One outgrowth of a new state 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’ compensation insurers.

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

And this problem is only likely to grow 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 Hearing Bureau is receiving an increasing amount of complaints from employers that are disputing their workers’ comp insurers’ request for additional premium for employees that had originally been classified as independent contractors.

The publication cited the case of a construction firm 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 Hearing 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 set forth a new test for who qualifies as an employee or independent contractor. Under this test, an employer must answer ‘yes’ to the following three questions if they want to classify a worker as an independent contractor:

Is the worker free of the employer’s direction and control?

Does the worker perform work that is not ordinarily part of the employer’s regular work ?

Is the worker involved in an independent trade or occupation that is the same/similar to the work being performed?

The Impact of AB5

A new law, Assembly Bill 5, which essentially codifies the Dynamex decision into state law, takes effect Jan. 1, 2020. 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.

Industry observers say they expect more employers to receive additional premium calls from their workers’ comp carriers after the law takes effect.

In order to reduce the possibility of a final audit with significant additional premium, please contact your Cannabis Connect representative to review individuals you current classify 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.

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