One outgrowth of a new California law that applies more stringent criteria for what constitutes an independent contractor is that many employers are likely to see more audits and calls for additional premium from their workers’ comp insurers.

In fact, it’s already happening in some industries, according to the insurance industry trade press. More and more employers are being hit with sizeable surprise bills for additional premium by their insurers for allegedly misclassifying independent contractors as employees, according to one article in the Workers’ Comp Executive trade publication.

And this problem is only like to get worse in 2020 as the full effects of this year’s landmark independent contractor law, AB 5, take hold.

What’s happening now

The Workers’ Comp Executive reported that the California Department of Insurance’s administrative hearings bureau is receiving an increasing amount of complaints from employers that are disputing their workers’ comp insurers’ request for additional premium for workers that had originally been classified as independent contractors.

The publication cited the case of a construction company that State Compensation Insurance Fund says misclassified 42 individuals who worked for the company as independent contractors in 2017 and hence should pay an additional $114,000 in premium for that year. The dispute is currently in front of the administrative hearings bureau.

In 2018, the California Supreme Court handed down a game-changing decision in the case of Dynamex Operations West, Inc. vs. Superior Court, in which it rejected a test that’s been used for more than a decade to decide who qualifies as an employee or independent contractor.

The court instead said that California employers must answer ‘yes’ to the following three questions if they want to classify a worker as an independent contractor:

  • The worker is free from the control and direction of the hirer in relation to the performance of the work, both under the contract and in fact;
  • The worker performs work that is outside the usual course of the hirer’s business; and
  • The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hirer.

The impact of AB 5

In 2019, Assembly Bill 5, which essentially codifies the Dynamex decision into state law, was signed into law ― and it will take effect Jan. 1, 2020. But while the Dynamex decision specifically excluded the independent contractor test from use in applying workers’ comp premiums, AB 5 does not. The new law will apply to workers’ comp on or after July 1, 2020.

The law is not retroactive, however, so insurers should not be able to apply the new test for workers’ comp premium assessment purposes for policies that took effect before July 1.

Industry observers say they expect more California employers to receive additional premium calls from their workers’ comp carriers after the law takes effect. The law will have the most significant workers’ comp implications on industries including construction, real estate, professional services and fitness, which often have many workers classified as independent contractors.

Your workers’ comp insurer will not send you a demand for additional premium without conducting an audit of your payroll. If the insurance company deems any independent contractors that you use as employees, then it will calculate the amount of back premium it thinks you owe for them.

For employers who think the insurance company erred, they can usually challenge the decision with the insurer. However, if that fails, businesses have a second opportunity: to file a complaint with the Department of Insurance.