With the publication of the final rules regarding the establishment of association health plans, many believe we have given new life to an old concept of employers banding together to purchase goods and services in an effort to use a scale-up approach to reduce expenses.

Unfortunately, with this strategy comes with the meeting of several roads; each having very rocky terrain.

On the one hand, the appeal of industries banding together makes a lot of sense.  For example, the tech industry typically attracts young healthy employees who traditionally embrace healthy lifestyles and who require little health care services to maintain healthy lives (a perfect pool for an insurer).

On the other hand, pools like this would extract the healthiest individuals from other pools; leading to the worst disaster for insurance companies, what we call adverse selection. This adverse selection is the likelihood that those most likely to join are those most likely to consume – and in significant amounts.

The ACA, for all its efforts, attempted to build the largest pools and level the playing field for all by requiring virtually all Americans to purchase and maintain health insurance – creating the best chance for Insurers to find a way to balance claims and rising medical care and pharmacy costs within a private healthcare system.

Trump’s new path allows associations to not only potentially offer, but further differentiate, the plan, by allowing significant reductions or exclusions to coverage.  This creates the idea/illusion that there is a simple format to buy coverage that doesn’t cover virtually everything (we call these “essential” health benefits), thus potentially paving the way for the Pool to charge lower premiums.

California legislators aren’t thinking this way – there is a strong sense the state of California likes the status quo, the pools of individuals that allow for guaranteed acceptance. The concept of allowing insurers to offer plans that are less generous or that cover fewer conditions seems to make legislators uneasy.

And so, the jury is still out as to whether states will embrace association-based health plans and whether insurance companies will consider sponsoring these pools.

The “ABC test” ratified by the California Supreme Court in the Dynamex Operations West, Inc. v. Superior Court case is now recommended as the leading way to make the differentiation between an “employee” and an “entrepreneur.”

The court’s adoption of the ABC test is designed for determining whether an employee should be classified as an employee or independent contractor. This circumstance places the burden on the business, not the worker, to prove that any particular worker is properly classified as an independent contractor. This in effect, has sent California employers reeling; gaining the responsibility as the hiring entity to classify the worker under the “ABC test.”

Can Your Business Pass the ABC Test?

A hiring entity classifying an individual as an independent contractor must prove each of the following three factors:

(A)  That the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;

(B)  The worker performs work that is outside the usual course of the hiring entity’s business; and

(C)  The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

20+ states already use some form of the ABC test, however, for most of them the test has been used for only a particular inquiry such as unemployment insurance determinations.

In California, the state Supreme Court ruled that the ABC test should be widely applied for inquiries under the California Wage Orders as to whether a worker is considered an employee or independent contractor.

The Wage Orders regulate the conditions of employees across various industries and occupations. Some areas of the law remain uncertain, such as whether the ABC test should be applied to Labor Code or to what extent the state or local federal courts could find that an aspect of the test is assumed by federal law.

To Who Does the ABC Test Apply?

Businesses who have service workers who request to be paid as 1099 independent contractors need to evaluate the terms of the new law and classify workers. These include workers from different occupations and industries, such as truck drivers, graphic designers, seamstresses, contract accountants, IT workers, and even high-level managers. Among their most common reasons; avoiding income taxes or other tax relief benefits. However, a worker’s request to be reclassified, won’t necessarily work in the employer’s favor.

Is Dynamex Retroactive?  

Another reason employers should be concerned: the issue of whether the Dynamex decision applies retroactively. This issue could mean the difference between holding liability or merely a correction, as needed.

Businesses stand firmly against that the new mandatory test adopted by the Dynamex decision. Their reasoning maintains that it should not apply to employers retroactively because it would violate the due process. After all, businesses and their model have been established upon more flexible employee hours and factors for years.

In contrast, employee advocates believe that the decision only gave clout to existing law and therefore should apply retroactively.

Will Dynamex Apply to Joint Employment Scenarios?

The silver lining: one California court has already limited the reach of the ABC test, ruling that the test does not apply when determining whether two businesses are joint employers of an individual already treated as an employee. The court ruled that it only applies when determining whether an individual has been correctly classified as an independent contractor or freelancer.

A word of caution, however: the May 18 decision in Curry v. Equilon Enterprises, LLC comes from a state appellate court, not the state Supreme Court, so there may be further court rulings on this topic before concluding.

California businesses should carefully evaluate their independent contractor relationships with legal counsel to avoid liability going forward, as there are sure to be further legal implications clarifying the application and scope of the ABC test.

Salary History Ban Law Clarified

Governor Brown recently signed AB 2282 to clarify questions regarding AB 168 signed into law October 2017 prohibiting California employers from asking job applicants for salary information. AB 168 makes it unlawful for an employer to ask salary history information, orally or in writing, personally or through an agent, about an applicant for employment.

AB 2282 addresses questions relating to the definition of “applicant”, “pay scale”, “reasonable request”, and “salary expectations”.

The bill defines and clarifies the following.

• An applicant as an individual who seeks employment with the employers and not a current employee.
• Pay scale as the salary range or hourly wage that does not include bonus or equity.
• A reasonable request made after the applicant has completed the interview process.
• Employers may ask applicants what their salary expectations are during the interview process.

Employers are recommended to update their recruiting and pay policies to reflect the updated law before or by January 1, 2018.

ACA Individual Mandate Updated

President Trump recently signed a bill repealing the ACA Individual Mandate (the tax on individuals who are not enrolled in health insurance.) This means that the individual who shared responsibility payment (the tax penalty you owe for failing to purchase health insurance) was repealed. Which ultimately means that you will not be penalized for going without the minimum health insurance. If you want to explore alternative coverage options for 2019, then you can do so without paying a tax penalty.

So how does this affect you?

• No individual penalties for 2019
• Higher health insurance premium is predicted due to loss of customer base.
• Employers 50 or more are still under the employer mandate.
• Foreseeable repeals for the employer mandate effective 2020.

Updated Child Support Withholding Order

Effective August 31, 2018, employers should only be using the revised version of the standard Child Support Withholding Order with an expiration date of August 31, 2020. To learn more about the new version, contact the Office of Child Support Enforcement Services (OCSE).

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