Tag Archive for: AB-5

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California Assembly Bill 5 (AB-5) took effect on January 1, 2020, and is the new standard by which employers must classify employees. Small business owners (SBOs) should familiarize themselves with AB-5 and the ABC test to avoid employee misclassification and potential penalties from the Internal Revenue Service (IRS).

What is Assembly Bill 5 (AB-5)?

Assembly Bill 5, commonly referred to as AB-5, is a piece of legislation that extends employee classification status to some independent contractors, requiring that hiring entities reclassify these workers as employees based on the strict criteria outlined in the ABC Test.

What Caused Assembly Bill 5?

Assembly Bill 5 was inspired by the April 2018 Dynamex Case—when Dynamex reclassified all employees (previously classified as W-2s with all the associated perks) as independent contractors to save employee costs– before being signed into law by Governor Gavin Newsom in September 2019.

Read on to learn how Dynamex ruined it for everyone.

What Businesses Does AB-5 Affect?

AB-5 affects all small businesses and small business owners. Most prominently, AB-5 impacts SBOs who hire 1099 independent contractors and their operations in California.

How Does AB-5 Affect Businesses?

Through AB-5, the California Employment Development Department (EDD) places the burden of proof on businesses to show that workers are correctly classified as 1099 contractors.

The misclassification of employees can lead to:

  • High fines
  • Penalties
  • And back tax payments

How Do I Correctly Classify 1099 Independent Contractors?

AB-5 introduced the ABC test as a stricter guideline to determine how to classify a worker as a 1099 independent contractor. 

What is ABC Test?

Check out our video below for an in-depth explanation of the ABC Test.

The ABC test is a set of requirements that the worker must meet to be classified as a 1099 independent contractor instead of a W-2 employee. The worker must meet all three criteria of the ABC test to be correctly classified as an independent contractor:

  1. The worker is free from the control and direction of the hiring entity in connection to the performance of the work.
  2. The worker performs work that is outside the usual course of the hiring entity’s business.
  3. 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 the contractor fails to meet any of the criteria in the ABC test, they are automatically classified as a W-2 employee instead.  

How To Meet The ABC Test Criteria 

When classifying your 1099 independent contractors according to the ABC Test, gather the following information to make sure they are classified correctly.

The First Criteria

  • Gather information on project deliverables and how they are delivered.
  • Have your contractor submit an invoice.
  • Keep correspondence about project timelines recorded in a clear and accurate manner.
  • Ensure you’re not placing requirements on your 1099 contractors regarding how they perform their work. For instance, do not tell the workers what to do or specify reporting requirements. 
  • Document and file scope of work (SOW) from your contractor.

The Second Criteria

  • Compose a definition of your contractors’ line of work.
  • Compose your definition of your business’s line of work (i.e. what products or services does your company provide?)

The Third Criteria

  • Verify if your 1099 has insurance.
  • Ask if they have a legal entity.
  • Check if they have associations, unions, or other affiliations.
  • Review their professional certifications.
  • Gather their business card, website, and a list of other clients the contractor has worked for.

What is the Borello Test?

Before AB-5 was signed into law, the Borello test was used to determine if an employee should be classified as a 1099 independent contractor or a W-2 employee. The Borello test was established by the Supreme Court in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989). The test relies on 13 factors to determine employee classification.

Even with new AB-5 regulations, the Borello test can still be a useful resource to help classify employees.

EDD provides the full Borello test worksheet with the following questions to help guide classification:

  1. Do you instruct or supervise the person while he or she is working?
  2. Can the worker quit or be discharged (fired) at any time?
  3. Is the work being performed part of your regular business?
  4. Does the worker have a separately established business?
  5. Is the worker free to make business decisions that affect his or her ability to profit from the work?
  6. Does the individual have a substantial investment in their job which would subject him or her to the financial risk of loss?
  7. Do you have employees who do the same type of work?
  8. Do you furnish the tools, equipment, or supplies used to perform the work?
  9. Is the work considered unskilled or semi-skilled labor?
  10. Do you provide training for the worker?
  11. Is the worker paid a fixed salary, an hourly wage, or based on a piece-rate basis?
  12. Did the worker previously perform the same or similar services for you as an employee?
  13. Does the worker believe that he or she is an employee?

