Changes to Independent Contractor Requirements Take Hold In California

Changes to Independent Contractor Requirements Take Hold In California
This is the second in a three-part series brought to you by CoreMark Insurance Services, Inc to address a few of the major changes facing California employers in 2020. If you missed our first installment, you can read it here.

The so-called “gig-economy” has made ever-lasting waves in the California employment landscape, and the full effects of these changes are still yet to be seen.  In September of this year, Governor Gavin Newsom signed Assembly Bill 5, also known as AB-5, that codifies the “ABC Test” first seen in the Dynamex Supreme Court case. The new law puts a much stricter standard in place for which workers can be classified as independent contractors, and many industries are still scrambling to find solutions as the new law takes effect January 1st, 2020.

What is the ABC Test?

As of January 1, 2020, to be classified as an independent contractor, one must meet all of the three requirements below:

  1. The worker is free from control or direction from the hiring individual or company.
  2. The worker is providing a service that is outside the hiring entity’s normal scope of business.
  3. The worker is customarily engaged in an independently established trade.

While some industries were given exemptions under the new bill, many industries are particularly struggling with meeting the second bullet point. The previous test for establishing independent contractor status, called the Borello test, included a number of factors regarding the contractor being free from control, but did not require them to be outside the business’ normal scope of business.

While the task of reconstructing the California workforce seems daunting, there are a few steps you can take to ensure compliance.

Does AB-5 Apply to My Business?

A number of industries lobbied to be exempt from the rules of AB-5, and the final version of the bill left over 50 types of businesses exempt. Many include professionals such as doctors, dentists, lawyers, insurance agents, and more.

There are also specific exemptions for business-to-business contractors and referral agencies that meet specific requirements.  You can read the full list of exempted businesses here.

Any businesses classified as exempt under AB-5 are still required to have their independent contractors pass the Borello test and are only exempt from the stricter standards of the ABC test.

If you don’t meet one of the exemptions, you’ll need to take steps to get your operations in line with the new rules.

Know the Ab-5 Deadlines

The new regulation states that any independent contractor deemed an employee as defined by AB-5 should be converted to an employee by January 1st, 2020, but of course, it’s not quite that simple.

For example, what does this change mean for your workers’ compensation reporting and premium? Essentially, two rules will be in play for policies that are already in force prior to January 1st. A policy effective 10/1/19 would be subject to the Borello Test until 12/31/19, and then subject to AB-5 standards from 1/1/20 to expiration in October of 2020. Additionally, as of 1/1/20, the employment test per AB-5 will apply to all employment-related disputes except Workers’ Compensation claims.

Workers’ Compensation claims with an occurrence date on/after July 1st, 2020 will be subject to AB-5 for determination if the injured worker is an employee for coverage consideration.  Claims with an occurrence date prior to that will be subject to the prior Borello test.

Steps for AB-5 Compliance

Legal experts recommend that employers:

  • Perform a worker classification audit, and especially review all contracts with personnel.
  • Determine which benefits and protections should be provided to any workers who are reclassified from independent contractor to employee (think health insurance and other benefits).
  • Notify any state agencies about corrections and changes to a worker’s status.
  • Discuss with legal counsel whether they should now also include them as employees for the purposes of payroll taxes, workers’ compensation insurance, federal income tax withholding, FICA payment and withholding.

If you have questions, please reach out to your CoreMark agent for details.