What does the California AB5 (gig economy) ruling mean for insurance?

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Jonathan Selby

General Manager



Update: We’ve released a new whitepaper examining the Sharing Economy industry. We dive into the insurance landscape, legal climate and how to approach risk management for companies in this sector. You can download the report here!


For decades, people worldwide have discussed the possible misclassification of gig-workers. However, California is doing something about all the ambivalent chatter. 

From ride-hailing drivers to medical professionals to translators, Sen. Maria Elena Durazo co-authored a bill stating contractors should be treated as employees. California Gov. Gavin Newsom signed the California AB5 ruling into law after it passed in the California State Assembly and Senate earlier this year (we actually cover this last year in our 1099 vs W2 Employee piece).

Although the law won’t take effect until January 1, 2020, the paramount question surrounds how the California gig-economy companies will respond to this new law. What we do know is that it will undoubtedly reshape the gig economy and the inner-workings of various companies—impacting insurance, as well. 

Here’s the skinny on what the California AB5 ruling means for insurance.

Background on California Gig-Economy Companies

It’s safe to say that California frequently sets the tone for the rest of the nation. In fact, similar proposals wound their way through legislation in other states only to fall short in the end. Like many other states, though, California is rich with gig-economy companies. To put it into perspective, the AB5 ruling will impact at least one million workers

However, several professions are exempt from the AB5 ruling. They won exemption because they typically negotiate their prices directly with their clients. These professions include:

  • Accountants
  • Commercial fishermen
  • Dentists
  • Doctors
  • Direct Sellers
  • Engineers
  • Graphic designer
  • Hairstylists
  • Insurance agents
  • Lawyers
  • Psychologists
  • Real Estate agents 
  • Stockbrokers
  • Travel agents

Despite much of the focus being on app-based contractors, such as Uber and Lyft drivers, plenty more California gig-economy companies exist. Consider jobs such as food-delivery couriers, nail salon workers, construction workers, custodians, and also franchise owners. These independent contractors will now be classified as employees.

Uber for one is not happy with this ruling and has publicly announced its intent not to comply with AB5. They stated, “we continue to believe drivers are properly classified as independent, and because we’ll continue to be responsive to what the vast majority of drivers tell us they want most—flexibility—drivers will not be automatically reclassified as employees, even after January of next year”. It remains to be seen how this story will unfold, but keep an eye out for Uber in the news in January.  

How the California AB5 Ruling May Impact Insurance

Many independent contractors thrive from flexible schedules and an unrivaled sense of self-reliance. Others believe companies continually take advantage of gig-workers with low compensation and the lack of benefits. 

Naturally, not everyone is on board with the governor’s decision as it does throw a wrench in the plans of multiple companies, particularly in the on-demand and sharing economy space. Plenty of concerns have popped up, as well—insurance topping the list. Following are a few insurance ramifications of the California AB5 ruling.

Workers’ Compensation

In 2018, the California Supreme Court made a decision known as Dynamex, which now helps to determine employment status using the ABC test. The recent gig-economy ruling expounds upon this decision. Mainly because this test is pioneering. It transforms contractors into employees based on a simple three-part criterion, which includes:

  1. If the worker performs tasks under control of the company
  2. If those tasks are principal to that company’s business
  3. If the worker doesn’t have an independent enterprise in that trade.

As imagined, this could significantly increase an employers payroll. Essentially, companies are now adding a chunk of “new” employees to the roster in compliance with the Dynamex ruling and the most recent California AB5 ruling.

The contractor turned employee status is problematic in various ways, including insurance classifications. Gig-workers aren’t regulated as typical employees, so they’ve never qualified for workers’ compensation…until now. 

For example, to pay the monthly bills, a gig-worker might opt to work 18-hour days or several gigs at once. No one has been able to stop them, and this is where the lines get blurry. After all, this “hustle” mentality lies at the heart of the gig-economy. 

However, working more than one side-gig, or working for long hours drives behemothian insurance risks. The risks are so wide-spread, and delivering consistent safety training will likely prove impossible. It makes specific exposures hard to pin down—bumping premiums up significantly. 

Employment Practice Liability Insurance

As well as workers’ compensation, employment practices liability insurance (EPLI) premiums are bound to skyrocket, too. As if California premiums could get any more otherworldly! The Golden State’s premiums and retentions are already some of the highest in the nation. No uptick would go unnoticed, even in California. 

But let’s back up to what determines the cost of EPLI coverage. Insurance carriers rate premiums on a variety of factors, such as:

  • Type of business
  • Number of employees
  • Legal history (i.e., Have you been sued in the past?)
  • Other various risk factors

More employees mean a larger pool on which to rate premiums. Plus, gig-work isn’t typically as cut and dry as traditional employee tasks. So, risks have the potential to be significant.

Health and Benefits

Advocates of the California AB5 ruling, such as Sen. Durazo, frequently accuse California gig-economy companies of exploiting contract workers by falsely labeling them. Many of these companies indeed secured success because of cheap, independent labor. But most gig-economy companies would contest the exploiting angle. 

However, reimagining contract workers as employees calls for an honest look at labor costs, including health and benefits. Hiring independent contract workers pre-AB5 ruling meant companies could avoid paying for a range of benefits—unemployment insurance, overtime, minimum wage, etc. 

To no one’s surprise, these benefits will add up to 30% more in labor costs after January 1. Also, with more people considered as employees, small and mid-sized companies may face additional challenges. A lot of these companies who rely on professional employer organization (PEO) won’t qualify post-AB5 ruling. Then, the grueling reshaping will get under way. 

As your company evolves to comply with the California AB5 ruling, it can be tricky determining the coverage you truly need. Founder Shield specializes in knowing the risks you face at each stage of development, and we work to make sure you have adequate protection. Feel free to reach out to us, and we’ll help you find the solution to fit all your needs. 


Want to know more about EPL risks or Workers Compensation insurance? Talk to us! You can contact us at ​info@foundershield.com​ or create an account ​here​ to get started on a quote.

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