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Multiple Legal Entities: How the Ownership of a Business Can Impact the Applicable Workers' Compensation Classification

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Multiple Legal Entities: How the Ownership of a Business Can Impact the Applicable Workers' Compensation Classification

October 22, 2014

In this edition: Entities with majority common ownership comprise a single employer for classification purposes.

A key principle of the Standard Classification System is that employers are grouped into classifications so that each classification reflects the risk of loss common to those employers. With few exceptions, it is the business of the employer within California that is classified, not the separate employments, occupations or operations within the business. See the USRP at Part 3, Standard Classification System, Section I, Introduction. To apply this provision correctly, it is important to understand the USRP definition of an employer, and how that definition interacts with the way entities are combined for experience rating purposes pursuant to the ERP.

USRP, Part 1, General Provisions, Section II, General Definitions, Rule 4

4. Employer

One or more entities meeting the combination of entities standards for experience rating set forth in the Experience Rating Plan.

 

ERP, Section IV, Change in Status and Combination of Entities, Rule 2, Combination of Entities

2. Combination of Entities

Separate entities shall be combined for experience rating purposes when the same person or persons own a majority interest in each of the entities.

The operations of all entities that share majority common ownership are reviewed together when determining the classification(s). For example, if Entity A makes ice cream and Entity B sells ice cream to restaurants and grocery stores and the entities share majority common ownership, the operations of both entities must be reviewed collectively.

Assuming Entity B is selling the ice cream manufactured by Entity A, both entities would be classified as 2063, Creameries and Dairy Products Mfg., as the two comprise a single employer and the manufacturing classification (2063) includes the delivery of product to its customers.

If these entities do not share majority common ownership, Entity A would be classified as 2063 and Entity B would be classified as 8018, Stores – wholesale.

Related Information

WCIRB Education on Demand : Introduction to Ownership

Online Guide to Workers' Compensation: Ownership

Classification Information

California Workers’ Compensation Uniform Statistical Reporting Plan—1995