How the Gig Economy Is Upending Worker’s Comp

A full 36% of employed respondents — or an estimated 58 million Americans — identify as independent workers, according to a 2022 American Opportunity Survey by McKinsey.¹ In 2016, just 27% of respondents in a similar survey were considered independent workers, indicating a notable uptick.²

While some workers take on independent work on top of permanent employment, 72% of independent workers reported only having one job, according to the most recent survey.

As many as 16% of American workers reported earning some income through the gig economy in 2021, a percentage that has only continued to rise in the wake of Covid-19.³

This shift in the workforce from employee to independent contractor has left regulators, companies and workers grappling with who exactly qualifies as an employee for purposes of taxes, overtime and Worker's Compensation — traditional benefits of the traditional employee/employer work relationship that don't apply to independent contractors.

Still, gig workers in increasing numbers have the potential to drive down employers' overall payrolls.

The ABC Test

California, which tends to lead the way on Workers' Compensation insurance, developed the ABC test as a legal standard to determine which workers are truly independent contractors.⁴ According to the ABC test, independent contractors must meet these criteria:

1. The person 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.
2. The person performs work that's outside the usual course of the hiring entity's business.
3. The person is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

The ABC test became the widely used rule after a landmark 2018 California case found that a class of drivers for the same-day delivery company Dynamex didn't meet the B or C requirements of the test, which qualified them as employees rather than independent contractors.⁵ It was determined that the workers should be paid the state minimum wage, be paid overtime and be reimbursed for their vehicle operating costs.

The Evolving Decision: Employee or Independent Contractor?

California later passed AB5 in 2019.⁶ The US Supreme Court upheld it on June 30, 2022, making it retroactively effective as of January 1, 2020. AB5 is intended to restrict businesses from classifying workers as independent contractors.

In March 2021, a federal court ruled that four 7-Eleven franchise owners were not employees.⁷ Even though franchise owners were required to attend trainings and host visits by "field consultants" to the stores once per week, ultimately the court found that 7-Eleven didn't have a sufficient level of control over the franchise owners to constitute them as employees. AB5 was not applied and instead the Borello test of the California Labor Code was used.

In March 2023, a California court determined that Uber drivers in California passed the ABC test and could continue to be considered independent contractors.⁸

Not Everyone Wants to Be an Employee

If more gig workers were classified as employees, companies would be required to offer Workers' Compensation, dramatically expanding the market.

That's exactly what's happening in California today. Although Uber drivers aren't on the list for the employee track, truck drivers — to their great dismay — are.

While doctors, dentists, insurance agents, lawyers, accountants, securities brokers, real estate agents, hair stylists and many creative professionals are exempt from AB5, owner-operators in the trucking industry are not exempt.

Note that the California Trucking Association is opposed to the decision to classify truck drivers as employees.⁹ The required move to employee status is largely perceived as unfair for truckers who operate their own trucks, taking away many of the typical freedoms they have — to choose when to work, what they haul, etc. — and making it more expensive to do business.

Workers' Comp premium trends are intrinsically connected to labor market conditions. An increase in the number of employees in the market boosts demand for coverage. Demand factors into premiums. According to the Workers' Compensation Insurance Rating Bureau of California, California Workers' Compensation premium levels rose by 14% in 2022.¹⁰

While the Worker's Compensation market is soft, if more gig workers across the US were to become reclassified as employees, the Workers' Compensation insurance market could suddenly grow. If more employees, however, trade in their employee status for flexibility, market demand could decline.

Learn more about what's next for the Workers' Compensation market in the RPS 2023 Workers' Compensation Market Outlook.

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