Business Owners: Beware of the Second Notice Trap!

As a business owner, you have plenty to worry about. But did you know you may be violating the Workers’ Compensation Act without even realizing it?

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Texas is the only state that does not mandate employer participation in the state’s workers’ compensation system. Unlike other states, an employer may participate in the workers’ compensation system or choose to forego workers’ compensation insurance altogether.  However, many employers are unaware that, even if the company elects to participate in the workers’ compensation system, the employee of a subscribing employer has the individual right to waive coverage at the time of hire.

The Texas Workers’ Compensation Act (the “Act”) allows an employee (or beneficiaries) to be compensated if the employee suffers from a work-related injury. It tends to attract employer participation because it places a significant limitation on the employer’s liability if an employee is injured on the job. This “limitation” on the employer’s liability is that the injured employee is only allowed one remedy – either workers’ compensation insurance or common law rights of action.

All Texas employers must comply with certain notice requirements imposed by the Act.  For employers who maintain workers’ compensation coverage, the employer must first notify employees in writing and by posting a notice that the workers’ compensation coverage exists.  However, employers have an additional notice responsibility after this first notice to the employee.

Under the Administrative Code (and NOT the Labor Code or Workers’ Compensation Act) employers are further required to give each new (or newly-insured) employee notice of the employee’s right to opt out of coverage.  The notice is required to include the following statement:

“You may elect to retain your common law right of action if, no later than five days after you begin employment or within five days after receiving written notice from the employer that the employer has obtained coverage, you notify your employer in writing that you wish to retain your common law right to recover damages for personal injury. If you elect to retain your common law right of action, you cannot obtain workers’ compensation income or medical benefits if you are injured.”[1]

Translation: you are required to inform the employee that he or she must respond to your notification in writing within five days.  The response should describe the employee’s choice of remedy should there ever be a work-related injury for which they would attempt to recover damages. It must specifically state whether the employee will pursue the potential remedy under: 1) workers’ compensation law; or 2) the common law right of action.

An employer commits an administrative violation if they fail to provide this second notice to employees.[2] Failure of the employer to provide the requisite notice constitutes an administrative violation that may be punishable by a fine of up to $25,000 for every day that the employee has not been provided the second notice.

So, what if you haven’t provided each employee with this second notice? You could be looking at a hefty fine.

Because of the complexity of the Texas Labor Code, many employers aren’t aware that they are required to follow this second notice requirement. However, even if you haven’t provided the proper notice to your employees, you can take some comfort that the practical aspect of enforcing this law is difficult. Based on our experience, the Texas Department of Insurance (“State”) does not actively monitor to ensure that employers are providing this second notice to their employees. While it is entirely within the State’s authority to enforce this penalty proactively, the State usually relies on employee complaints before bringing any action against an employer.

In the event that an employer initially fails to provide employees with notice, but subsequently corrects the notice violation before the State becomes aware of it, the State does not routinely enforce this penalty retroactively.  Rather, the State will usually send the employer a notice such as a “warning letter” or “education letter.” Make sure you understand your responsibilities and rights as a business owner before hiring, and avoid the “second notice trap.”

Mark Simon is an AV rated trial attorney who has represented clients ranging from public corporations and governmental entities to small start-up businesses. He primarily focuses his practice on employment issues, including: employment discrimination, harassment, retaliation, wrongful discharge, wage-hour, non-compete agreements, non-solicitation agreements, trade secrets, ERISA and independent contractor litigation.

[1] TEX. ADMIN. CODE § 110.101(a)(5) (2000) (Tex. Dept. of Ins., Covered and Non–Covered Employer Notices to Employees).

[2] Tex. Lab. Code Ann. § 406.005 (Vernon 2006).