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New in the Brief – Act 196, Members, Partners, and Sole Proprietors are Not Employees for Workers’ Comp

Hey Everyone,

just a reminder to come join me at the Box Jelly tomorrow night 10/18 for a talk on “Protecting Your Brand.” The subject will be a discussion of various intellectual property laws that a small business owner should understand as they grow their business. Here is the link for more info.

Today’s law in the brief shows exactly why definitions play a role in the application of the law. If you attended my talk on Business Entity Formation you would know that when you choose to operate a business there are many forms you can choose from. Each has its pro and con.

Many times the pros and cons come with dealing with things like taxation and the way benefits are handled by the entity. Act 196 tries to specifically clarify one of these areas. Namely, that LLC members, partners in partnerships, and sole proprietors are NOT defined as “employers” for the purposes workers’ compensation.

The Mechanics of it All

Act 196 amended HRS Section 386-1, which is the definition of employment AND lists what is excluded from that definition. Thus by adding the following lines to the exclusion section:

(10)Service performed by a member of a limited liability company if the member is an individual and has a distributional interest, as defined in section 428-101, of not less than fifty per cent in the company; provided that no employer shall require an employee to form a limited liability company as a condition of employment;

(11)Service performed by a partner of a partnership, as defined in section 425-101, if the partner is an individual; provided that no employer shall require an employee to become a partner or form a partnership as a condition of employment;

(12)Service performed by a partner of a limited liability partnership if the partner is an individual and has a transferable interest as described in section 425-127 in the partnership of not less than fifty per cent; provided that no employer shall require an employee to form a limited liability partnership as a condition of employment; and

(13)Service performed by a sole proprietor.

people in those situations would not be treated as an “employer” for workers’ compensation law.

What does this Mean?

To put it succinctly, The Retail Merchants of Hawaii stated it in their testimony regarding the Act when it was a measure in the Legislature:

A business owner who is not actively involved in the day-to-day activities of the business most likely would not suffer a work-related injury and therefore would not benefit from workers’ compensation insurance. Even if the owner does work at the business, there would be little or no gain to file a worker’s compensation claim, which would result in increased premium costs borne by the business. In the case of a sole proprietorship, an injury would likely result in the termination of the business operations.

Admittedly, worker’s compensation insurance imposes additional costs on the business. This exclusion would provide additional and much needed financial resources to the small business person.

Taken from Testimony before the WAM Committee on HB518 HD1 SD1, 04-01-11.

Therefore, a change in definition saves businesses from having to purchase workers’ compensation insurance. After next week’s Law in the Brief, I will be talking about definitions in agreements in my new series “Boilerplate Blurbs.” This will be all about those sentences you see in agreements. This will culminate into a seminar entitled “What’s in an Agreement? A Primer on Contract Law.”

As always, don’t forget to “Subscribe” to this blawg do so by clicking the little orange button up in the right-hand corner of the page.

*Disclaimer: This post discusses general legal issues, but does not constitute legal advice in any respect. No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction. Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

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