As of January 2019, the new California independent contractor law is still in effect. The effects of Assembly Bill 5 (AB5) are ongoing for companies who use independent contractors within the state, or have workers that operate within California. Other states are also looking at passing similar legislation, which means this could be a widespread trend in coming years. Understanding what this law means and how it might affect your business is critical to staying compliant and avoiding penalties. This article covers everything you need to know about AB5 as it pertains to independent contractors and your company. We’ll answer some common questions about this law, explain how its implementation will change things going forward, and highlight some best practices for any business operating in the state.
What is AB5?
AB5 is the official name for the new California independent contractors law. It was passed in 2018 and will be in effect until January 2022. It’s closely related to Assembly Bill 1099, which was passed in 2017 and provides state oversight for workers’ compensation insurance coverage. The goal of AB5 is to clarify and reform the rules for classifying workers in California as independent contractors. It applies to all businesses operating in California and affects how companies classify workers, manage their payroll, and report taxes.
What does the new California Independent Contractor Law mean?
The law is meant to clarify what it means to be an independent contractor. The idea is to distinguish between people who are true independent contractors and those who are actually employees. The contractor classification is important because it determines how companies manage taxes, health care, and workers’ compensation coverage. The new law allows the state to crack down on businesses that are misclassifying employees as contractors. It also creates more consistent enforcement and penalties for companies who fail to comply with the law.
Who is an independent contractor under this new law?
There’s no one-size-fits-all definition of an independent contractor under the new law. It will depend on several factors, such as the type of work being performed, who’s supervising the work, and how the work is being compensated. The new law outlines a series of considerations and questions to help you determine if a worker is an employee or a contractor. To summarize, the most important questions to ask are: Who’s making the rules? Who’s providing the equipment? Who’s paying for the work?
Limitations of the Independent Contractor Classification under AB5
No matter how hard you try to comply with the new law, it’s nearly impossible to achieve 100% accuracy. There’s always going to be some uncertainty and variability in how to apply the law. This is especially true when it comes to contractors, since the law doesn’t provide a clear-cut definition for when someone should be considered an independent contractor. The new California law does provide some clear guidelines and a framework for how you should make your determination. But there’s no foolproof system for accurately classifying contractors. That’s why many companies have stayed away from using contractors entirely, or have transitioned contractors to full-time employees. Even if you do everything right, there’s still a good chance you’ll end up misclassifying someone, or have the state come after you for it. The state’s threshold for determining misclassification is pretty low, and it will aggressively go after companies it believes are in violation.
Penalties for misclassifying employees as Independent Contractors
If you’re caught misclassifying employees as contractors, you could be facing some hefty penalties. The state can fine you up to $5,000 per contractor for violating the law. And if you continue to misclassify workers, the state could end up taking away your business license. There’s also a risk that workers could sue a company for classifying them as contractors when they think they should be considered employees. The contractor classification comes with different levels of insurance coverage, which could leave a company responsible for workers’ compensation for employees when they’re injured.
Is your company ready for AB5?
If your company has operated in California for any length of time, there’s a good chance you’ve used contractors at some point. The new law doesn’t change that fact. It just means you need to be extra careful when classifying workers. Make sure you understand and follow the requirements of the new law. And if you’re not sure, it never hurts to err on the side of caution and classify someone as an employee. On the flip side, if you’ve been using contractors but have been operating under the old law, you might want to consider transitioning them to employees. It might be a good idea to do so before the state comes after you or you see a lot of contractor workers transitioning to employees.
How do reclassify my employees from 1099 to W-2?
You can google it. It's rather complex and vague for those not familiar with all of the details. But, that's where Band of Hands comes in. Our solution makes it simple and cost effective to reclassify your employees from 1099 Independent Contractors to W-2 employees. Here's how it works:
Sign up as a company on Band of Hands.
You'll complete a simple online enrollment with your basic company information.
Add the employee contact information and they will be notified to complete an online onboarding process through our platform.
Once they are e-Verified, they're good to go and you're compliant.
You'll be charged only $10 per week per employee. This covers everything from Payroll, HR, Compliance, AND allows you to post unlimited jobs to our platform and instantly hire people who are onboarded and verified to work.
Learn more at www.bandofhands.com/how-it-works