California Assembly Bill 5 (also known as CA AB 5) was signed into law in September 2019, implementing a new test all employers must use to determine if a worker is an employee or an independent contractor under the California Labor Code. The law may impact who must be covered under an employer’s workers’ compensation policy.
While the bill is effective January 1, 2020, the part that affects workers’ comp coverage goes into effect July 1, 2020.
LET’S GET STARTED …
Who’s an Employee and Who Isn’t
The change requires employers with workers in California to use a 3-pronged test (known as the ABC test) to determine whether a worker is an independent contractor. The test assumes a worker is an employee unless the company can prove all of the following:
A. The worker is free to perform services without the control or direction of the company.
B. The worker is performing work tasks that are outside the usual course of the company’s business activities.
C. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.
How might the test requirements apply?
Scenario: Molly Thomas, a licensed electrician, is hired by Stub Pub, a new sports bar, to update the wiring in an older building they bought. It takes about a week, and the electrical work is completed before Stub Pub’s scheduled grand opening.
Conclusion: Molly is not an employee of Stub Pub and therefore not covered by the pub’s workers’ compensation plan.
A. Molly was not under the control or direction of Stub Pub related to the work she performed – the installation of the new wiring.
B. Work performed by Molly was outside of the usual course of Stub Pub’s business – electrical vs food service.
C. The work Molly did for Stub Pub is consistent with the work she’s customarily engaged in providing to other businesses (not just Stub Pub) and homeowners – electrical services.
CERTAIN CLASSES MAY BE EXEMPT
The classes below are examples of those that may be exempt from the new test if certain conditions are met.
They may still be subject to the Borello test.
• Direct Salesperson
• Physician and Surgeon
• Private Investigator
• Securities | Investment Advisor
YOU NEED TO KNOW
• The new legislation is not based on policy effective date. All employers with workers’ compensation policies inforce as of July 1, 2020 will be subject to the new test. This means that a worker could be classified as an independent contractor before July 1, 2020 and as an employee after July 1, 2020.
• To avoid an unexpected change in exposure at the time of premium audit, employers must include payroll for all employees defined by the statute as of July 1, 2020.
• The statute applies to businesses headquartered in California AND businesses headquartered elsewhere with employees working in California.
• If an employer hires a contractor who maintains workers’ compensation insurance for themselves and all other workers under the contract for the period of the policy (must provide a certificate of insurance), The Hartford will not include payments to that contractor as payroll under the policy.
By The Hartford