As of Jan. 1, 2020, AB-5 has been enacted in the state of California – which restricts employers from classifying workers as independent contractors (more commonly known as 1099s) if they do not meet the ABC Test Standards.
The passage of AB-5 makes all businesses who regularly engage workers as 1099s – especially those in the gig economy such as Lyft or Uber – at risk for audit by the Labor and Workforce Development Agency. If a worker has been misclassified as a 1099, the employer might be subjected to the following:
- Payment of Back Payroll Taxes, plus interest:
- Unemployment Insurance (UI) Tax
- Employment Training Tax (ETT)
- State Disability Insurance (SDI) Tax
- …and any taxes that should have been withheld from the employee’s wages
- Under California Labor Code Section 226.8, businesses that willfully misclassify workers as 1099 can be fined between $5,000-15,000 per violation. Fines increase to $10,000 to $25,000 for repeat offenders.
AVOID MISCLASSIFYING EMPLOYEES!
When engaging with a worker as a 1099, apply the ABC Test first to ensure they meet all the independent contractor criteria:
A. 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.
B.The worker performs work that is outside the usual course of the hiring entity’s business.
C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Prong B is the hardest to satisfy since consultants performing engineering tasks are routinely brought in to solve technical challenges.
If the worker does not meet the criteria enforced by the AB-5 law, convert them to W-2 employees.
This may not be feasible for companies who need engineering resources for projects or temporary spikes in workloads.
Consider using a different strategy such as SoloPoint’s employee leasing option.
SoloPoint can help engage the key engineering resources you need, and properly classify them in full compliance with all state and federal labor requirements.
Please feel free to contact me to learn more about our services: