How Does AB5 Affect Independent Contractors?

How Does AB5 Affect Independent Contractors?

California Labor Code section 3353 defines an independent contractor as a “person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished.”

An employee and an independent contractor have some clear distinctions between them:

• W-2 Employees work for an employer that controls the work – what will be done and how it will be done. The employer also carries workers’ benefits, vacation time, and withholding for annual taxes.
• Independent contractors are professionals in a trade or business offering services to the general public. Independent contractors are self-employed, and their earnings are subject to self-employment taxes.

Independent contractor isn’t a one-size-fits-all term. There are various jobs and skills for these specific kinds of workers. Some examples include:

• Advisors (legal, financial, personal)
• Tax professionals
• Doctors
• Accountants
• Trades workers (Electricians, Plumbers, Carpenters, etc.)
• Florists
• Mechanics
• Warehouse workers

B5 goes into effect until January 1, 2020 and will apply retroactively to certain claims arising under the California Wage Orders and will apply on a go forward basis to ALL independent contractors. While it has generally been perceived as a Bill targeted at the Gig economy and large firms like Uber and Lyft it has potentiality far-reaching effects for the entire State and there are clear insurance implications too. This has implications for all types of businesses from those who employee drivers as Independent Contractors to Domestic Workers if nothing else because it codifies what may have already been the law in California around who can correctly be classified as an independent contractor.

Dynamex ABC Test

The California Supreme Court’s April 2018 Dynamex decision established a presumption that workers are employees unless the hiring entity demonstrates that the worker:

A. is free from the control and direction of the hiring entity in connection with the performance of the work;

B. performs work that is outside the usual course of the hiring entity’s business; AND

C. is customarily engaged in an independently established trade, occupation, or business.

AB5 expands this test beyond Wage Orders to provisions of the Labor Code and Unemployment Insurance Code.

Exemptions

There are certain occupations, industries, and business relationships which are carved out in AB5 from the ABC test. Although those exemptions are not automatically deemed independent contractors but instead those exempted classes must be assessed under a more flexible multifactor test. The exemptions include the following:

• Certain professional occupations, including licensed insurance agents, physicians, doctors, lawyers, architects, engineers, private investigators, and accountants; registered securities broker-dealers or investment advisers; direct sales salespersons; and commercial fishermen.
• Construction subcontractors, motor clubs, and real estate and repossession agency licensees that satisfy certain criteria.
• Workers operating under certain types of professional services contracts that meet additional sub-criteria, including human resources administrators, marketing professionals, travel agents, graphic designers, fine artists, photographers, writers/journalists, and licensed barbers and cosmetologists.
• “Bona fide business-to-business contracting relationships” where a “business service provider” contracts to provide services to another “contracting business,” if the contracting business demonstrates that 12 criteria are all satisfied. These 12 criteria though include prongs A and C from the above ABC test so it is still a significant hurdle to get over.
• Certain “referral agencies” – businesses that connect clients with service providers in specified industries of dog walking, dog grooming, home cleaning, minor home repair, moving, errands, furniture assembly, animal services, web design, picture hanging, pool cleaning, yard cleanup, graphic design, photography, tutoring, and event planning – can have the multi-factor test apply instead of ABC if they can establish all of 10 requirements, which are similar to the above-mentioned business-to-business-contractor factors.

Employers should consider the financial implications of AB5 for the increased insurance premiums associated with these new employees in terms of increased health benefit costs, increased workers compensation premium, increased employments practices liability and increased employee benefits liability premiums.

Beyond this though AB5 will also lead to Workers Compensation audits looking at independent contractors and potentially reclassifying those workers to employees for Workers Compensation purposes which is another avenue of enforcement that employers should be aware of.  The Workers Compensation implications of AB5 to not go into effect until July 1, 2020.

Given the law’s retroactivity, it is likely to open a floodgate of lawsuits for which there may not be coverage under Employment Practices Liability policies if they are solely focused on Wage and Hour issues which some policies exclude or provide a sub-limit for the cost of defending it only. This increase in law suits will likely effect an already difficult market for Employment Practices Liability coverage in California and lead to increased pricing and restricted terms especially for those employers with a concentrated California workforce. To combat the threat of such lawsuits and to demonstrate best practice risk management Employers should consider implementing arbitration agreements with class action waivers. Employers should also evaluate an effective communication strategy if and when they decide to reclassify workers under the new law.

Source :

https://adia.works/blog/california-ab5/

https://g2insurance.com/defining-independent-contractors-how-will-ab5-affect-your-business/