California employment law is changing and small business owners must be prepared.
When Assembly Bill 5 (AB-5) goes into effect on January 1, 2020, employers will have to meet stricter standards when classifying workers as independent contractors. Workers who don’t meet the new standards must be classified as W-2 wage-earning employees.
This has wide-ranging implications for how small business owners in California conceptualize their workforce, anticipate their labor costs, and plan for their employment tax bill.
The extent to which AB-5, also called the Gig Work Bill, will affect your business largely depends on how much you rely on independent contractors. Some types of businesses, however, are exempt entirely, including doctors, lawyers, architects, and hairstylists, among others.
One thing all business owners should expect, however, is an increase in audits from the California Employment Development Department (EDD). In order to enforce AB-5, state auditors will need to scour the books of individual companies to confirm that contractors and employees are all classified correctly.
Even for businesses that do everything right, complying with an audit can be a confusing, stressful, and time-consuming process. Knowing that these audits may soon become more common, it’s important to get prepared in advance. Making plans and provisions now may prevent a lot of headaches once the auditors arrive. With only a short time before the Gig Work Bill becomes law, here are some steps you can take to start preparing now.
1. Secure Legal Counsel
While California legislature has already outlined the details of AB-5, the bill may go through additional changes as a result of the imminent legal challenges it will face. While you likely already work with a CPA to manage your business taxes, it’s important to also seek a tax attorney for legal support that a CPA cannot offer. Finding a trusted tax attorney to offer you legal counsel can prove to be a huge asset, as your attorney can help you interpret how the (ever-evolving) letter of the law affects an individual company and its workforce. Form a partnership with an experienced tax attorney who is versed in California employment law and specifically AB-5, so you can best prepare for this bill’s long-term implications.
2. Evaluate Your Exposure
As California EDD audits are likely to become more common, your company may be subject to one in the near future. If your company currently relies on independent contractors, prepare ahead by conducting a thorough review of your hiring and classification procedures. Consider everything from contractual negotiations to job responsibilities to get a better sense of how exposed your company may be to potential AB-5 violations. While many business owners feel secure that their contractors are legitimate businesses, can you be certain that those business’ professional licenses are up to date? Details like this can slip by the most prepared business owner.
If you need help evaluating your own processes for worker classification or identifying potential red flags, contact our team of trusted tax attorneys for a free consultation.
3. Revise Your Record Keeping
Complying with audits is largely about handing over copious records on-demand. Audits generally cover the three most-recent years of business, so be sure to keep everything relevant stretching back at least 36 months. A comprehensive — but not necessarily complete — list of the documents auditors may ask for can be found here. Having the right records on hand can make audits faster and less disruptive, which is only possible with an effective record keeping system in place.
4. Embrace Technology
Technology can make it easier to document information, retrieve records, and systematically comply with the Gig Work Bill. It can also complicate compliance, because it allows companies and independent contractors to maintain close relationships that could compromise their independent classification. For both reasons, you should review how your company currently uses technology. The right combination of implementation, upgrades, policy changes, and partnership agreements can make ongoing compliance far easier to manage.
5. Re-Define Relationships
As painful as audits may be, they are nothing compared to the consequences of compliance breaches. Staying within the letter of the law by properly classifying employees needs to be the primary consideration, which involves re-defining how companies and contractors work together. Preserving the right kind of distance is paramount. Maintaining compliance may mean changing everything about how companies engage with talent, but the effort is worthwhile if it results in a clean audit.
Knowledgeable tax attorneys who are well-versed in California employment law and have experience with the California legislature can help individual companies review and revise their practices to ensure consistent compliance.
A new era of California employment law is upon us. If you have questions or concerns about being prepared for 2020, contact Milikowsky Tax Law today.