How Insurance Can Help You Prepare for AB5

On January 1 2020, a new law titled AB5 went into place in California, making it more difficult to classify workers as independent contractors, rather than employees. On July 1, this law was written into the workers’ compensation code. Effectively, what this means is that insurers have a concrete way to enforce the law, and now they are able to use workers’ compensation audits to determine whether independent contractors are properly classified. While the law has been on the books for 6 months, the July addition adds a level of urgency for California businesses rushing to meet the new requirements, and companies in other states preparing for similar legislation to surface. This guide will teach you how innovative new insurance solutions can help you avoid the risks and looming insurance audit charges that will almost certainly come with AB5.

What is AB5?

AB5 is a new law which assumes that, for the most part, all workers are employees unless they can meet three requirements, known as the ABC test. Workers have to meet all three requirements to be considered independent contractors.

1 | The worker performs services free of the control or direction of the company.

For example, if an on-demand / gig platform were to set a minimum number of hours, or require that their workers wear a uniform, they may be accused of misclassification.

2 | The worker is performing tasks that are outside of the usual course of the company’s business activities.

For example, a retail business could hire a freelance writer to create their catalogue. However, a magazine may have a hard time hiring a freelance writer to write their articles.

What about rideshare platforms, like Uber or Lyft?
This is where classification laws get tricky. Are on-demand / gig platforms all technology companies that provide a marketplace, or are they employing workers (e.g. drivers)? Uber, Postmates, and several other leading  on-demand/gig platforms have pooled $100M to suggest changes to AB5; including minimum wage and worker rights. It’s not clear how all of this will play out over the coming months, as there are still quite a few questions to be answered.   

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.

This is where insurance comes in handy. Demonstrating that an independent contractor has their own business insurance policy is one way to demonstrate that they are, in fact, their own independent business.

What Does AB5 Have to do With Insurance?

Insurance has always been inextricably linked with employment. Workers’ Compensation, specifically, is a benefit required of employers in almost every state to protect their employees. As of July 1, workers’ compensation insurers can audit businesses with workers in California based on AB5 criteria. Many think of this as “presumptive workers’ compensation,” meaning that AB5 assumes your workers are employees unless they pass the ABC test. It is expected that if your insurer doesn’t believe the independent contractors can pass the ABC test, they can adjust your workers’ compensation premium based on independent contractor payroll, as opposed to employee payroll. If this happens, you’ll be facing more than prohibitively high insurance premiums. This determination would also signal to the courts that your independent contractors do not pass the ABC test, potentially triggering a misclassification suit and requiring you to reclassify all independent contractors as employees. 

In our experience, there are three main implications an insurance audit will have on your classification:

  • In your audit, you’ll be asked whether or not you provide workers’ compensation for your workers. As a function of employment law, providing workers’ compensation indicates an employee/employer relationship, and can tip the scales towards a W-2 classification.
  • As we mentioned above, the last item in the “ABC Test” requires that the worker has an “independently established” business, that performs similar services to the work they’ll be doing as a 1099. Having their own business insurance policy is one way to demonstrate they are an independent business.
  • If you do not provide an equitable, 1099 equivalent to workers’ compensation, your insurer will worry that workers’ claims will flow upstream to them. Because they expect to pay out claims based on your independent contractor population, they’ll be more likely to insist that the premium reflects their payroll. In the next section, we’ll go through “1099 equivalents” that you can access. 

A common problem for businesses utilizing independent contractors, is that they can’t find a good replacement for workers’ compensation, and will simply cover independent contractors with their policy. Alternatively, we’ve also seen several companies let their independent contractors linger uncovered, which can result in claims to your workers’ compensation policy over time – and your insurer may non-renew your policy and/or assess audited premium. Neither of these situations are ideal, but the good news is that there are solutions available – and more emerging that we’ll share details about below. 

Workers’ compensation insurers are allowed to go back to when the original policy was put in place (even if it’s years ago!) and assess premium for an audit if they find that contractors were misclassified and not reported. In light of the evolving regulatory environment and the recent AB5 change, this is more important than ever. It can easily manifest itself into unexpected workers’ compensation audits in the tens and hundreds of thousands of dollars – literally years of premium being assessed retroactively.  

Want to talk with an on-demand insurance expert about your current solution, and how your business can best prepare for AB5 audits? Reach out to!

What Are My Options?

