AB 5 — You may have recently been hearing a lot of concern about how this newly enacted law may impact you, your business and employee/contractor relationships.
What is AB 5? In September 2019, the State of California Legislature passed an initiative that says workers classified currently as independent contractors versus employees — meaning they are not guaranteed minimum wage, workers’ compensation, disability and unemployment insurance — may actually really be employees, thereby entitled to those rights.
AB 5 rose initially out of a lawsuit against Dynamex, a delivery company that was forced to classify its drivers as employees. Many gig economy workers, such as Uber and Lyft drivers, wish to be classified as employees versus contractors to have access to full employee benefits.
After strong Democratic support with the goal of protecting workers, AB 5 passed and went into effect January 1, 2020.
However, not everyone is thrilled: Many companies, including Postmates, Uber and Lyft, are challenging the law and/or suing to block its enforcement and push for a statewide vote on the issue. Tens of thousands of workers are finding themselves facing hurdles such as reduced contract work or cut hours and assignments based on this new law; many employers are refusing to classify contractors as employees and are choosing to contract with individuals from states besides California.
Both arguments have merits: Those in favor of AB 5 say it protects workers that may have been exploited by companies seeking to use freelancers or contractors up to and beyond full-time capacities but without any of the benefits full-time employees might enjoy. Those opposed, including gig workers or freelancers that are facing a loss of livelihood because of pulled contracts, say the rule takes away the flexibility and independence that drew them to these career choices in the first place.
As a business owner or manager, what are you supposed to do? Undoubtably the AB 5 issue is not a done deal and ongoing litigation and potential state-wide votes may drastically change the enforcement and policies imposed on employers. While all sides argue their case and the law goes into effect as it stands now, there are a few things you should do to ensure you are in compliance and also providing your team the best work environment possible:
1. Sit with your HR manager or benefits consultant and review all your employees and contractors. Understand who works for you on payroll and who is paid directly/on a 1099 and who falls into specific categories covered under AB 5 (some categories of workers have more flexibility with the definition of a contractor).
2. Determine why different people are paid under specific arrangements with your business — do you need full-time help all year round? Is your work sporadic or seasonal? Do you hire out specialized skills that change from year to year? These are the people most likely to work for you on a freelance or contract basis.
3. Review if various contractors would be classified as employers under the “ABC Test” laid out in AB 5:
A) Is the worker free of the control the hiring entity typically exercises over its employees?
B) Is the work performed by the contractor integral to the businesses operations? If so they may not be able to classified as a contractor.
C) Does worker customarily perform work in an independently established trade or occupation of the same nature as the work performed for the hiring entity? (for example, if you are a consultant that does creative design, you might not be able to work as a freelancer for a design agency)
4. Review the different financial implications of various contractors becoming employees — While there are additional expenses such as Social Security, Medicare, disability and unemployment insurance, you may be able to pay the employee less on a salary versus an hourly or contracted basis.
5. If it makes sense to have contractors stay independent and they do not wish to become employees and you don’t wish to send that work to another vendor out of state, work with your attorney or CPA to advise contractors on the requirements to set up as a separate company, LLC or corporation (versus a Sole Proprietor setup) to work around this issue.
6. Make sure to monitor updates to litigation and challenges to AB 5 during the year for potential changes or suspensions of employee status requirements; enforcement is expected to begin July 1, 2020.
7. Always communicate to all employees and contractors their status, benefits, rights and responsibilities accordingly to avoid potential legal and tax challenges for you down the road.