For over half a century our commercial insurance agency has worked with businesses that have hired independent contractors.
In 2020, there are many questions about the new AB5 rules in California, and how they affect whether businesses’ workers are employees or independent contractors.
For many years, business owners have been able to hire people as either an employee or as an independent contractor. The biggest differences were in the requirement to withhold income tax and pay medical and retirement benefits.
This situation worked well for a lot of small business owners who didn’t want to have the extra pressure of making payroll every week and having additional payroll taxes due.
However, all that changed with the introduction of the California Assembly Bill (AB5). The AB5 affects how companies recognize people who work for them and tightens the definition of ‘independent contractor’.
The new AB5 requires employers to conduct ‘ABC tests’ to determine whether their workers are classified as full-time employees.
AB5 went into effect on January 1, 2020, and has had a big impact on ‘gig economy’ workers like Uber, Lyft, and Doordash.
Understanding the AB5 ‘ABC Test’
Under California’s AB5’s ABC test, a worker is only considered an independent contractor if they meet all three of the following conditions:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
If all three of these conditions cannot be satisfied, then a worker is categorized as an employee and must be offered the same benefits.
The Difference Between Independent Contractors Vs. Employees
An independent contractor is someone who is in business for himself or herself. Independent contractors typically perform work that requires a specialized skill or trade that is not part of a company’s regular business.
They also provide their own tools and equipment; and determine how and when the work is to be done. They don’t take direction or instruction from the business.
An employee, on the other hand, performs work that is a regular part of a company’s business.
The company has control over how the employee performs the work, often providing training, guidelines, or other supervision over the work product.
Employees also usually have regularly scheduled hours, work at the employer’s place of business, receive training and direction from the company, and receive an hourly wage or salary.
An employee is also subject to payroll taxes, minimum wage rules, overtime, and worker protection programs.
By contrast, the responsibilities of any business that hires an independent contractor are minimal.
The Business does not have to file or pay payroll taxes or workers compensation insurance (although the independent contractor must pay self-employment taxes and should carry their own personal liability insurance).
This difference in responsibility is why many business owners kept independent contractors on staff most of the time,
However, with the introduction of AB5, any worker who is misclassified as an independent contractor can actually cost an employer a lot more money.
Under AB5, if a court finds a company has willfully violated the law, the penalties may run from $5,000 to $25,000 per violation. The business is also responsible for the worker’s share of payroll taxes.
If you are considering hiring new workers in 2020, be sure you comply with the new standards laid out as part of AB5, and hire accordingly.