2020 Legislation AB 5 For Workers’ Compensation

Workers’ compensation premium is determined by your total employee payroll. This is why employment status can have a huge impact. If you use independent contractors in your operations, their payroll probably is not included in your current policy’s payroll.

California Assembly Bill 5 (AB 5), which became effective January 1, 2020, will apply to all workers’ compensation policies as of July 1, 2020. It establishes a new test to determine if a worker is an employee or an independent contractor. This means that many workers you’ve previously considered independent contractors may now be considered employees.

Determining employee vs. independent contractor status

The California Labor Code defines “Employee” and dictates how to assess whether someone is your employee or an independent contractor. However, there have been questions around this distinction.

In order to help you determine whether your employee is considered an independent contractor under this new legislation, the CA Labor & Workforce Development Agency has developed a new assessment called the “ABC Test”. This test serves as a yardstick when determining employment status for workers’ compensation purposes.

The new ABC Test guidelines

Under the ABC Test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:

  1. 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;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and,
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

To find the complete 3-pronged test, see the CA LWDA ABC Test.

Things you should know

  • Policies Impacted – The change is effective July 1, 2020 and affects all work comp policies – current inforce policies as well as new and renewal policies effective July 1 and later.
  • Industry Exceptions – There are several exceptions built into AB5 (see the labor.ca.gov AB5 FAQs #4). Those industries exempt from the ABC Test will continue to use the existing Borello test for determining whether or not the worker must be included under your work comp policy.
  • Payroll Reporting – To avoid any unexpected premium charges on your Final Audit billing, you should report all payroll for individuals considered employees under AB5. If your policy is based on regular installment payments (not monthly payroll reporting), please contact your agent to make any necessary adjustments to your payroll estimates and installment payments.

    Effective 7/1/20, all payments to workers re-categorized from independent contractor to employee are considered payroll and are included in your workers’ comp premium.

  • Policyholder Notice – Starting July 1, 2020, we’ll attach an AB5 Policyholder Notice to all current inforce policies as well as new and renewal policies effective July 1 and later.

What you should do to avoid unexpected premium adjustments

We want to help you manage changes in your premium. We don’t want to over or under charge you, and we hope to protect you from an unpleasantly large, final audit invoice.

If an employee’s status changes at renewal or during your current policy, please contact your agent. A change to your policy may be necessary.

Questions about AB 5?

The CA Labor & Workforce Development Agency has provided several FAQs to help you. Visit the CA LWDA Frequently Asked Questions on AB 5.

You can also use our free HR OnDemand service for advice and guidance on the new law.