Have you considered the insurance implications of working with contractors?

You are probably already aware of the California Assembly Bill 5 (AB5) or what is popularly called the gig worker bill. The bill, passed by the California legislature, requires companies that hire independent contractors and freelancers to reclassify them as employees.

Currently, the bill is limited to California and targets companies such as Lyft and Uber that have a large number of independent contractors. But there’s some speculation that it could be soon extended to other states and other businesses too.

This is the digital economy. All small businesses, irrespective of where they are, are taking advantage of the access to expert, experienced, and economical human resources to address specific tasks. If your business uses software for billing and finance, would you really think of hiring a full-time IT pro when a part-time expert could do just the job you need by working for a few hours a week?

The growth of this trend has made it important to consider the insurance implications of working with freelance contractors.

Given the focus on AB5, let’s first understand the nuances of the bill and its (possible) impact on small businesses, should it get more widely applied.

What is AB5, and how will it affect businesses?

The gig economy is booming, as people are attracted to the flexibility that comes with it. According to Wonolo, more than 50% of the US workforce will be a part of the gig economy by 2027. UpWork says that the number of independent workers is expanding three times faster than the working population in the US.

Large enterprises like Google and small businesses alike prefer working with independent contractors as it saves millions of dollars for them on headcount and employee benefits. All that, while giving them access to skills they may otherwise find hard to hire.

However, the AB5 law is set to change all this for the companies and independent contractors operating in California. It could potentially convert over 1.5 million freelancers in the state into employees.

Once the bill is implemented, companies will have to reclassify the contractors as employees. They will have to pay the contractors a minimum wage and offer them other employee benefits such as social security, paid holidays, health insurance, and unemployment insurance. The additional benefits could add to the financial liabilities of companies.

Obviously, companies fear that this could impact their bottom line. Some estimates are that it could cost companies $290 million and even lead to bankruptcy.  Opponents of the measure say that it could increase labor costs by 30%. Companies might offset this cost by passing it on to the customer. However, that could increase the cost of their offerings and could result in unhappy customers.

The clear implication on insurance is on worker’s compensation and associated covers. As the number of employees increases, so will the need for cover. That will impact the premium you pay.

But of course, this is not just about contractors getting classified as employees. I’m fascinated by the dramatic changes in today’s workplaces. And while some jobs are not “portable”, it’s a fact that cheaper smartphones and better network bandwidth have made many small businesses consider working with freelance contractors. In many respects, these freelancers are like telecommuting employees. They may be working from a remote site and providing some specific services over the internet.

Of course, this creates a complicated situation when you consider the insurance implication of such moves. If the freelance contractor is to be treated like an employee, how would worker’s compensation insurance play out in the event of an injury to an employee working off-site? What if that site is the employee’s own home? How about the impact on liability insurance when some trade secrets or data the employee is working on from home gets compromised?

There are no easy answers. Just more questions.

We, at Gonzalez Insurance, support small businesses and offer customized and industry-specific insurances. We understand that small businesses often have questions about the laws that govern their operations.  They worry about the implications on their insurance and business. What they need is unbiased and honest guidance on how to prepare for the likely risks and how to safeguard their bottom line. That’s where agencies like us can help.