The Dynamex Decision Takeaway: Why Hiring Independent Contractors Is Now an Increasingly Risky Business

The definitions of ‘employee’ versus ‘independent contractor’ are up for debate, leaving employers to classify workers properly and remain compliant within state laws.
By: | January 29, 2019 • 6 min read

Given the “more nuanced” definition of “employee” and “independent contractor” in California’s Dynamex Operations West Inc. v. Superior Court, employers, brokers and carriers should carefully audit their payrolls to make sure they do not misclassify workers as independent contractors under Dynamex’s new wage order standard, said John McGowan, Jr., partner, BakerHostetler.


Misclassification can introduce a host of risks, he said, including lawsuits, back taxes, wage payment liability, penalties and fines — and nasty surprises when insurance policies don’t respond as expected.

With the Dynamex decision, California joins Massachusetts and New Jersey in adopting the ABC test, which slashes the number of workers eligible for independent contractor status. Under the test, a worker is considered an independent contractor only if A, B and C are satisfied:

A) The worker must be free from the control and direction of the payor in connection with the performance of the work, both under the contract and in fact.

B) The worker must perform work that is outside the usual course of the payor’s business.

C) The worker must be customarily engaged in an independently established trade, occupation or business of the same nature as the work performed by the worker for the payor.

Dynamex Operations West’s delivery drivers claimed they should be classified as employees, not independent contractors. The superior court agreed, and it ruled against Dynamex in April 2018.

According to the Economic Policy Institute, 10 to 20 percent of employers misclassify at least one employee because of ambiguous laws, prompting greater adoption of the ABC test in other states.

Why Dynamex Matters to Insurance

The Dynamex decision changes the way carriers view independent contractor exposure, said Aileen Smith, vice president, Bermuda professional liability, Allied World, and prompts questions from the underwriting side.

Matt Zender, senior vice president, WC product manager, AmTrust Financial Services

“For employers with a large independent contractor base, we want to know that they have a good understanding of their worker base and that they’re conducting audits around worker classification” to stay compliant, Smith said.

Brokers should know how much their clients use independent contractors so they can properly point out risk exposure and advocate for risk solutions with carriers, said Michaelene Cody, vice president and policyholder counsel, HUB International. “It’s our job to explain why our client is different, how they’re reducing exposure and why the exposure isn’t as big as people feared.”

Wage-and-hour claims are typically excluded from standalone EPLI and casualty insurance policies, said Smith, although some London- and Bermuda-based markets have offered wage-and-hour risk transfer products since 2012.

Although the Dynamex decision is narrowly confined to wage orders, which address working conditions and wage entitlement, different tribunals treat the employee-or-independent contractor question very differently, said Linda Pierce, vice president, Gallagher, and the issue is far from resolved.


For example, she said, employment status is an issue in determining unemployment benefits and workers’ compensation in state tribunals. It’s an issue in determining eligibility for participation in ERISA plans in federal tribunals, and it comes up in vicarious liability cases involving third-party claims where a worker caused an injury.

In California, independent contractors have standing to sue an employer for unlawful harassment, and they may allege to be employees for purposes of claiming they have been discriminated against, Pierce said, “so you want a definition of who can bring a claim to be as broad as possible.”

California’s court of appeals has heard several related cases since the Dynamex decision, including one involving a claim of joint employment status, which the court rejected. Although it’s a narrow decision, said Cody, confined for now to wage orders, “that doesn’t mean at some point it won’t be broader.” She expects future litigation around the scope of the Dynamex decision.

Cody recommends retaining outside counsel familiar with the kinds of issues that can arise from worker misclassification and taking “a proactive approach”— auditing the worker base and ensuring “solid, well-drafted contracts” — to determine and preempt risk exposure early on. “It will help on the back end,” she said.

If Assembly Bill 5, introduced by a democrat, is codified by the democratic-leaning state, “it will apply to worker classification, and therefore workers’ compensation.” — Matt Zender, senior vice president, WC product manager, AmTrust Financial Services

If Dynamex becomes the standard, added Matt Zender, senior vice president, WC product manager, AmTrust Financial Services, the population of “employees” will inevitably expand, resulting in more covered employees and expanded premiums. Losses will scale to the larger covered population, but the expense load from premiums will increase business costs, which employers will pass along to their customers.

“Will this increase the cost of goods and services?” he asked. “It will have to.”

As California Goes, So Goes the Nation?

Although Dynamex applies only to California and solely for work order purposes — not workers’ compensation, employee benefits, tax treatment or ERISA — the insurance community, including carriers that offer wage-and-hour coverage, should take notice, said Smith, because “a lot of state legislatures follow the lead of California.”

To companies in Iowa, for example, she said, “pay attention. Even if you’re not using independent contractors today, you may in 16 or 18 months.”

Because the standard of worker protection is so high in California, she said, “a lot of our insureds who operate in California and other jurisdictions typically roll California’s standards across the other jurisdictions.” That way, “if a large claim were ever brought against them, they’ll have defenses in place.”

John McGowan, Jr., partner, BakerHostetler

Other states currently use the ABC test for determining unemployment compensation. Depending on how California’s state assembly votes on two current bills, said Zender, it may yet apply to workers’ compensation. If Assembly Bill 5, introduced by a democrat, is codified by the democratic-leaning state, “it will apply to worker classification, and therefore workers’ compensation.”

So far, Zender said, no federal standard exists to define who is an employee and who is an independent contractor, although the National Labor Review Board determined last year in Velox that employers violate federal labor law when they misclassify employees as independent contractors. That case involved a former driver’s unfair labor practice claim against a medical courier service. Twelve state attorneys general joined an amicus brief supporting the decision.

So Who Is an Employee?

Identifying who is an employee and who is an independent contractor is easy at the extremes, as when the employer exercises direct supervision and exerts a lot of control over the worker’s hours and processes, but “it gets complicated when you dabble in the middle,” said McGowan.

Read More: The Definition of ‘Employee’ Was Changed by the New Economy; Here’s How That Impacts Insurance

For example, said Zender, take Isha, a software engineer hired as a full-time independent contractor to perform a specific task at a software company — her only employer. If she’s performing software work on its phone network software or some part of the company that is not core to its operation, then maybe she is an independent contractor under the ABC test, said Zender.


But if she’s a server maintenance engineer for, then she’s an employee under the B part of the ABC test.

And consider Doug, a rideshare driver who picks up commuters from the airport every weekday morning and spends his afternoons running his own mobile phone repair business, his primary source of income.

The nature of the company that sends him rides determines if he’s an employee. The fact that his primary income derives from his mobile phone repair business isn’t a factor, said Zender. “If it’s Airport Shuttles R Us, he’s probably an employee.”

But if it’s Uber, which has successfully argued so far that its core business is technology and not transportation, then no, he’s not an employee under the B part of the test, said Zender.

“You particularly want to understand your client’s workforce as society moves more into the gig economy,” said Pierce, “The generation of people in their twenties like flexibility. These are interesting times.” &

Susannah Levine writes about health care, education and technology. She can be reached at [email protected]

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.


Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.

R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.


We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?


Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.


Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.


More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]