There are a lot of newcomers in town. The California legislature has been very busy lately creating new benefits law for its residents: mandatory retirement savings programs for all employers with 5 or more employees¹ (See: New CalSavers Law Takes Effect on July 1, 2019-What Employers Need to Do Now), expanded MediCal including coverage for young residents regardless of immigration status², and an individual health insurance mandate requiring residents to enroll in minimum essential health coverage³. Each of these laws pushes boundaries and involves some controversy. The most recent new law to be adopted by the State does no less and has resulted in the rowdiest response from the townsfolk.
Assembly Bill 5 (“AB 5”), which takes effect on January 1, 2020, codifies and expands the California Supreme Court’s 2018 ruling in Dynamex Ops. W. v. Superior Court of Los Angeles.(“Dynamex”)⁴, which set a new test for determining the employment status of workers. Dynamex only applied to “wage orders.” (See: Misclassified Employees in California) AB 5 extends the Dynamex holding to all aspects of California’s labor law, and has resulted in strong push-back from employers and some independent contractors who wish to remain classified as such.
This article explores the employee benefits implications of AB 5 and other recently enacted California benefits related statutes.
The Judges Rule
Employers generally classify workers as employees or independent contractors. Over the years, courts have set forth tests to determine whether a worker is an independent contractor or an employee under the cloak of an independent contractor designation. The consequences of worker reclassification from a benefits perspective are significant and wide-sweeping, as independent contractors who are reclassified as employees may be entitled to retroactive benefits under all benefit plans that they would have been eligible for had they been properly classified as employees originally. Such misclassification may have gone on for years and the costs of the benefits resulting from the reclassification can be significant. Last year in Dynamex, the California Supreme Court established a new test for determining whether a worker is an employee or an independent contractor. This new test is called the “ABC Test” and it makes it much more difficult workers to be considered independent contractors.
Under the ABC Test, in order to establish that the worker is not an employee, the hiring entity must establish all of the following:
(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; and
(C) that the worker is customarily engaged in an independently established trade, occupation, or business.
The Long Arm of the Law
As described above, AB5 codifies the holding in the Dynamex case and expands it further. The law, however, does exempt certain professions, including licensed insurance agents, certain licensed health care professionals, registered securities broker-dealers or investment advisers, a direct sales salesperson, real estate licensees, workers providing hairstyling or barbering services, and those performing work under a contract for professional services. Workers who qualify for an exemption (there are very specific requirements for exemption in certain fields) are still governed by the multifactor approach taken by the California Supreme Court in Borello v. Department of Industrial Relations.⁵ Some of the exclusions are set to walk off into the sunset, expiring in future years.
The Dust Up
The effect of AB 5 is that every employer will need to review the status of its workers and many workers will likely be reclassified as employees under the ABC Test. Some large employers plan to push for a ballot initiative in 2020 to overturn the decision and other groups plan to lobby the legislature for changes. If there is a shootout at the ballot box, all of this could change. And, to further complicate matters, for employee benefits purposes, federal law generally applies, not state law.
In light of this uncertainty, employers may want to review the following to mitigate the risks that arise under employee benefit plans:
Review plan documents for “Microsoft language.” In 1997, in Vizcaino v. Microsoft Corp.⁷, the United States Supreme Court set a standard for reclassification of independent contractors as employees based upon a 20-factor common law test. As a result of the Microsoft case, many retirement plans now have standard language excluding reclassified employees from participation. But the plan must still meet minimum coverage and discrimination requirements, so even if the reclassified employees are excluded under the plan document, compliance could still be challenging. While this type of language can also be included in a health and welfare plan wrap document, excluding reclassified employees from health coverage could be problematic for compliance with the Affordable Care Act (“ACA”) employer mandate, for employers subject to those requirements.
Review language in employee handbooks, summary plan descriptions and other communications to ensure consistency with the plan documents in this regard.
Review language in employee handbooks, summary plan descriptions and other communications to ensure consistency with the plan documents in this regard.
Review whether current independent contractors meet the ABC Test. If they do not, then they will be considered employees and this could affect compliance other benefits laws, such as:
ACA compliance. Failing to offer coverage to full-time employees can result in significant penalties.
CalSavers compliance, which requires that California employers offer a retirement plan to employees or register employees with the CalSavers program and forward deferrals.
Be aware that with the California individual mandate effective in 2020, workers may be looking for sources of minimum essential health insurance coverage.
Employers should also be cautious about simply adding independent contractors to benefit plans rather than determining whether they are, in fact, employees. While this may seem a simple solution to the situation, it could create more problems for the employer. This is particularly a concern in the case of health and welfare plans, as it could create a multiple employer welfare arrangement (“MEWA”) which is subject to special requirements⁸, and as well as insurance coverage concerns. In the retirement plan context, it may be possible, but the plan document should so provide and cover the situation of a “multiple employer plan.”
The Round Up
California employers will need to look at their independent contractors in light of the ABC Test. This could lead to significant changes to the structure of the businesses or the employment of workers, which in turns affects compliance with employee benefit plans and laws. What is certain is that it is never dull in this here state. ⁶
¹ The California Secure Choice Retirement Savings Trust Act, California Government Code Sections 100000 –100050 (“CalSavers”).
² Senate Bill 104, signed by the Governor July 9, 2019.
³ Senate Bill 78, signed by the Governor June 27, 2019.
⁴ Cal. 5th903 (2018).
⁵ S. G. Borello & Sons, Inc. v. Department of Industrial Relations48 Cal.3d 341, 54 Cal. Comp. Cases 80 (1989).
⁶ Employee Retirement Income Security Act of 1974, Section514(a).
⁷ 120 F.3d 1006 (9th Cir. 1997).
⁸ (See: What is a MEWA?).
If you have any questions about this article, please contact a Boutwell Fay attorney.
*Sherrie would like to acknowledge Kathleen Salas Bass for her assistance in writing this article.
© Boutwell Fay LLP 2019, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of September 30, 2019.