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On January 1, 2020, a contentious California proposal, Assembly Bill 5, became law. Commonly known as AB5, it requires many companies that use independent contractors to reclassify them as employees. Once reclassified, these employees are entitled to the benefits afforded to employees under California state law: minimum wage, expense reimbursements, health coverage, and rest breaks, among others. For employers, this transition means one thing: higher costs. While AB5 seemed targeted at so-called gig economy stars – particularly the ridesharing platforms Uber and Lyft – the fallout has bubbled into other sectors, like the delivery industry, and has implications beyond the Golden State.
As the controversy surrounding AB5 continues, companies in other states that hire independent contractors should pay close attention to the bill’s reception as others are likely to follow suit. For example, Illinois has already considered legislation that mirrors the guidelines established by AB5.
If you’re a delivery company with independent contractors (a.k.a. 1099 contract drivers), how can you shore up your business model now to prepare for any ripple effects from AB5?
Partner with Third-Party Administrators (TPAs)
TPAs act as a complimentary resource to both the delivery company and the 1099 driver by assisting with risk mitigation through the development of best practices and implementation of compliance standards. Further, TPAs can assist with administrative work and provide guidance to delivery companies on contact negotiations, settlement processing, tax documents, and even on implementing and managing insurance programs. Using the TPA’s advanced technology, the delivery business can operate from a digital platform using 1099-classified drivers more safely.
This structure can help insulate the delivery company as the TPA role provides evidence the drivers are independent contractors, avoiding employee re-classification costs and blunting possible state audits. Also, fees associated with TPA partnering are typically paid by the 1099 driver in exchange for the benefits they receive from the TPA’s services.
Build a ‘Three-Legged Stool’
The biggest consideration when contracting 1099 drivers is workers’ compensation. Every W2 employee is guaranteed this coverage, statutorily, in each state. If a company is not providing workers’ compensation coverage for their W2 employees, they’re penalized. While the contract a delivery company holds with their 1099 driver typically states the company won’t be providing workers’ compensation coverage and they’ll have to seek coverage personally, there are pitfalls that can get the company into trouble.
For example, a delivery company that contracts with 1099 drivers likely also employs full-time, or W2-classified, office administration staff. If the company tries to purchase workers’ compensation coverage for its W2 employees, they may be audited for cost of hire association with the 1099 drivers and charged for their coverage as well. Why? Because the insurance provider doesn’t want to get stuck with a costly litigated claim later and historically, uninsured independent contractors have accessed workers’ compensation benefits in similar scenarios.
To address this risk, delivery companies, either on their own or with the assistance of a TPA, can build a ‘three-legged stool.’ This solution includes providing occupational accident coverage to the 1099 drivers, workers’ compensation to the W2 employees and contingent liability coverage to the delivery company. This insurance is provided all through the same, trusted carrier. A three-pronged approach will not only protect the courier company from audits, a costly injury claim or an employee classification lawsuit but will also support a stronger independent contractor model for the delivery company.
Find the Right Support
To get started, work with a risk management team that has the expertise to steer you through this confusing time and ensure your business model is built to last. Our team has strong relationships with credible TPAs, law firms, vendors and insurance carriers that will help you prepare for any changes in employee classification possibly coming to your state.
Want to learn more?
Connect with the Risk Strategies Transportation team at transportation@risk‐strategies.com.