Relieving an Owner's Personal Liability for L and I Tax Through Bankruptcy of the Employer/Entity
Washington State has created a worker’s compensation insurance system for industrial workers by imposing workers’ compensation tax (L and I tax) on certain employers. L and I tax collected creates a fund that pays for an injured worker’s approved medical services necessary for the injured worker’s treatment. The injured worker may also receive partial wage replacement payments through this system. Payments to workers for this coverage come from a fund financed from L and I premiums imposed on and collected from employers.
Unless an exemption applies, employers must pay the workers’ compensation, or L and I tax to ensure insurance coverage for their workers, which in turn, typically precludes such worker from suing the employer for the worker’s work-related injury.
An employer’s failure to collect L and I tax can have significant consequences for the employer and the person responsible for ensuring such payments are made by the employer (“Responsible Person”). This includes potential personal liability against the responsible person and collection of such tax against the responsible person.
Personal Liability of Responsible Person – RCW 51.48.055.
RCW 51.48.055 provides:
Upon termination, dissolution, or abandonment of a corporate or limited liability company business, any officer, member, manager, or other person having control or supervision of payment and/or reporting of industrial insurance, or who is charged with the responsibility for the filing of returns, is personally liable for any unpaid premiums and interest and penalties on those premiums if such officer or other person willfully fails to pay or to cause to be paid any premiums due the department under chapter 51.16 RCW.
According to the statute, a Responsible Person “willfully fails to pay” if such failure was the result of an intentional, conscious, and voluntary course of action. RCW 51.48.055(1).
The Responsible Person would be the “officer, member, manager…” of the business entity primarily liable for the L and I tax. RCW 51.48.055(2).
Bankruptcy May Be the “Get Out of Jail Free Card”
Notwithstanding that an individual may be personal liability for unpaid premiums, plus penalties and interest on the premiums and penalties, such Responsible Person is relieved of liability if the employer that is a limited liability company or corporation filed bankruptcy or receivership. RCW 51.48.055(4).
RCW 51.48.055(4) provides:
“The officer, member, manager, or other person is not liable if all of the assets of the corporation or limited liability company have been applied to its debts through bankruptcy or receivership.
If you’re are a stakeholder that faces personal liability for uncollected L and I tax, you may wish to explore chapter 7 bankruptcy for the employer. This would not be a bankruptcy filed by the individual. Rather, it’s a petition filed by the employer/entity as required by the above-referenced statute. For defunct entities with minimal to no assets, it’s difficult to see why a chapter 7 bankruptcy of the entity should not be explored.