California Assembly Bill 5 (AB5), the new law restricting who can be an independent contractor, takes effect Jan. 1, 2020. Do you know how it will affect your business?
Stated simply, if you use independent contractors or freelancers, it will affect you.
What is California AB5?
California AB5 requires companies that hire independent contractors to reclassify them as employees unless the firm can prove that they:
- Are free from control or direction in work performance
- Perform specialized services that differ from a client’s usual business
- Maintain an independently established business offering services to clients
This is being called the “ABC test.” The legislation declares that all workers in California are considered to be employees unless the company that hires them can establish they meet all the provisions of the new legislation.
Who is affected?
Initially, it’s California-based companies. But California AB5 is just the start.
Other states have similar restrictions already in place. And still others are watching California closely and evaluating whether they should pass their own legislation. Because more and more companies are relying on the flexibility they gain with contract professionals, the issue is widespread.
Why should businesses be concerned?
There are substantial obligations that companies must meet when hiring employees that do not apply to independent contractors, who are expected to take on these obligations themselves as business owners.
If you find you must reclassify any of your workers to employee status, you must start complying with minimum wage and overtime pay requirements, as well as those related to workers’ compensation, unemployment insurance, expense reimbursement, paid sick leave and paid family leave. You must also pay the employer portion of the workers’ Social Security tax. These are not insignificant expenses, especially if you have multiple reclassifications on your hands.
But there’s another reason companies should be concerned, and that’s the difficulty of the worker reclassification task itself. It has long been a challenge to determine how a business’s workers must be classified under existing laws. Now, with new legislation, the task will be more complex and confusing.
What happens if you fail to get it right?
Failure to properly classify workers can be extremely costly for a business, especially those that use a lot of independent contractors. Misclassification could result in significant legal fees and litigation costs. You may also be required to compensate workers for unpaid wages. Perhaps even more important, you could lose clients due to unfinished and late projects.
Are just new hires affected?
No, the job isn’t that simple. California AB5 requires companies to assess not only the role new hires will occupy but also the jobs of the firm’s existing workers to ensure they are all properly classified.
Save your company the risk of misclassification. Contact Robert Half today.
How can businesses prepare for AB5 and similar laws?
Most companies don’t have the internal staff with time on their hands to devote to assuring every worker is properly classified. Robert Half has a solution that also brings with it other key advantages for your firm: Hire workers through us.
Not only are the professionals Robert Half provides skilled, experienced and ready to work, but they also remain our employees. That means you have no risk and no burden associated with classifying workers properly.
It’s going to be increasingly difficult for companies to classify workers as independent contractors once California AB5 becomes law on Jan. 1, 2020, and other states follow suit. Robert Half can be your solution to hiring talent without the hassles and worries of misclassification.