(Extended Version, Unedited)
Note: Shorter version, edited for space, printed in the County of Orange Insurance News (The COIN), November-December, 2019
By: Dorothy M. Cociu, RHU, REBC, GBA, RPA
President, Advanced Benefit Consulting & Insurance Services, Inc.
We’ve been talking about the Dynamex ruling (April 30, 2018; Dynamex Operations West vs Superior Court of Los Angeles), which adopted the “ABC Test” for worker classifications, followed by the signing of Assembly Bill 5, for nearly two years, and it just keeps getting worse for certain California businesses.
The Dynamex case started with the presumption that a worker who performs services for the hiring entity is an employee for the purposes of claims for wages and benefits. In this supreme court case, the ABC test was adopted to distinguish between an independent contractor and an employee.
Assembly Bill 5 (AB-5) was signed into law by California Governor Gavin Newsome on September 18, 2019. The purpose of AB-5 was to codify the Dynamex decision and to clarify the decision’s application to state law. Basically, under AB-5, the burden of proof that someone is an independent contractor falls onto the hiring employer entity… Otherwise, the person doing the work will be an employee. To prove the independent contractor status, the employer must apply the ABC Test.
According to Marilyn Monahan, attorney at Monahan Law Office, “Dynamex changed the test that employers must apply to distinguish between common law employees and independent contractors for wage order purposes. The Court referred to the new 3-factor test as the ABC test. Prior to Dynamex, California had relied on an 11-factor test outlined in the case of S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989).” These tests are not at all easy to understand or to apply for many California employers faced with this new challenge.
I asked Marilyn if/how Dynamex caused controversy. “[Yes], Dynamex generated controversy. The legislature responded by introducing several bills to address the application (or not) of the ABC test, including AB-5. AB-5 also generated controversy, but it was passed by the legislature and signed by the governor this summer. AB-5 codifies Dynamex (in Labor Code section 2750.3). The bill also expands the scope of Dynamex (because the new standard applies to more than wage orders), but at the same time it includes a number of exceptions (because lobbyists took an active interest in the bill).”
AB-5 has far-reaching applications. According to Marilyn Monahan, it “applies to work performed on or after January 1, 2020. However, the bill also states that it is declaratory of existing law, which means that the Dynamex test is currently in effect with regard to wage orders.”
I’m sure most of you have been hearing about the ABC test, and many affected by this ruling have been seeking assistance from their law firms for months or years. For those that may not be as familiar, let’s break down the ABC test…
“Under the ABC test,” stated Marilyn Monahan, “a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:
(A) 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.
(B) The person performs work that is outside the usual course of the hiring entity’s business.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
It is anticipated that this test will result in more individuals being classified as employees than was the case under the Borello test.”
If any exceptions apply during the ABC test (and often many will, as it’s almost impossible to pass the B test), then we move to the Borello test. (S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 1989, 48 Cal. 3d 341).
The most important factor is whether the person to whom service is rendered (employer), has control or the right to control the worker. This could apply to both the control the work performed and the manner and means in which the work is performed.
It is under the Borello Test that professional services, such as insurance agents, were exempted from Dynamex.
“AB-5 includes a number of exceptions,” stated Marilyn Monahan. “One of those exceptions applies to insurance licensees. The bill states that the Borello test, rather than the Dynamex standard, applies to a ‘person or organization who is licensed by the Department of Insurance pursuant to Chapter 5 (commencing with Section 1621), Chapter 6 (commencing with Section 1760), or Chapter 8 (commencing with Section 1831) of Part 2 of Division 1 of the Insurance Code.’”
AB-5 author Assembly Member Lorena Gonzalez has stated “the exceptions we have included will ensure that independent contractors in professions where people have the ability to negotiate for themselves, such as doctors, lawyers, insurance agents, real estate agents, accountants, hairstylists and freelance journalists – are protected.”
Borello has 11 additional factors to be considered. Although the 11-factor Borello test is complicated, I will try to highlight some of the provisions. Again, as stated above, the most significant factor to be considered is whether the employer or principal has control or the right to control the worker both as to the work done and the manner and means in which it is performed.
Additional factors include whether the person performing the services is engaged in an occupation or business distinct from that of the principal/employer; whether or not it’s part of the regular business of the alleged employer; whether the employer or worker supplies the tools and instruments used; the alleged employee’s investment in the equipment or materials used; whether the services require a special skill; the kind of occupation in the locality, and whether the work is usually done under the direct supervision of the employer or done without supervision; the alleged employee’s opportunity for profit or loss depending on his or her skills; the length of time for which services will be performed; the degree of permanence of the relationship; the method of payment (by time or by job), and whether or not the parties believe they are creating an employer-employee relationship.
