A change in ownership is material only if the owner or owners prior to the change in ownership own less than a one-half interest after the change in ownership. See Section IV, Rule 1a, paragraph (2) of the California Workers' Compensation Experience Rating Plan—1995 (ERP).
Material Change in Ownership Example
Oscar's Oysters Incorporated is owned by Oscar (75%) and Lily (25%). Oscar sells his 75% to Howard. Since the prior owners did not continue to own 50% or more of the entity after the sale, the change in ownership is considered material.
In the event of a material change in ownership, the seller's experience is carried forward to the buyer unless it is demonstrated that a material change in employees or a material change in operations occurred within 90 days of the ownership change. Such a material change in employees or operations is referred to as a "change in status." (Learn more about When an Entire Risk Is Sold or When Less than the Entire Risk is Sold.)
Once incurred, a company's payroll and loss experience stays with it throughout the applicable experience period regardless of whether or not the company changes its employees or operations. In other words, a company cannot shed its experience by selling its business and starting a new one, nor can it shed its experience by selling a portion of the business.
Seller's Side Example
Stanley sells his restaurant and buys a quick print shop. The payroll and loss experience from the restaurant – prior to the date of sale – continues to be used in Stanley's experience modification, which is now applicable to his quick print shop.
In the event of a material change in ownership, Section IV, Rule 1 of the ERP describes the circumstances in which the seller's experience is – and is not – carried forward for use in the experience rating of the buyer. The rules regarding the application of a risk's payroll and loss experience to the buyer are based on the following rationale:
The ERP has been structured to ensure that when an entity undergoes a material change in ownership, the experience of a prior owner shall be carried forward to the new owner unless there is a compelling reason to do otherwise. Compelling reasons are limited to clearly defined material (majority) changes in employees or operations.
When all or a portion of a risk undergoes a material change in ownership, the seller's experience applies to the buyer unless there is a change in status. A change in status occurs if, in comparing the 90 days subsequent and prior to the change in ownership, there is either a material change in employees or a material change in operations. See Section IV, Rule 1b, for changes in operations, and Rule 1c, for changes in employees, of the ERP.
Insurers, agents and brokers can log into WCIRB Connect® and use the Ownership Information Submission tool to notify the WCIRB of a change in ownership. The WCIRB no longer accepts ownership information submitted using WCIRB Form 601, Notification of Change in Ownership and/or Combinability of Entities Form. Learn more about the Ownership Information Submission tool on WCIRB Connect.
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