You may have heard about the new law regarding Independent Contractors and the ABC test that helps determine employee vs independent contractor status. 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 you cover under your workers’ compensation policy.
While the bill is effective January 1, 2020, the part that affects workers’ comp coverage goes into effect July 1, 2020.
You Need to Know
- The new legislation is not based on policy effective date. As of July 1, 2020, as an employer, you’ll 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.
- If you’ve employed an independent contractor that can supply you with a certificate of workers’ compensation insurance that is effective during your policy period, he/she would not be considered part of your employee roster. You would not report payroll for him/her.
- In order to avoid an unexpected change in exposures at time of audit, you 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.
On Sept. 18, 2019, the California legislature adopted the Dynamex ABC test as the state standard for employee classification and expanded its scope to include matters related to the state’s:
- Labor code;
- Wage orders (including overtime, meal periods, rest breaks and other wage and hour issues);
- Unemployment benefits; and
- Workers’ compensation laws
The ABC Test
The ABC Dynamex test presumes that a worker is an employee, unless the employer can prove that the worker:
|A.||Is free from the control and direction of the employer when performing work, both practically and in the contractual agreement between the parties;|
|B.||Performs work that is outside the usual course of the employer’s business; and|
|C.||Is culturally engaged in an independently established trade, occupation or business of the same nature as the work performed for the employer.|
In spite of having a broad reach, the new law also offers a substantial number of exemptions. However, when an exemption applies, the new law also dictates which standard must be used for worker classification under that exemption. For the vast majority of exemptions, the Borello multi-factor test will continue to apply.
- General exemptions to the new law include (but are not limited to):
- AAA-affiliated tow truck drivers;
- Builders and contractors;
- Commercial fishermen (until 2023);
- Direct sales (if compensation is based on actual sales and not wholesale purchases or referrals);
- Doctors, physicians, surgeons, dentists, podiatrists, veterinarians and psychologists;
- Financial services (accountants, securities broker-dealers, investment advisors);
- Freelance writers and photographers (if they contribute no more than 35 submissions to an outlet in a year);
- Hair stylists and barbers (if licensed and can set own rates and schedule);
- Insurance brokers;
- Licensed estheticians, electrologists;
- Licensed manicurists (until 2021);
- Professional services (marketing, human resources administrators, travel agents, graphic designers, grant writers, fine artists);
- Professionals (lawyers, architects, engineers);
- Real estate agents; and
- Tutors (who teach their own curriculum, and who are not public school tutors).
Links and Resources
- Employment Development Department AB 5 webpage
- Answers to frequently asked questions