What is AB 5?
Workers as generally categorized as either employees or independent contractors. If a worker is classified as an employee, then they are entitled to employee benefits at the cost of their employer. However, if a worker is classified as 1099 (subcontractor), then they are not entitled to any employee benefits or protections. These factors contributed to a multitude of misclassification issues. As a direct response to misclassification issues surrounding employees and contractors, California Governor Gavin Newson signed into law Assembly Bill 5 (AB5), and it went into effect on January 1, 2020. AB5 says that individuals are presumed employees and not independent contractors unless the employer can meet the ABC test.
What is the ABC Test?
The ABC test is a three-part test that is used to determine whether a worker is an independent contractor or employee. Under the ABC test, workers are presumed to be employees unless the hiring entity proves:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work and in fact; and
- That the worker performs work that is outside the usual course of the hiring entity’s business; and
- That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
Failure to establish any one of the three conditions will result in the worker being legally classified as an employee.
Businesses that utilize 1099 contractors are expected not to practice overarching control mechanisms. All contractors must advertise their own business and be looking for other work, even though some contractors only work for one client and others are purely word-of-mouth referrals.
How Can We Pass the ABC Test?
While there are no definite requirements for a contractor to prove contractor status, here are some ways contractors can show they are not employees. First, contractors are required to advertise their services. They can advertise in many ways such as social media advertisements, Instagram or Facebook pages, email lists, flyers, commercials, or even by word of mouth. Additionally, contractors must have a registered business name and invoice appropriately. The registration process is very expensive for an individual pursing work as a 1099 to make some income on the side and not as a full-time job. 1099s are also required to utilize their own equipment and set their own schedule while taking minimal instruction from the client. This means that the client is very hands-off, and it is the contractor bringing in their equipment, setting their schedule, advertising their services, and managing the finer details.
The employer is required to maintain documentation of wages and paystubs. If a contractor is found to be misclassified, the business is required to pay back taxes for that employee’s labor. Penalties can range anywhere between seven and fourteen thousand dollars.
What Happens When the Labor Board Gets Involved?
AB5 is a generally new law, passed only in 2020. While the worker classification problem has been around for years, only recently has the California legislature provided a clearer distinction on the misclassified employee scenario. As a result, and especially with the pandemic prompting more and more people to file for Unemployment, the Labor Board has begun conducting audits of businesses flagged as misclassifying their employees. The Labor Board conducts audits going as far back as April 2018 to see how employees were classified to the time of the audit. Generally, audits occur when a contractor has a sudden change in employment status and EDD flags the change in status. Audits require an extensive amount of information, and the auditor performs a deep dive into a business’s financial records, payroll records, and employee records. If the auditor determines a business has misclassified its employees, the business may be subject to hefty penalties and fines.
Why You Need to Call Uplift Law
If your business has been affected by AB5, or if you want to ensure you are protected in case of a Labor Board audit, Uplift Law can help you at every step of the way. We are well-versed in preventative measures to shape up your employee records and we can guide you through the auditing process from start to finish.