Most business owners are aware of the legal requirement to provide workers’ compensation insurance for their employees. But, can limited liability company members be covered as well? Consider the following…

A recent case…

Under New Jersey’s Workers’ Compensation Act, employers are required to provide workers’ compensation insurance (WCI) for their employees. In short, WCI provides medical and wage benefits to people who are injured or become ill in the course of their employment. There can be serious consequences for employers who fail to maintain WCI.

In a recent case, the New Jersey Supreme Court noted that a member of a limited liability company (LLC) who actively performs services on behalf of the LLC may be deemed an employee of the LLC for purposes of the Workers’ Compensation Act if the LLC elects to classify the member as such. In the case in question, the sons of a member of an LLC were employed by the company for several years. As employees, they were covered by WCI. Some time later, the sons became members of the company, and the company discontinued their WCI for company members. At some point, the broker met with the members of the company to discuss the company’s insurance. However, the broker did not advise the sons that, because they were LLC members rather than employees, they were no longer covered by the company’s WCI or that the company could elect to purchase WCI to cover them for work-related accidents.

Tragically, one of the sons died as a result of a work-related head injury. The company’s insurance broker filed a WCI claim on behalf of the deceased member’s wife. The claim was denied for lack of coverage. The wife of the member filed a lawsuit against the company’s insurance broker alleging claims for professional negligence and breach of fiduciary duty. The trial court held that an insurance broker owes a duty to an LLC to inform it of the availability of workers’ compensation coverage for its members and of its option to elect such coverage. On appeal, both the Appellate Division and New Jersey Supreme Court agreed.

Conclusion…

The very tragic case described above illustrates the point that the evolution from employee to business owner can have significant consequences—some obvious, other less apparent. Please feel free to contact me if you would like more information about transitioning from employee to owner or if you would like a copy of the case… Holm v. Purdy (12/13/2022).

PLEASE NOTE: This blog is merely for the general interest of the reader. It is not legal advice or opinion and it does not create an attorney-client relationship. Please call me at 973-921-0600 if you’d like to have a free initial telephone consultation or learn more about me or my practice. Thank you.