthermore, the person would be personally liable for 100% of the benefits owed to an injured employee that otherwise would be paid by insurance.  The POA employer itself also can be liable for a Class H felony and a Class 1 misdemeanor.  Because of the criminal nature of these penalties, the POA’s Directors and Officers Insurance would not apply.  Most POA board members confronted with this information will likely believe that responsibility for substantial workers’ compensation costs, fines, and even criminal liability is more than they signed up for.

Conclusion

In light of the substantial risk associated with not purchasing workers’ compensation insurance and the relative inexpensiveness of such coverage, it is prudent for all North Carolina POAs to verify that they have sufficient workers’ compensation programs in place to meet their obligations under the Act.