California’s AB-5 Worker Status: Employees and Independent Contractors

various workers

California lawmakers have passed a landmark bill that reshapes how some companies do business. The legislation, known as Assembly Bill 5 (AB5), was passed into law and will go into effect on January 1, 2020.

Many businesses across the U.S. have shifted to independent contractors to reduce labor costs, but labor experts say they often misclassify workers to avoid offering costly benefits like health care, paid vacation and sick time, and retirement plans. As defined in AB5, an independent contractor is a person who runs an independent business; who is hired by a company to do something outside of that company's usual course of business; and who has full say over how, where and when they complete that job. The bill exempts dozens of occupations, including some artists, doctors, lawyers, architects, accountants, private investigators, commercial fishermen, manicurists, and estheticians, but leaves many industries affected that have come to rely on contract labor.

Other states' lawmakers are watching California's AB5 issue closely as they draft regulations to address the challenge of worker classification and the 'gig' economy. Read Politico's "CA narrative casts a pall over East Coast efforts to elevate gig economy workers." 

MI industry experts Alan Friedman, and Daniel Jobe of Friedman, Kannenberg & Co. have penned articles and hosted special education sessions on the topic – linked below. NAMM will continue to post updates on this and related issues. Please visit this page regularly. Questions? Download the California Chamber of Commerce "Roadmap for AB5: California's New Law on Worker Classification" white paper. 

  • IRS Worker Classification: Employee or Independent Contractor? 

People who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer (business) has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.

A worker is not an independent contractor if they perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if they are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed. If an employer-employee relationship exists (regardless of what the relationship is called), the worker is not an independent contractor and their earnings are generally not subject to Self-Employment Tax. If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker. 

For more information on determining whether to classify a worker as an independent contractor or an employee, refer to IRS website on Independent Contractors or Employees.