In recent weeks there has been an increase in chatter in the local media, as well as other information outlets, regarding the application of the North Carolina Workers’ Compensation Act to homeowners associations in North Carolina.

This activity has prompted a flood of inquiries as to whether associations must, or should, obtain worker’s compensation insurance.After discussing this issue at length with John Ayers – a member of our firm with nearly three decades of experience dedicated to workers’ compensation claims – we’ve developed two color-coded risk-assessment categories, Yellow and Red, that we believe cover the landscape in this corner of the law where workers’ compensation and community association management overlap.

Your association falls within our Yellow risk-assessment category if your only “workers” are members of an executive board comprised of at least three unpaid members or officers. This category represents a relatively low level of risk in this area. Our Red risk-assessment category, however, involves a higher level of potential exposure and reaches any association that hires one or more paid employees to perform services for or on behalf of the association.

This update is intended to help you first determine which risk assessment category applies to your association and then give you the practical information you need to better understand the effect of the North Carolina Workers’ Compensation Act on your particular association.

Yellow: Proceed with Caution

However, even if your association’s only workers are the unpaid members of your executive board, there are other considerations that may justify the expense of maintaining workers’ compensation insurance despite the low risk of a payout. The Act requires all statutory “employers” to maintain workers’ compensation insurance and establishes civil and even criminal penalties for employers who fail to do as the Act requires.  However, for associations in our Yellow risk assessment category, exposure to a worker’s compensation claim brought by an injured executive officer presents an almost inconsequential risk.  This is tied to one of the basic principles of workers’ compensation law:  An employee’s ability to recover under the Act is tied to his or her earning capacity in whatever position the employee held at the time of the injury.  That earning capacity is measured in terms of the employee’s average weekly wage.

Since the executive officers of non-profit homeowner’s associations are almost always unpaid volunteers, they have no average weekly wage and therefore cannot recover under the Act.The North Carolina Workers’ Compensation Act applies to all employers within the State with at least three statutory “employees,” which – under the Act – includes unpaid executive officers of non-profit corporations organized in North Carolina.

If your association, like most, is managed by a group of three of more executive officers, you are an “employer” under the Workers’ Compensation Act and your association is exposed to potential liability when an employee is injured on the job.

With that said, we believe that there may be legal avenues available to circumvent application of the Act to associations that fall within our Yellow risk assessment category (“ghost policies,” etc.), and we are unaware of any enforcement action having been undertaken against a community association in North Carolina for its failure to maintain workers’ compensation insurance.

However, the penalties do exist under the statute and your association should consider whether an absolute safeguard against the possible imposition of those penalties is enough to justify the cost of insurance premiums.

Red: Stop and Get Insured

WHAT’S THE BOTTOM LINE?

If your association has hired paid workers to provide services to or on behalf of the association, then we need to discuss your potential exposure under the North Carolina Worker’s Compensation Act and encourage you to contact your association’s insurance professionals.

This article has only scratched the surface of this hot-button issue, and the details of your association’s employment arrangements will determine the full impact that the Act has on your community.

If your association maintains even one paid employee on the association’s payroll, the association falls within our Red risk-assessment category and we strongly recommend that your association obtain adequate workers’ compensation insurance.  Even if you only pay one or two employees, keep in mind that your executive officers still qualify as statutory “employees” for purposes of satisfying the Act’s three employee threshold.  If the threshold is met and one of your paid employees is injured on the job, your association is exposed to significant liability under the Act and, in the absence of insurance, may be required to pay an injured employee’s claim directly from association funds.

This alone justifies obtaining workers’ compensation insurance if you fall into the Red category.  In addition, your association’s failure to maintain adequate workers’ compensation insurance under these circumstances is precisely the sort of scenario in which we expect the Act’s civil and criminal penalties may be brought to bear.

For example, some of your association’s paid workers may qualify as independent contractors who do not qualify as “employees” under the Workers’ Compensation Act. Since they’re not “employees” under the Act, independent contractors do not count toward the three employee threshold that will determine whether or not the Act applies to your association.

In addition, since independent contractors don’t come within the Act’s definition of an “employee,” independent contractors can’t bring a successful workers’ compensation claim against your association in the event they become injured in the course of their work. However, some paid workers who you think of as independent contractors may actually qualify as statutory “employees” based upon a number of different factors including the degree of control your association maintains over their on-the-job activities.

An additional consideration that warrants careful thought is the fact that even an ill-founded and ultimately unsuccessful workers’ compensation claim against your association will require some form of legal defense, the cost of which might alone justify the expense of annual insurance premiums.Our firm is ready to help you analyze your unique situation and better understand whether you should obtain worker’s compensation insurance.

Our community association attorneys will work in conjunction with our worker’s compensation colleagues and your insurance professionals to provide the specific guidance your association needs to navigate this potentially murky area of the law and minimize your costs.

Please feel free to call or email Stephen C. Sellers with any questions about this post.