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How to Determine Combinability for Experience Rating Purposes

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How to Determine Combinability for Experience Rating Purposes

April 8, 2020

What Is Combinability?

Combinability is an important component of experience rating. The California Workers’ Compensation Experience Rating Plan—1995 (ERP) specifically states “separate entities shall be combined for experience rating purposes when the same person or persons own a majority interest in each of the entities.”

An entity is defined as an individual, joint venture, partnership, limited liability partnership, corporation, limited liability company, unincorporated association or fiduciary operation. Majority interest means an ownership interest that is greater than 50 percent.

When the same person or persons own a majority interest in more than one entity, these entities are considered “combinable” for experience rating purposes.

How Do I Determine Combinability?

  1. Identify the legal entity type of each business based on the definition of Entity in the ERP.
  2. Refer to the ERP, Rule 9, Ownership, to determine the ownership percentages based on the entity type or visit the Determining Ownership page on wcirb.com.
  3. Determine if the same person or persons own a majority interest in more than one entity.
Example #1

Sue’s Bakery LLC has two members, Sue Childs and Anne Childs. Anne’s Deli Inc. has two owners, Anne Childs and Robert Smith. Anne Childs owns 80 shares of the voting stock in Anne’s Deli Inc., and Robert Smith owns 20 shares. Are these entities combinable?

Step 1: Determine Legal Entity Type

The legal entity type for Sue’s Bakery LLC is a limited liability company. The legal entity type for Anne’s Deli Inc. is a corporation.

Step 2: Determine Ownership Percentages

Sue’s Bakery LLC is an LLC. Per the ERP, ownership of an LLC is determined as though each member owns an equal share of the LLC. Therefore, Sue Childs owns 50 percent and Anne Childs owns 50 percent of Sue’s Bakery.

Anne’s Deli Inc. is a corporation. Per the ERP, ownership of a corporation is determined by voting stock, if voting stock has been issued. The number of voting shares owned by each person determines ownership. Therefore, Anne Childs owns 80 percent and Robert Smith owns 20 percent of Anne’s Deli Inc.

Step 3: Determine Common and Majority Ownership Interest

A) Anne Childs is the only person who has an ownership interest in both Sue’s Bakery LLC and Anne’s Deli Inc.

B) Majority interest is an ownership interest that is more than 50 percent. Anne Childs owns exactly 50 percent of Sue’s Bakery LLC and 80 percent of Anne’s Deli, Inc. Therefore, she does not have majority ownership interest in Sue’s Bakery LLC, but she does have a majority ownership interest in Anne’s Deli, Inc.

Conclusion

Since Anne Childs does not have a majority ownership interest in both Sue’s Bakery LLC and Anne’s Deli Inc., these two entities are not combinable for experience rating purposes. Note that Anne has an ownership interest in both entities but not a majority ownership interest in both entities.

Example #2

Frank’s Coffee Partnership has three partners: Frank White, Patty White and John White. Patty’s Tea JV has two joint venturers, Patty White and Frank White. Patty and Frank are married, and John is their son. Are these entities combinable?

Step 1: Determine Legal Entity Type

The legal entity type for Frank’s Coffee Partnership is a partnership. The legal entity type for Patty’s Tea JV is a joint venture.

Step 2: Determine Ownership Percentages

Per the ERP, ownership of a partnership is determined as though each general partner owns an equal share. Since Frank’s Coffee Partnership is not a limited partnership, all partners are considered general partners. Therefore, Frank White owns 33.33 percent, Patty White owns 33.33 percent and John White owns 33.33 percent of Frank’s Coffee Partnership.

Per the ERP, ownership of a joint venture is determined as though each joint venturer owns an equal share of the joint venture. Therefore, Patty White owns 50 percent and Frank White owns 50 percent of Patty’s Tea JV.

Step 3: Determine Common and Majority Ownership Interest

A) Frank White and Patty White together have an ownership interest in both Frank’s Coffee Partnership and Patty’s Tea JV. Therefore, Frank and Patty White have a common ownership interest in both Frank’s Coffee Partnership and Patty’s Tea JV.

B) Majority interest is an ownership interest that is more than 50 percent. Together, Frank and Patty White own 66.66 percent of Frank’s Coffee Partnership, which is a majority ownership interest. Together, Frank and Patty White also own 100 percent of Patty’s Tea JV, which is a majority ownership interest.

Conclusion

Since Frank White and Patty White have a majority ownership interest in Frank’s Coffee Partnership and Patty’s Tea JV, these two entities are combinable for experience rating purposes. Note that as a single person, neither Frank White nor Patty While has a majority ownership interest in both entities.

Finally, note that although Frank and Patty White are married, and their son has an ownership interest in one of the entities, this information had no bearing on determining the combinability of these entities.

Reporting Ownership Information to the WCIRB

An agent/broker or insurer who believes that two or more entities should be combined for purposes of experience rating and such entities are not in the same bureau file should notify the WCIRB. More information on how insurers and agents/brokers can submit this notification to the WCIRB can be found on the WCIRB Connect® Ownership Information Submission Tool page.

Related Links

Ownership
Determining Ownership