New Employment Law, Ab5 reiterates and creates narrower rules when determining a worker’s classification
Assembly Bill 5 or AB5, is a bill that was signed into law on September 11, 2019 and took effect on January 1, 2020. This new employment law reiterates and creates narrow rules when determining a worker’s classification.
Historically, business owners have utilized independent contractors to avoid paying for many benefits that employees are entitled to such as paid breaks, overtime pay, worker’s compensation, etc. Furthermore, some business owners have misclassified employee workers as independent contractors, resulting in tax savings to their businesses. This law is expected to be enforced by state taxing authorities, the California Attorney General, city attorneys, and private attorneys and will impact many small business owners that have previously used or reported workers as independent contractors.
AB5 reiterates the “ABC test” and expands its application in order to determine whether workers are properly classified as either an employee or independent contractor. The ABC test previously provided that the employer must show that the following conditions that are met for the worker to be classified as an independent contractor:
(A) The person 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 person performs work that is outside the usual course of the hiring entity’s business.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
It is important for business owners to look at their workers and assess what their classification would be under AB5 in order to ensure full compliance within the law. Being compliant is expected to result in additional overhead expenses such as increases in payroll and insurance costs. Due to this major shift, business owners may be subject to additional risks as the law is retroactive and may result in penalties and fines.
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The time to act on AB5 is Now! As a business owner, it would be prudent to consult with an experienced Business Tax Advisor (BTA) at Vitae Tax. Book a Free, no-obligation CPA consultation today. Let us be your gateway into the solution applicable to your specific business needs.
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