Its Now the Law – AB5 and Independent Contractors

Previously just a California Supreme Court decision, the new rules surrounding Independent Contractors is now law. AB5 has passed in the CA legislature and now has been signed into law. The law is effective January 1, 2020.  The law codifies the new ABC test that last year replaced the previous “20 rule” test to determine if a worker was properly classified. The new rules that will apply have been simplified and made even more strict than before in what is now called the “ABC test”

The ABC Test
Starting immediately, for a worker to be properly classified as an independent contractor, they must meet ALL the following rules:

A)  The worker is free (contractually and in fact) from the control and direction of the hirer in connection with the work;

B)  The worker performs work that is not the hiring entity’s usual business;

C)  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.

This means, that although an employer who uses independent contractors may meet some of the old rules, or even a portion of these new rules, it might be likely that these new rules will cause a reclassification.

Now is the Time to Make Changes
That said, California businesses currently utilizing independent contractors should immediately evaluate their current relationships, and either confer with counsel to determine if they still meet the rules, or if they need to make changes.

Businesses, unless covered under specific exemptions, (Doctors, real estate agents and hairdressers are ok. But not truckers, commercial janitors, nail salon workers, physical therapists) will have to comply with the ABC test or face potential legal problems. Workers considered misclassified under the new state law will also be eligible for workers’ compensation coverage, unemployment insurance, various benefits, paid sick days, and state family leave. All employers should ensure that they are bulletproof in this area.

Here are some examples of what works and what doesn’t:

CORRECT independent Contractor classifications:

• A computer expert that is contracted to help you create special software for your business. They are not in your business or industry, they are working for you and likely work for others.
• Using an outside bookkeeper to come in several times a month to go over your books or update your accounting software. Again, they work for others and do not do what your business does.
• Using an HR consultant to be onsite training your employees on safety or HR issues. Hiring Infinium HR is still cheaper than hiring someone in house!

INCORRECT Independent Contractor Classifications:

• Using drivers as independent contractors delivering your product.
• Using dedicated salespeople that wear your shirts or distribute your material, unless they are true “manufacturer’s reps”.
• Hiring workers fist as independent contractors to test them out, later converting them to employees.

If you file 1099’s, beware, the EDD and the California Labor Department will likely be paying you a visit of sorts in 2021 to review any independent contractors you may have. Also, they will be monitoring employee complaints and still performing general audits in target industries to discover improperly classified workers.

What can you do:

1. If you have independent contractors currently, please, let us review the position(s) to make sure it meets the ABC Test.
2. Before you consider hiring workers as independent contractors, make sure they meet the ABC test first.
3. If it doesn’t smell right, don’t do it! Employees may be complicated, but that’s what we’re here for!

Contact the experts at Infinium, we provide free consultation if you have an issue we can help you with.