What a lot of employers want to know is, why isn’t their industry considered an exception, when so many others are? In particular, the trucking industry seems to be among the hardest hit, and they have the most to lose.
I sat down with one of my long-term friends and business associates, Kathryn Kingston, who works as the Controller for a trucking organization in Chino, to ask her about how this new law affects them.
“Kathryn,” I asked, “for years, many employers like yourselves have hired independent contractors for many positions, and now you’re faced with many of these independent contractors becoming employees. Can you tell us the financial impact, in general, that this will have on your firm?” Kathryn replied: “The financial impact is huge when you consider the workers compensation costs, health insurance and employer taxes, just for starters.”
In our conversation, I asked her about the time and money they spent on specialists, like law firms and consultants, to work with her firm on this. How time consuming was/is this, I asked her, and did this time take away from your primary business operations? “This is a big distraction to executives. The trucking industry has spent millions of dollars over the last couple of years fighting for the rights of the independent contractor. All the time spent attending meetings and weekly phone conferences is time that is taken away from growing our business.”
Overnight, her trucking firm will go from a small to a mid-size employer, which brings on many more complexities with benefits, the ACA, and more. I asked her what her biggest fears/concerns were with these issues? “Compliance,” Kathryn stated, matter-of-factly. “As a small employer, we have not had to learn or comply with various laws. Now we have to learn a whole new set of complex laws and try to be compliant. Since California does their own thing, it is often hard to keep track of whose law to be compliant with, Federal or State.”
Kathryn’s firm did not have to worry about ACA applicable large employer (ALE) compliance until now. Her firm was under 50 full-time employees, with over 100 independent contractor truck drivers. With AB-5, she will need to hire them as employees, some of whom that their organization values they may lose to another trucking firm, since many work for more than one. Then, of course, she will need to track them due to the ALE requirements for employer reporting under the ACA. This means much more time and expense to them, reliance on either their payroll company or other vendor to provide variable hour employee hours tracking, or determine them all designated full-time employees, which could be even more expensive to them. They will then, of course, have to offer them benefits under the ACA, which means that significant plan changes will occur, and a lot of additional compliance concerns.
I asked Marilyn Monahan to help me break down the law’s particulars for industries like trucking industries.
“In general,” Marilyn stated, “whether someone qualifies as an employee under the ACA depends on the federal common law definition, rather than the California standard. However, it may be administratively difficult (if not almost impossible) to effectively distinguish between individuals who are employees for one purpose and independent contractors for another. Therefore, reclassification could have a significant impact on employee benefit plans. For example, reclassification could turn a small employer into an ALE, could impact eligibility for small group coverage, and could expand the number of employees who are entitled to an offer of coverage to avoid a 4980H penalty. Employers should seek the advice of legal counsel as to the impact of reclassification on workers.”
Of course, there is more to it than that. This law has far-reaching effects, and employers affected have to look across the board for changes and additional compliance requirements.
“In all events,” Marilyn stated, “employers should also review the language of their employee benefit plan documents to ensure that eligibility terms accurately reflect the employer’s intent, as well as any applicable legal mandates or standards.” So plan documents, SPDs, even employee manuals, policies and procedures related to their ACA decisions, etc. are all components of the law. Meaning that the formerly small employer takes on the role of the large employer, without the benefit of years to adjust and prepare.
The state legislature seems to think that all independent contractors will love this law and applaud it’s existence. So, as an employer being affected with this, I asked Kathryn Kingston how she thinks the independent contractors feel about this law? Do they want to be employees or do they prefer to be independent? “Many contractors don’t want to lose their rights to set their own schedules and to be able to pick and choose which loads they want,” Kathryn stated. “California law is taking those rights away by making them employees.”
Of course, many employers are feeling these things. I asked Kathryn if she could tell our state legislators in a few sentences what she thinks of this law, what would she tell them? “Stop taking away the rights of the independent contractor. Stop targeting the trucking industry,”, she said emphatically. “Why does this law have carve-outs for industries like Doctors, Architects, Financial Advisors but they refused to carve out trucking? This is a discriminatory law in that it doesn’t apply to everyone, only who California government chooses.”
It’s not just the trucking industry, of course. As you may have heard, UBER and Lyft have put together $70 million to fight this law, because their drivers want to be independent, and their prices would of course skyrocket if they had to hire all drivers as employees. In addition, many drivers drive for both UBER and Lyft. They are taking this to the ballot in 2020, so stay tuned! ##
Editor and Author’s Note: The views contained herein are the views of
the author, and not those of OCAHU, CAHU or NAHU. The author always recommends the use of qualified legal counsel for legal recommendations. She is not an attorney and does NOT provide any legal advice, and this should not be construed as such.
