How Insurance Can Help You Prepare for AB5
On January 1 2020, a new law titled AB5 went into place in California, making it more difficult to classify workers as independent contractors, rather than employees. On July 1, this law was written into the workers’ compensation code. Effectively, what this means is that insurers have a concrete way to enforce the law, and now they are able to use workers’ compensation audits to determine whether independent contractors are properly classified. While the law has been on the books for 6 months, the July addition adds a level of urgency for California businesses rushing to meet the new requirements, and companies in other states preparing for similar legislation to surface. This guide will teach you how innovative new insurance solutions can help you avoid the risks and looming insurance audit charges that will almost certainly come with AB5.
What is AB5?
AB5 is a new law which assumes that, for the most part, all workers are employees unless they can meet three requirements, known as the ABC test. Workers have to meet all three requirements to be considered independent contractors.
1 | The worker performs services free of the control or direction of the company.
For example, if an on-demand / gig platform were to set a minimum number of hours, or require that their workers wear a uniform, they may be accused of misclassification.
2 | The worker is performing tasks that are outside of the usual course of the company’s business activities.
For example, a retail business could hire a freelance writer to create their catalogue. However, a magazine may have a hard time hiring a freelance writer to write their articles.
What about rideshare platforms, like Uber or Lyft?
This is where classification laws get tricky. Are on-demand / gig platforms all technology companies that provide a marketplace, or are they employing workers (e.g. drivers)? Uber, Postmates, and several other leading on-demand/gig platforms have pooled $100M to suggest changes to AB5; including minimum wage and worker rights. It’s not clear how all of this will play out over the coming months, as there are still quite a few questions to be answered.
3 | The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
This is where insurance comes in handy. Demonstrating that an independent contractor has their own business insurance policy is one way to demonstrate that they are, in fact, their own independent business.
What Does AB5 Have to do With Insurance?
Insurance has always been inextricably linked with employment. Workers’ Compensation, specifically, is a benefit required of employers in almost every state to protect their employees. As of July 1, workers’ compensation insurers can audit businesses with workers in California based on AB5 criteria. Many think of this as “presumptive workers’ compensation,” meaning that AB5 assumes your workers are employees unless they pass the ABC test. It is expected that if your insurer doesn’t believe the independent contractors can pass the ABC test, they can adjust your workers’ compensation premium based on independent contractor payroll, as opposed to employee payroll. If this happens, you’ll be facing more than prohibitively high insurance premiums. This determination would also signal to the courts that your independent contractors do not pass the ABC test, potentially triggering a misclassification suit and requiring you to reclassify all independent contractors as employees.
