The ABC’s of the Employee vs. Independent Contractor Distinction

August 23, 2018 | Ryan Kagarakis

Independent contractors serve an important role in our California economy by providing services to companies on a fee basis. Whether in construction, manufacturing, or services such as Uber, the independent contractor status allows the hiring entity to avoid certain taxes and expenses while the worker benefits with flexibility in their schedule and pay. On April 30th, 2018 a monumental precedent was set in Dynamex Operations West, Inc vs. Superior Court, where the California Supreme Court adopted the “ABC Test”.

Under the new “ABC test”, a person will be considered an independent contractor only if the hiring entity can prove all three of the following apply:

  • A) That the worker 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;
  • B) That the worker performs work that is outside the usual course of the hiring entity’s business;
  • C) That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The California Supreme Court’s decision states that although the independent contractor status may be advantageous to workers as well as businesses, that public interest in protecting workers was the central consideration in instituting the new test.

There is another major concern for employers as it relates to this new rule: Does the Dynamex decision apply retroactively to when it was filed? This is the primary difference between a disastrous financial setback, or simply a new protocol to be followed moving forward. Businesses maintain that the decision should NOT be retroactive as they have been making strategic decisions based on the old rule. Proponents of employee rights argue that this decision merely clarified an existing law. The issue is currently in front of the California Supreme Court.

So what does this mean for insurance?

Workers’ Compensation: Among the many costs an employer faces, workers’ compensation will likely be one of the highest. In the construction and manufacturing trades in particular, insurance carriers see the probability of injury occurring to independent contractors higher than other industries. Consequently, the rates follow suit. If you hire independent contractors or subcontractors and they do not meet all three of the ABC prongs then you will be subject to the workers’ compensation rates of that particular trade if they are not considered independent contractors. This will have a major impact on premiums paid moving forward. Even worse, if the rule is made retroactive the financial burden has the potential to be enormous.

Employment Practices: If the new ABC test is made retroactive that means that independent contractors, now-made employees, may try to recover lost wages and benefits. Although wage and hour related claims are not insurable, having defense costs under an Employment Practices Liability Insurance (EPLI) policy can offset the costs associated with defending yourself.

This is just a snapshot of the potential ramifications brought on by this complex new ruling. We recommend consulting with an attorney familiar with employment related issues and evaluating your independent contractor relationships. We also recommend consulting with an insurance professional to discuss the possibilities this new rule brings to your premiums.

Ryan Kagarakis
Property & Casualty Consultant
Brown & Brown Inc.

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