Workers Compensation Coverage Impact of California Assembly Bill 5
Effective July 1st, 2020, the law CA AB 5 requires a new test all employers must use to determine if a worker is an employee or independent contractor under the California Labor Code, which in turn impacts who must be covered under a workers compensation (“WC”) insurance policy.
Employers must use a three-pronged test to determine if a worker is an employee, and the law assumes a worker is an employee unless the company can prove all of the following:
- The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
- The person performs work that is outside the usual course of the hiring entity’s business.
- The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
If any of the above items cannot be satisfactorily proven, the law considers the worker an employee and therefore included and covered by the company’s WC policy, unless otherwise exempt.
Certain classes of workers may be exempt subject to the satisfaction of the “Borello test” such as:
- Direct Salespersons
- Physicians, surgeons
- Private Investigators
- Securities/Investment Advisors
This portion of CA AB 5 affecting workers compensation insurance is effective July 1, 2020 regardless of the policy effective date. All employers’ WC policies are subject to the law without exception.
The law also applies to companies with California employees – it doesn’t matter if the headquarters is located in California or not. If employees are in California, they are subject to the California WC.
Payroll is the principal exposure so it’s important for companies to prepare for premium increases with the inclusion of newly applicable employees. All of the rules and regulations regarding WC remain. We suggest that companies review their payroll exposure and contact us to discuss potential premium changes – this best practice can help to mitigate any surprises at audit. How to calculate WC costs.
How To Prepare
- Review current independent contractor relationships and apply the three-pronged test (and Borrello as applicable) to determine if the law may consider them employees.
- Consult with qualified labor counsel as needed to answer your questions – your insurance broker cannot offer legal advice with regard to CA AB 5.
- Review independent contractor contracts and certificates of insurance for evidence of WC coverage by contractors
- Visit these helpful resources:
Please understand that your WC broker and insurer(s) is required to comply with the law. As the employer, you need to provide them with the information they need to properly calculate your premium and appropriately provide the coverage.