An important new law, Assembly Bill 5, takes effect in California on January 1, 2020. What does it mean for California businesses?
In this blog, we break down the background of AB 5, what has changed, key takeaways and what needs to be done now, so you and your business can be prepared.
For California workers’ compensation purposes, a worker is classified as either an employee or an independent contractor based upon a number of factors that were established decades ago.1 These factors focus primarily on who has the right to control the manner and means of accomplishing work performed.
Passage of AB 5 (Gonzalez), signed into law September 18, 2019
Following the passage of AB 5 signed into law on September 18, 2019, a new test will be applied to workers’ compensation matters.2 AB 5 adopted and extended the California Supreme Court’s decision in the case of Dynamex Operations West, Inc. v. Superior Court of Los Angeles (Dynamex),3 which applies an “ABC” test to determine employment status. Click here to read the full Assembly Bill: https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB5
The three components
The ABC test focuses equally on the following three components and presumes that a worker is an employee of the hirer unless the hirer can prove all three: A, B and C:
- The worker, both under contract and in fact, performs the work free from the direction and control of the hirer
- The worker performs work that is outside the usual course of the hirer’s business
- The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.
It’s important to remember that the new law takes effect on January 1, 2020.4 For workers’ compensation purposes, it requires workers to be properly classified as employees and insured, by July 1, 2020, irrespective of policy inception/renewal date.
What to Do Now
- California businesses should consider conducting a thorough review of their operations. Any workers currently classified as independent contractors should be reexamined utilizing the new ABC test and reclassified by January 1, 2020 (and no later than July 1, 2020 for workers’ compensation purposes).
- Businesses should report any reclassified employees to their agent or insurance carrier’s underwriting department to ensure that reclassified employees are covered by a workers’ compensation insurance policy by July 1, 2020, irrespective of policy inception/renewal date.
- Businesses must remain aware that a failure to properly classify employees may raise additional issues more costly than failing to obtain workers’ compensation coverage for their misclassified employees (e.g., wage and hour violations).
For additional information about AB 5 please click here to visit the California Labor & Workforce Agency’s Employer Workplace Resources or contact your underwriting representative.
1. (1989) 48 Cal.3d 341.
2. There is a business-to-business exemption as well as exemptions for a number of industries that successfully lobbied for them, permitting the continued application of the traditional Borello test. It is anticipated that additional, future exemptions will be granted. Please consult the text of the law to determine whether an exemption applies and stay abreast of anticipated, future amendments extending exemptions to other industries.
3. (2018) 4 Cal.5th 903.
4. Per Dynamex, the ABC test is currently the relevant test regarding rights under the IWC’s wage orders.
Notice: this article is a summary intended for informational purposes and is not intended to be complete or intended as legal advice. How the law might impact any particular business is beyond the scope of the article. Readers are advised to consult with their legal counsel on the applicability of AB 5 to their unique business operations and when dealing with employment mis/classification issues in general.
Founded in 1925, CopperPoint Insurance Companies is a western-based super regional commercial insurance company and a leading provider of workers’ compensation and commercial insurance solutions. To learn more about our insurance products and find resources to better manage your risks, explore our website or contact your independent insurance agent.