Answering “yes” to questions 1-3 would provide a strong indication that the worker is an employee. Answering “no” to questions 4-6 would indicate that a worker is not in business for themselves and would likely classify as an employee. Questions 7-13 indicate important factors to be considered.

While answering “yes” to any one of the questions may indicate that a worker should be classified as an employee, no single factor is enough to determine classification independently.

The full worksheet provided by EDD provides further clarification on certain factors and circumstances.

If completing the provided worksheet does not provide sufficient clarification for employers, EDD also offers the ability to request a written ruling by completing a seven-page form called Determination of Employment Work Status. The form supports any business entity looking to determine if a worker is an employee or an independent contractor.

How Do I Avoid Misclassification?

You can avoid misclassification by carefully analyzing the arrangement you have with your worker in relation to the guidelines described in the ABC test and regulations set forth by AB-5.

To learn more, read on about how to hire an independent contractor.

Small business owner responds to EDD audit

Now that the April filing deadline has passed, small business owners may be asking: what’s next?

As tempting as it may be to put off thinking of taxes until next year, some small business owners may be required to respond to an California’s Employment Development Department (EDD) audit.

Read on how to learn common EDD audit triggers and and how to respond.

What is a CA EDD Audit?

EDD conducts an audit to determine if the employer has paid the full and correct amount of taxes due under California law.

What Triggers EDD Audits?

The following circumstances most commonly trigger EDD audits:

  • An independent contractor filing for unemployment
  • The EDD verification process
  • Late filing of tax returns or late payment of taxes
  • Failing to pay wages on time or collect SDI and PIT

Many verification EDD audits are conducted on a random basis. These audits are not based on any assumptions of inaccurate or incomplete information. Additionally, EDD has the power to audit a company if they believe the business has purposefully misclassified workers in an attempt to avoid paying payroll taxes.

However, many legitimate businesses are unintentionally misclassifying employees. Many of these misclassifications are a as a result of new, strict worker classification regulations, related to Assembly Bill 5 (AB-5).

What is AB-5?

AB-5 is a piece of legislation that extends employee classification status to some independent contractors and gig workers depending on the qualifications outlined in the ABC test. AB-5 went into effect on January 1st, 2020, and changed how Small Business Owners (SBOs) who hire independent contractors operate in California.

Learn more about how this law came into effect, and how Dyanmex ruined it for everyone, here. 

How Can AB-5 Lead to the Misclassification of Employees?

AB-5 introduced the ABC test as a stricter guideline to determine how to classify workers as 1099 independent contractors. A worker must meet all three criteria of the ABC test to be classified as a 1099 independent contractor instead of a W-2 employee. The worker must:

  1. Be free from the control and direction of the hiring entity in connection to the performance of the work.
  2. Perform work that is outside the usual course of the hiring entity’s business.
  3. Be customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

If the contractor misses one of the criteria in the ABC test, they should be classified as a W-2 employee.

Learn more about AB-5 and the ABC test, here.

What Happens If I Misclassify an Employee?

Employee misclassification can lead to several unfortunate outcomes, including fines and penalties.

With the new regulations, employee misclassification is more common for small businesses. As an example, let’s examine the case study of one of our clients, Ryan Brown, who misclassified his workers and was faced with EDD audit.

Check out the video below!

Meet the Client: Ryan Brown

Ryan Brown owns a construction company in Oceanside, California. His business classified a portion of the staff as 1099 independent contractors and the rest as W-2 employees.

How Can the Misclassification of W-2 Employees Happen?

The services of the hired independent contractor must be consistent with all three of the criteria established by the ABC test or they are automatically classified as a W-2 employee.

In Brown’s case, he didn’t realize that the independent contractors were providing the same services as the W-2 employees. Therefore, the employees he classified as independent contractors didn’t meet the second requirement, “[workers] perform work that is outside of the usual course of the hiring entity’s business.” Thus, all staff members should be classified as W-2 employees–any worker the business claimed was an independent contractor was misclassified.

What Triggered Brown’s EDD Audit?

EDD conducted a random site sweep of Brown’s business. This sweep resulted in EDD finding misclassified workers.

