How Small Business Owners Can Comply with California Law AB5

Updated: Sep 9, 2021

Steps to make sure your business is not at financial risk.





AB5 brings a radical change in how employers and businesses classify their workers. Historically, independent contractors could work as 1099s, but since this law passed in September 2019, there are strict conditions to determine if a worker can be classified as an independent contractor or must be an actual employee (W-2) of the business.

This law has been around as a ruling for almost 2 years but became formal on January 1st. And it’s not just California. Many states are following suit, because ultimately, it ensures the government gets its taxes.

The law narrows the definition of an independent contractor down to three key points. You now must meet all three conditions to classify someone as an independent contractor. These are:

  • Does the worker perform tasks that are under the control of the company?

  • Is this work that is integral to the company's business itself?

  • Does the worker have an independent enterprise in that particular trade?


California's AB5 law has a significant impact on franchising. Let’s say you own a yoga studio. You


have instructors. They may work for you instructing classes throughout the week, but they may teach at other studios as well. Do they meet all of the above conditions? No. So, they can’t be classified as independent contractors anymore. There are more in-depth resources explaining how the independent contractor status is determined.

So what does this mean for those who still aren’t classifying their “independent contractors” as “employees?” Will the Employment Development Department (EDD) or Internal Revenue Service (IRS) be alerted and come after you right away? Not necessarily. But, as a business owner, you must be aware this is now a law and comply. Like any other law, if you try to ignore it, the law usually wins. You know the song, “I fought the law, and the law won.” Trust it.

If you have a contractor working for you who doesn’t meet the contractor conditions, and that person files a workers comp claim or an unemployment claim, it will trigger an audit. And then the nightmare begins.


There are benefits to independent contractors becoming employees.

  • Your tax burden will be reduced Because you will not be paying self-employment tax,

  • You are entitled to at least 24 hours of sick pay a year as well as eligibility for the CalSavers program.

  • You are also covered by workman's comp and disability should you need it.


What if you’re not compliant?

If you’re audited, you could be compelled to pay both sides of the determined tax burden, and potentially fines. You have to come up with the money and cannot file bankruptcy to avoid doing so.

How do you become compliant?

If you have people working for you who do not meet the conditions stated above, you convert them to employees. It’s simpler than it sounds. You can use a PEO (professional employment organization) for this.

Band of Hands is a simple, low-cost solution that allows you to easily put your people on their payroll. Essentially they become employees of Band of Hands, but they’re leased to you to resume business as usual. This alleviates you of the liability associated with having them as your employees.

When you go this route with Band of Hands, you pay only $10/week per active employee. This covers everything from payroll, HR support, compliance, workers comp, EDD claims and even alleviates you from letting them go should you choose to. Band of Hands covers all of those needs, while also providing you with a marketplace of pre-qualified candidates to hire on more people at any time.

Employees also benefit from being employed through Band of Hands as the PEO, because they get the perks of being an independent contractor with the stability of a W-2 employee.


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