Bunker solves this problem by combining Workers’ Compensation, Contingent Liability, and Occupational Accident Insurance to create a program that protects your workers from expenses associated with work-related injuries, while protecting you against costly insurance disputes brought on by misclassification and injury claims. We think of this as the ‘three legs to the stool’. An on-demand platform really needs all three in place for the solution to properly work. Let’s break down the three elements:

Contingent Liability

Contingent Liability coverage is added to your corporate workers’ compensation insurance, to provide your company with a layer of protection against misclassification. It covers your legal defense when an independent contractor attempts to collect workers’ compensation benefits as an employee. Perhaps more importantly, it provides benefits equivalent to statutory workers’ compensation laws, should the independent contractor win their case.

An important note here is that workers have high success rates for cases. It varies by jurisdiction, but oftentimes the court or workers compensation council (procedures vary by state) has sided with the worker.

Occupational Accident Insurance

Occupational Accident Insurance is an equitable, 1099 replacement for workers’ compensation. It protects the independent contractor by providing compensation if they are injured on the job. Some of the key differences are that it is charged on a pay-as-you-go basis (making it optimal for gig workers picking up sporadic shifts), the limits are pre-determined by the company (rather than the state), and the premium is generally paid by the workers. Setting up an Occupational Accident Insurance program reduces your chance of ending up in a misclassification suit for two reasons:

  • Workers won’t have to sue you for workers’ compensation benefits after an injury; occupational accident insurance provides financial support and benefits to cover them for medical bills, lost wages, and disability payments.
  • If the program is structured appropriately, you’ll mitigate or eliminate the risk that comes with workers’ compensation carriers assessing premium for contractors in an audit.

Workers’ Compensation

The third piece is workers’ compensation. It’s important that your corporate workers’ compensation coverage is provided by a qualified insurer who specializes in independent contractors. Ideally, your workers’ compensation, contingent liability, and occupational accident insurance policies should be provided by the same insurer. If an insurer is responsible for both sources of risk (employee claims and independent contractor claims), they work in parallel to solve any misclassification disputes. For example, if your workers’ compensation insurer is separate, they will likely not recognize your occupational accident policy. We’ve seen in these situations that the insurer may audit your workers’ compensation premium and charge for both employees and contractor payroll. If they’re provided by the same insurer, each individual policy will be appropriately designed and priced to work together. 

Want to talk with an on-demand insurance expert about your current solution, and how your business can best prepare for AB5 audits? Reach out to!

What if I Can’t Access Occupational Accident Insurance?

Insurance carriers won’t provide Occupational Accident Insurance policies to every business. In part, this is because of the economics of the policies. Because the low premium is charged on an hourly basis, there needs to be a high enough volume of hours in order to effectively pay out claims. For example, if a gig or on-demand platform logs 1000 work hours at a rate of $0.30 / hour, one broken leg would vastly surpass the $300 that the carrier collected in premium for that month. In California specifically, insurance carriers are wary of providing the coverage to workers who may soon be classified as W-2 employees, given the uncertainty around AB5. Bunker still, however, has a solution to this, leveraging one of Bunker’s PEO partners – this is particularly helpful when you’re starting out.

What is a PEO Model?

PEO stands for Professional Employer Organization. In a PEO model, companies outsource the responsibility over risk management and human resources services, including benefits like workers’ compensation, to a third party. In this case, the PEO becomes a “co-employer,” and leases the employees back to the company. The PEO provides benefits for many employers at once, allowing them to use the combined size of the worker base to provide better coverage at a lower price.

A key benefit for those in risky industries is that when an employer joins a PEO, they take on the Experience Modification Rate of the PEO. Experience Modification Rate (EMR) is one of the key factors that determines your workers’ compensation premium, based on past claims. So, if your workers’ compensation cost is prohibitively high because of past claims, a PEO can help bring the premium down. We’ve partnered with several of the leading PEO firms to help in situations when they are the best solution. While it’s oftentimes better to ‘own’ your insurance program – a PEO model can be right in the earlier days of your company, you can ‘rent’ a policy.  

Let Us Take it Off Your Hands

With AB5 going into effect right in the middle of the COVID19 pandemic, risk teams and founders likely have plenty on their plates. The good news is that we have an expert team here to take it off your hands! Reach out to, tell us a bit about your business, and we’ll create an insurance solution that protects your workers, defends your business, and saves you tens of thousands of dollars in the process!