Alert / Risk Management
Getting ready for California Assembly Bill 5

The impact of California Assembly Bill 5 (California AB5) will soon be felt by many businesses that perform work in the state. Beginning July 2020, the bill (under Labor Code 2750.3) will require a three-part test that employers must use to determine if their California workers qualify as employees or independent contractors.

The revised worker classification standards

This multipart criteria, known as the ABC test, is a new method in determining if a worker qualifies as an independent contractor. Under California AB5, all workers will be presumed employees. Alternatively, using the three-part ABC test, a business will establish a worker as an independent contractor only if all of the following are established:

  • The worker is free from the control and direction of the hiring entity in connection with the performance of their work.
  • The duties performed by the worker are not central to the hiring company’s core business.
  • The worker is customarily engaged in an independently established business, trade, occupation or industry of the same nature of the work performed.

The law also provides a listing of occupation exceptions which “shall instead be governed by the California Supreme Court’s decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341” (the Borello test). These occupation exceptions include:

  • Doctors, surgeons, dentists, podiatrists, psychologists or veterinarians performing professional or medical services provided to or by a healthcare entity.
  • Lawyers, insurance brokers, architects, engineers, private investigators or accountants.
  • Securities brokers/dealers or investment advisers and their agents and representatives that are registered with the Securities and Exchange Commission, the Financial Industry Regulatory Authority or the State of California.
  • Real estate agents, repossession agencies, direct sales persons and commercial fishermen.
  • Individuals performing services under a contract with a licensed “motor club.”

Additional exceptions and other modifications include occupations that fall under professional services or referral agencies, as well as subcontractors within the construction industry. Details into these exceptions and the application of the Borello decision are outlined within the full text of the bill as well as in the California Labor FAQ on California AB5

The impact of the new worker classification standards

In addition to presuming workers are classified as employees, California AB5 will create a stricter criterion in establishing a determination of independent contractor status. As a result, employers may be required to provide and pay the associated premiums of additional workers’ compensation benefits for those previously classified as non-subject independent contractors. The financial implications and responsibilities between each worker status classification are dramatically different from a broader perspective:

Employee vs. independent contractor coverage in California

Besides these obligations to employees, businesses should also be mindful of the employment practices exposures that could result from potential nonadherence or the misclassification of worker status. Preparing for these changes will be key to successfully transferring to the California AB5 requirements.  

What actions should businesses take?

Given that California AB5 will change the criteria of worker classification, it is advisable that employers begin re-evaluating their entire workforce under the new protocols. Businesses should also consider retaining legal counsel who specialize in California employment law. Under their professional guidance, employers can proceed through the process of re-evaluating worker classification guidelines under California AB5.

Any employee status changes resulting from the process will then need to be evaluated in terms of employment obligations. Building financial models to understand the impact of these potential additional obligations will help forecast future increased costs.

Lockton can help you understand the implications that worker reclassification might have on your business insurance portfolio. Contact a member of your Lockton team to begin discussing the unique needs that may result from California AB5.

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