Employee Ownership & Worker’s Compensation, RMO/RME

Like rising summer temperatures, optimism is on the upswing as contractors begin to see opportunity again in the Golden State. Our first question comes from one such an optimistic Californian. Another contractor actually answers his own question, but for everyone’s benefit we ‘employ’ my expertise in explaining it for all…

Q:  I was reading your Kalb’s Column and I thought you would be the perfect person to answer my question.

I am currently living in California and want to open a construction company. My father has the experience and is willing to take the exam for a General “B” license. I want to form a S-corporation. I know I must form the corporation first before my father applies for the license. My question is does my father need to act as an RMO under my corporation and own 20% stock, or should he just apply for his own license. Thank you in advance,

A:  When forming a corporation, you have choices on the qualifier.  Your father can be a Responsible Managing Employee (RME) or Responsible Managing Officer (RMO).  If he will be the RMO, ownership percentage can be anywhere from 0 to 100%.  There is no requirement that he own 20% of the company.  To save time and money it is best to apply for the corporate license and have your father sit for the exam.  There is no need for him to first apply for ‘his own’ Sole Owner license.
Q:  We have noticed a trend towards some corporations becoming “100% employee owned”.  One of these general contractors recently submitted exemptions to a public agency, stating that since they were all “owners”, no Worker’s Compensation Insurance was required.  This is not the first time we have heard this, although this is the first time an agency has informed us that this has occurred.  As you know, under California law, any company with employees must provide Worker’s Compensation. I think the Exemption this company has on file with the Contractors Board is improper.  If you publish my question, please withhold my name.

A:  As many of my readers know, I never use anyone’s name or any identifying information in my columns.  When people ask me questions by email, phone or fax, I answer them as best I can and, if published, always make sure there is complete anonymity.

What you’re describing is likely an ESOP (Employee Share Option Plan).  This is a benefit plan that allows employees to become owners of stock in the company they work for.  Under a typical ESOP plan, companies usually provide their employees the opportunity to acquire the company’s shares over a period of time. Employee ownership can mean many things, ranging from a few executives owning stock in their companies to the ownership of a company by most or all of its employees.

Without knowing the specific make up of the company in question, I cannot speak to whether they’re acting properly or trying to ‘game the system’.   Nevertheless, you’re correct, simply being a “100% employee owned” would not exempt them from needing Worker’s Compensation. Even the claim, ‘employee’ –owned suggests insurance would be necessary.

If in fact they have employees (but have filed an Exemption), this is a serious violation and may result in disciplinary action being taken by the CSLB and CA Department of Industrial Relations.  During several of the Contractor Board’s recent sting operations, companies that had employees but had filed an Exemption form (under penalty of perjury) were targeted.