California’s contract worker law could add health coverage for some but put others at risk
A new California law that reclassifies some independent contractors as employees, requiring they be offered a range of benefits and worker protections, will probably expand health insurance coverage in the state, health policy experts say.
But it also might end up harming some workers.
That’s in part because the law, which takes effect Jan. 1, could cut two ways. While inducing many employers to extend health insurance to newly reclassified employees, it might prompt others to shift some workers from full-time to part-time status to avoid offering them health coverage, or — in the case of some small firms — to drop such benefits altogether.
Some companies might trim their workforce to limit cost increases. Benefits typically account for about 30% of total employee compensation costs, and health insurance is the largest component of that.
“I think we will see more people classified as employees over time,” said Ken Jacobs, chairman of the Center for Labor Research and Education at UC Berkeley. “And that is very likely to expand the number who are offered and take coverage. But the situation is definitely fluid.”
California companies are scrambling to figure out how AB 5, a sweeping new hiring law, affects them.
Adding to the fluidity: Some large employers are contesting the new law. Uber, the ride-hailing app company, has said the law does not apply to its drivers and indicated it is prepared to defend its position in court. The company has joined competitor Lyft in broaching the idea of a 2020 ballot initiative to challenge the law.
California Gov. Gavin Newsom has indicated a willingness to negotiate changes and exemptions with those companies and others.
Uber did not respond to requests for comment, and Lyft declined to comment.
In addition to Uber and Lyft drivers, the law affects construction workers, custodians and truck drivers, among others.
Some independent contractors prefer the flexibility that comes with setting their own hours, but others are eagerly eyeing health coverage.
Steve Gregg, a resident of Antioch, Calif., is among them. Gregg, 51, is uninsured and makes too much to qualify for Medi-Cal, the state’s version of the Medicaid program. He hopes to be reclassified as an Uber employee in 2020, primarily to gain access to health insurance.
“The only medical care I can really afford right now is to use an online doctor for my blood pressure medicine,” said Gregg, who typically logs 50 hours or more a week driving for Uber in the Bay Area.
Under the Affordable Care Act, companies with at least 50 full-time employees must pay a penalty if they don’t offer health insurance to those who work 30 hours or more a week.
California’s new law requires employers to treat independent contractors as regular employees unless they meet a three-part test: Independent contractors must be free to perform their work as they wish, must be in a different line of work from the company contracting with them, and must operate their own business. The law codifies and expands on an April 2018 California Supreme Court decision.
Several industries and professions were able to win exemptions. Doctors, accountants, architects, real estate agents, travel agents, graphic designers and investment advisors will not be subject to the rules. Barbers, cosmetologists and manicurists are exempt only if they set their own rates, are paid directly by clients and schedule their own appointments. Salespeople are exempt if their pay is based on actual sales rather than wholesale purchases or referrals.
Jacobs says other states will closely watch what happens in California, given that some tech companies hire large numbers of independent contractors.
New Jersey, Massachusetts and Connecticut have similar labor laws on the books. Lawmakers in Oregon and Washington state are eyeing legislation akin to California’s.
Independent contractors in the Golden State are nearly twice as likely to be uninsured as regular employees, according to an analysis by UC Berkeley’s Labor Center. From 2014 to 2016, just under 70% of workers classified as employees had employer-sponsored health insurance, compared with 32% of independent contractors, the study shows.
Uber, Lyft and Doordash will spend $90 million to undercut a California employment law.
An estimated 1.6 million of the state’s 19.4 million workers are full-time independent contractors, according to another analysis by the Labor Center. It is unclear precisely how many contractors are misclassified, but sponsors of the new law, led by Assemblywoman Lorena Gonzalez (D-San Diego), put the number at around 1 million.
Whatever the exact number, employers who rely on contract workers will need to make complex health insurance decisions.
A company whose contract workers average 35 to 40 hours a week, for example, could reclassify them as employees for the purpose of complying with the new law but try to limit their weekly hours to fewer than 29, thus avoiding the ACA coverage requirement, said Dylan Roby, an associate professor of health policy and management at the University of Maryland and an adjunct associate professor at UCLA.
A large proportion of small companies that are not required by the ACA to cover their employees do so anyway, and the ones that hire independent contractors will also face hard choices.
“If they have to expand that to reclassified employees, the cost could be substantial,” said Christen Linke Young, a health insurance researcher at the Brookings Institution in Washington, D.C.
A small firm with a skilled and relatively high-wage workforce might choose to absorb the cost of expanding coverage to reclassified workers, Young said, because those workers might not qualify for subsidies to buy health insurance on their own through Covered California, the state’s ACA marketplace. Offering insurance is also a retention tool.
Other small companies, however, could choose to drop coverage altogether rather than pay the tab for newly reclassified workers.
And some might be able to place the new employees in a separate category and offer them no health benefits, or less generous ones than the existing employees get. But under federal law, an employer can do that only if the new employees are doing a different kind of work than the current ones, Young said.
Companies of all sizes can wait a year before offering new employees coverage, to establish what their average weekly hours are. That buys firms with 50 or more employees time to decide whether the reclassified workers qualify for health benefits under the ACA.
The uncertainty about how the new law will play out is sowing confusion among many independent contractors.
Vanessa Bain, a resident of Menlo Park, Calif., who works full time as a contract worker for Instacart — a same-day delivery service for groceries — worries about what her employer will do. (In September, San Diego City Atty. Mara Elliott filed a lawsuit alleging that Instacart had classified workers as independent contractors to avoid paying overtime, providing unemployment insurance and scheduling paid rest breaks.)
Bain and her family are enrolled in Medi-Cal. But she would rather get insurance through Instacart.
“What will they offer us?” Bain, 33, wondered. “If the premiums are too high or the coverage crappy, we may be better off buying it on our own through Covered California. We’ll have to see.”