The AB-5 Law Regulations require business owners in the fitness industry to convert independent contractors into employees (1099 to W2). The bill is known as AB-5 legislation because it is the fifth attempt by lawmakers to pass such a law. Now that it is signed, AB-5 can have serious implications for the $24 billion fitness industry in California.
Many business owners are not sure how they will handle compliance with this legislation, and there is much confusion about its potential implementation and impact. Learn more about the California AB-5 Law requirements and how you can keep your fitness business compliant.
What the AB-5 Law Means for Fitness Studio Owners and their Staff
California Assembly Bill 5 (AB-5) changes how the business owners hire and employ their staff. Most fitness instructors historically have worked as independent contractors (and many still do). However, the AB-5 law regulations now require California fitness studios to convert independent contractors into employees. This applies to all fitness workers, including fitness instructors, such as yoga instructors and pilates instructors, as well as personal trainers and staff.
Because the former law treated fitness instructors and trainers as independent contractors, many of them are were eligible for health insurance, retirement plans, workers’ compensation, or other employee benefits. Studio owners may have opted to hire their staff as independent contractors because, frankly, it was cheaper. It meant they were not responsible for paying their share of these benefits, including the costs of workers’ compensation. Under the new AB-5 regulations they are.
How to Determine Who Should Be Classified as an Independent Contractor vs. an Employee in California?
Do you know if you need to convert employees who are 1099 to W2? The California AB-5 Law presumes that all workers are employees. It's the responsibility of the business owner to prove that their worker is an independent contractor. In the case of fitness instructors, instructors, a fitness studio owner must show proof of documentation that their instructors meet all three of the AB-5 Law Requirements.
In order to be legally classified as an independent contractor, fitness instructors and staff must meet all 3 criteria (also known as the ABC test):
Be free from control and direction of the fitness studio as to how they perform their services.
Perform their work outside of the fitness studio’s usual business.
Be currently engaged in their duties as a business, occupation, or independently established trade.
In most cases, fitness instructors do not meet this criteria, As a result of AB-5 law regulations in California, this means fitness instructors in California cannot continue to be classified as an independent contractor.
Penalties for Non-Compliance With Converting 1099 to W2
Think you can get away with ignoring the consequences of California AB-5 Law requirements? Fitness business will undoubtedly face penalties for non-compliance. Specifically, the California Labor Commissioner will enforce penalties for businesses that do not comply with AB-5. For instance, businesses that do not convert from 1099 to W2 could face penalties of up to $1,000 per violation, per employee per pay period. Businesses that fail to provide their employees with the same benefits as independent contractors could face penalties of up to $5,000 per violation per employee per pay period. Learn more about the requirements and implications here.
What this Means for Business Owners in the California Fitness Industry
If you didn't meet all three of the criteria in the AB-5 Law "ABC test", studio owners will be required to convert their independent contractors into employees. This means that studios would need to both pay and provide benefits for employees who have been working for them as independent contractors for years.
How Can You Convert Your Independent Contractors Who Are 1099 to W2 Employees in a Simple, Cost-Effective Way?
Band of Hands' solution is a win-win for business owners and professionals across the fitness industry. We ensure your fitness business is compliant with today's current and future employment regulations. At a flat fee of $10/employee per week, our cost structure is affordable and predictable, allowing fitness studio and gym owners to reallocate time and resources to running a successful business. We will help you easily convert your employees, so you run a compliant business and aren't stressing over the inevitable IRS audit.
Band of Hands is a one-stop shop "HR in a Box" solution that handles everything from hiring, onboarding, payroll, payroll taxes, HR, compliance and more for one flat low fee.
Learn more at www.bandofhands.com/how-it-works
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