States and Businesses Watching California’s AB5

California Assembly Bill 5 (“AB5”), also known as the “gig worker bill,” went into effect on Jan. 1, 2020.  AB5 is based on a September 2018 case in which the California Supreme Court ruled in the Dynamex Operations West, Inc. vs. Superior Court of Los Angeles.  With few exceptions, this bill was designed to require California companies that hire freelancers and independent contractors to reclassify them as employees.  Some in the trucking industry are moving out of California in response to AB5 fears and others are taking the wait-and-see approach.  Uber, Lyft, DoorDash, Instacart, and Postmates are watching court cases involving the trucking industry.  More than 50 professions and types of businesses are exempt, including insurance agents, attorneys, real estate agents, service providers, certain photographers & graphic designers, HR professionals, and other specific types of business-to-business contractors and referral agencies. 

AB5 assumes that workers are employees unless the company that hires them can pass an “ABC” Test.

  1. The worker is free to perform services without control or direction of the business.
  2. The worker is performing work tasks that are outside the usual course of business activities.
  3. The worker is customarily engaged in the work performed in an independently established trade, occupation, or business of the same nature. 

The Amway Corp. has found itself back in court in 2020, being sued by William Orage, former Amway IBO.  Orage is seeking back minimum wages from the giant for himself and others in California.  Amway, the 8+ billion-dollar, largest direct selling giant, has been using the independent business owner model for 60 years and is not a stranger to court cases.  Other MLM companies in California and across the US are watching to see how this case plays out. 

Judicious employers will best prepare by seeking legal counsel that specializes in employment law and independent contractors.  When  establishing business-to-business relationships with independent contractors, companies will need to take appropriate steps to stay compliant. Risk assessments, in the way of audits, are recommended to understand the classification of independent contractor processes.  Comprehensive audits should include the following:

  • Billing and invoicing processes
  • Contractual terms
  • Documentation processes
  • Engagement guidelines
  • Independent Contractor or Freelancer incorporation interactions
  • Independent Contractor or Freelancer incorporation requirements
  • Levels of control
  • Rate negotiations 
  • Technology Separations
  • Work structures

AB5 specifically exempts business-to-business contractors from the ABC Test.  The IRS uses a different test than California for differentiating employees and independent contractors.  We have yet to see how the IRS will treat this differentiation with respect to ACA reporting.  Employers with more than 50 or more full-time employees are required to offer affordable, Minimum Essential Coverage (MEC) for at least 95% of their full-time workforce and their dependents. California businesses, starting in 2020, following AB5 rules, will most likely need to extend health insurance coverage offers to more of their employees. 

Sound complicated? It is! Now more than ever, it is prudent for businesses to utilize certified professionals and robust solutions for their ACA reporting needs. Contact SPSGZ to learn more about ACA compliance, click here.

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