Beware Of California’s Gig-Worker Law (AB5)
Business owners in California should be aware that California Law (AB5) has changed how employers determine whether a worker is an employee or an independent contractor. However, this Law only applies to California workers, regardless of where the employer is based. In contrast, it does not apply to workers outside of California, even if the employer is based in California.
What is California’s Gig-Worker Law (AB5)
As of January 2020, California’s new Law defines independent contractors as employees rather than as independent contractors. There are a few exceptions, which will be explained, but the majority of people previously classified as independent contractors for a company now need to be considered official employees of the company.
What are the effects of this Law?
Reclassifying independent contractors as employees can significantly affect the cost incurred by their employers. This is because contractors are not entitled to most of the protections and benefits that hired employees get. This includes a minimum wage, unemployment insurance, overtime pay, workers’ compensation insurance, and paid family leave.
What if a firm didn’t follow the AB5 Law?
If that independent contractor or IC initiated legal litigation against the hiring firm and won the case, that firm can be required to pay fines and/or penalties and back pay all benefits. In addition, as per California law, these firms can face a civil penalty of up to $25,000 per violation if it proves that an employer intentionally misclassified individuals as independent contractors. Additionally, they can sue hiring firms for misclassifying workers in front of local prosecutors. Individual workers can bring their own lawsuits, including class actions on behalf of large numbers of similarly situated workers.
This Law makes companies think twice before hiring an IC to do a certain job as they used to before this Law was enacted.
Under this Law, all workers are presumed to be employees. But to qualify a worker as an IC, the worker needs to satisfy all three criteria in what is called “ABC TEST.”
Under this test, a worker is an IC only if:
- Free from employer control.
- Work outside the hiring firm’s usual business operations.
- Have an independent business.
An IC’s work must be different from the work done by the firm’s regular employees, so the firm’s control over the results must be limited to accepting or rejecting them. In other words, the worker’s business activity must exist independently and separately from the service relationship with the hiring firm.
A worker may be classified as an IC if they pass another test (Borello test). The list is long and includes many specifics, but a few examples include individuals who qualify as an IC if they are one of the following and fulfill the requirements: Real estate license, in the music industry, construction subcontractor, freelance writer or editor, and provider of a professional service.
There are gray areas that can be used for or against the employer. And business owners need to be aware of this, not only to avoid any costly mistakes but also to know exactly how to set up the cost structure of their operations.
If you need to know more about California’s Gig-Worker Law (AB5), reach out to the experts at Logica Accounting Services. As a leading accounting firm in Long Beach, CA, our payroll services can help you determine your risk level and keep your business in compliance. Through legal methods and strategies, we’ve helped businesses save money and lower their tax bills for many years.
Our services include bookkeeping, payroll processing, sales tax, income tax filing, non-profit organizations accounting and grant management, consultations/advisory, budgeting, and forecasting.
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