If you own a business in California, workers’ compensation is not optional. Even if you have just one employee, state law requires you to carry coverage. Failing to comply can lead to heavy fines, stop-work orders, lawsuits, and even criminal charges.
Many small business owners don’t break the rules on purpose. They simply make avoidable workers’ compensation mistakes that could cost your business thousands of dollars — or more.
Below are the most common mistakes California employers make, how penalties are enforced, and how to protect your company before an audit happens.
1. Not Carrying Workers’ Compensation Coverage
In California, every employer must carry workers’ compensation insurance under Labor Code Section 3700. There are no exceptions for part-time staff or family members working for pay.
The California Division of Workers’ Compensation (DWC) actively enforces compliance. If you’re caught without coverage, penalties can include:
- Fines of up to $10,000 per employee
- Stop-work orders shutting down operations
- Personal liability for medical bills and lost wages
- Potential misdemeanor criminal charges
Example: If a construction company with three employees operates without coverage and one worker gets injured, the owner can be personally responsible for medical costs that can easily exceed $50,000.
Why this matters: One injury claim in California can cost tens of thousands of dollars due to higher medical and wage replacement rates compared to many other states.
How to avoid it:
Secure coverage before hiring your first employee. If you’re unsure whether a worker qualifies as an employee, get a professional review immediately.
2. Misclassifying Employees As Independent Contractors
California has strict worker classification rules under AB 5 and the “ABC test.” If your worker doesn’t meet all three criteria, they are likely considered an employee — and must be covered.
Misclassification is one of the most expensive workers’ compensation mistakes that could cost your business in California.
If audited, consequences may include:
- Back premiums owed for up to three years
- Payroll penalties
- Fines for willful misclassification
- Exposure to wage and hour claims
Insurance carriers calculate premiums based on payroll and job classification codes. If a worker is wrongly excluded, you could owe large retroactive payments during a premium audit.
How to avoid it:
Review every contractor relationship carefully. If the worker performs core services for your business, they likely need coverage.
3. Underreporting Payroll During Premium Audits
Workers’ comp premiums are calculated based on:
- Total payroll
- Industry classification code
- Experience modification factor (claims history)
At the end of each policy period, your carrier performs an audit. If payroll was underreported — even accidentally — you will owe the difference.
Example:
A retail business estimates $300,000 in payroll but ends the year at $450,000. The audit reveals a $150,000 gap. The business receives a surprise invoice for thousands in additional premium.
Underreporting can trigger red flags with the DWC and insurance regulators.
How to avoid it:
Maintain clean payroll records and update estimates during the year if growth accelerates.
4. Using The Wrong Classification Codes
California uses detailed class codes to determine risk level. Roofing, for example, carries far higher rates than clerical office work.
If you classify high-risk workers under lower-risk codes, you may pay less upfront — but during an audit, the correction can result in a massive bill.
Insurance carriers calculate risk based on injury frequency in each industry. High-hazard jobs like construction, landscaping, and manufacturing carry significantly higher base rates.
How to avoid it:
Work with an advisor who understands California’s classification system and reviews job duties carefully before binding coverage.
5. Ignoring Required Workplace Posting And Reporting Rules
California employers must:
- Post workers’ compensation notices in the workplace
- Provide claim forms immediately after an injury
- Report injuries within required timelines
Failure to follow reporting procedures can increase claim costs and invite regulatory penalties.
The DWC closely monitors claim-handling compliance. Delayed reporting can lead to higher medical costs and increased scrutiny from regulators.
How to avoid it:
Create a written injury response process and train supervisors on what to do immediately after an incident.
6. Waiting Until There’s An Audit Or Claim To Fix Coverage
Many employers only address workers’ comp when:
- They receive an audit notice
- An employee files a claim
- A state investigator contacts them
By then, options are limited and penalties may already apply.
California regulators have increased enforcement efforts in industries with high misclassification rates, particularly construction and gig-based services.
How to avoid it:
Conduct an annual compliance review before renewal. Proactive corrections are far cheaper than reactive penalties.
Coverage Options For California Employers
Workers’ compensation policies in California typically include:
- Medical care for work-related injuries
- Temporary disability benefits (usually two-thirds of wages)
- Permanent disability benefits
- Supplemental job displacement benefits
- Death benefits for dependents
Some businesses may also consider:
- Employer’s liability coverage
- Pay-as-you-go premium plans
- Risk management and safety programs to reduce claims
The right structure depends on payroll size, industry risk, and growth plans.
Why Insurance Carriers Scrutinize California Businesses
California consistently ranks among the most expensive states for workers’ compensation claims due to medical costs and regulatory complexity.
Carriers evaluate:
- Claims history
- Industry loss ratios
- Payroll trends
- Safety practices
Even small mistakes can increase your experience modification factor (EMR), which raises premiums for multiple years.
That’s why fixing workers’ compensation mistakes that could cost your business early is critical for long-term savings.
Bottomline: How To Simplify Your Workers’ Comp Coverage With HUMANO
Workers’ compensation compliance in California isn’t just about buying a policy. It’s about protecting your business from audits, fines, and personal liability.
HUMANO acts as a compliance partner — not just a policy provider.
We help California employers:
- Classify workers correctly
- Align payroll with carrier requirements
- Prepare for audits
- Secure low down payment, pay-as-you-go coverage
- Access multiple carriers for competitive pricing
Instead of reacting to penalties, you can operate with confidence knowing your coverage is structured correctly from day one.
If you’re unsure whether your current policy is compliant, now is the time to review it — before the state reviews you.