On July 1, 2020, the workers comp and payroll obligations of California Assembly Bill 5 (CA AB 5) will come into effect.
Here’s what you need to know:
1- What is AB 5 and what is its purpose?
AB 5 was signed into law by the CA governor in September 2019 and goes into effect at the beginning of July. The focus of the bill is on the classification of workers as independent contractors vs full-time employees.
Most notably, AB 5 codified the ABC test for determining the status of a worker which was first used by the California Supreme Court in Dynamex Operations West, Inc. v . Superior Court (2018) 4 Cal.5th 903.
This has a wide range of implications for unemployment benefits, labor regulations, payroll taxes, and other legal areas of the employer/employee relationship.
The employee status of staff also obligates the employer to Labor Code requirements such as workplace safety, labor law enforcement, and workers comp.
2- What is the ABC test?
The ABC test is used to determine whether or not a worker is an employee or an independent contractor. The assumption of the law is that a worker is an employee unless all three conditions of the test are met by the hiring entity.
According to the California DOL website, these three conditions are:
- 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 categories are not met, then the worker is automatically assumed to be an employee. This means the employer must comply with all legal and regulatory requirements related to this status.
3- Does the ABC test apply to all industries and occupations equally?
No. There are exceptions where the ABC test is not necessarily required. Employers should confirm whether or not they are obligated, as non-compliance results in stiff penalties.
More detailed info on excluded occupations is available on the California DOL website.
4- Do businesses have a grace period to get payroll taxes in order?
No. Employers are expected to cover all payroll tax obligations for all employees as of January 1, 2020. This process can be started by registering with the ED Department.
5- How should my clients ensure their businesses are compliant with AB 5?
Do your research on AB 5. While this list hits on the major implications of the new bill, there are details which may apply to specific industries and businesses.
The sooner your client determines the status of their workers the faster they can get started on the path towards compliance.
The California DOL has plenty of information and resources for both employers and employees you and your clients may find valuable.
You should also discuss the implications this change may have on workers’ compensation insurance with your clients, as they may need expertise in navigating policy changes.
For any more specific questions, we recommend contacting the California DOL directly for guidance.