What Happened When Brown Contacted Milikowsky Tax Law?

Brown called Milikowsky Tax Law and set an initial meeting. Before signing any kind of retainer, John started making calls to learn more about the audit and what steps they needed to take immediately to protect the business and provide accurate information to EDD and CSLB.

What Were the Results of Brown’s EDD Audit?

After less than a month, EDD sent a final letter indicating the decision– minor fines were due, the case was closed. For Brown, the results–and knowing his business was going to be fine– provided a sense of relief.

Ryan’s results are both exceptional and the kind of outcome our team strives for with every client. And while we can’t promise any client’s outcome will be the same as another, we can say with utmost assurance that the team at Milikowsky Tax Law is your relentless advocate in the face of EDD, CSLB, and IRS audit.

A 2021 EDD Audit will include classification criteria from the Borello Test and the ABC Test

Watch our video below to learn how the last 12 quarters affect your EDD audit criteria.

Have You Received an EDD Audit Letter?

The California Employment Development Department (EDD) sends audit letters through the mail. If you receive an audit letter, you have 30 days to reply. Typically, the agency audits back three years from the most recent tax filing. However, EDD sometimes will audit the previous year’s tax filings.

Right now, for example, an EDD audit period would span from 2018 to 2021; the standard 12 quarters (three years time). At this time, that means that your audit process will include the years before AB-5 was signed into law and those years after. EDD audits in 2021 will look different because of the two different verification methods: AB-5 and the Borello test.

What is AB-5?

The law in California named AB-5, effective January 1st 2020, changed the way EDD classifies workers as either W-2 or 1099s. Before January 1st, 2020,  the old rule, the Borello test, was in effect. The Borello test was broader and in the grey zone on who could be classified as a 1099 contractor.

In the case of current California EDD audits, auditors are making determinations on both the old rule for the appropriate time period and on the new ABCs of contractor classification as set forth in AB-5.

Because of this, in some cases, there may be a worker who is classified as an independent contractor under the old rule, and as an employee under the new rule because they don’t meet the more stringent requirements.

According to the California Department of Industrial Relations, workers are employees, not independent contractors unless all of the following requirements are met:

  • “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
  • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”

Under AB-5’s rules, 1099 contractors have to meet all three of the ABC’s of contractor classification to be considered to be a 1099 contractor. If they fail to meet even one classification, they’re automatically classified by EDD as a w-2 employee.

In audits that misclassification is proven, EDD can assess you for payroll taxes and penalties, and interest calculated based upon total payments made.

What is an Unemployment Audit?

Unemployment audits, otherwise known as Unemployment Insurance (UI) benefit audits, are also performed by EDD. The federal-state unemployment insurance system provides temporary wage replacement for those who have lost their jobs. The EDD conducts benefit audits periodically to protect the integrity of the UI program.

These audits aid in lowering employee UI costs. New employees are assigned a 3.4% UI rate for two to three years of employment, which fluctuate after that set time depending on your contribution to UI benefits. EDD can take from 1.5% to 6.2%, but the taxable wage limit caps at $7,000 per calendar year.

EDD benefit audits are conducted on a daily, monthly, and quarterly basis to ensure that UI is distributed to eligible claimants only. They are done by matching the information provided by employers against information provided by individuals who have filed a UI claim.

There are four types of unemployment benefit audits:

  • New employee registry benefit audit
  • National directory of new hires
  • Quarterly wage earnings
  • Interstate crossmatch

If you receive a benefit audit, respond with the completed audit form within 10 days of receiving the notice. For more information on the different types of EDD benefit audits, read our “What is an EDD Benefit Audit?” article.

What Should You Ask Yourself Before an Audit?

Before your company experiences an EDD audit, take the time to go through a profile for your 1099 contractors to ensure they have a legitimate business.

Questions to Ask:

  • Do they have clients?
  • Do they advertise?
  • Do they have their own website?
  • Do they have a business license, tax certificate, or EIN?

For some California cities, if you do business in that city, you’re required to get a business license specific to that location. For instance, if you’re a subcontractor performing work in multiple cities because you have a job that happens to be, for instance, in Del Mar (which is in San Diego and in Riverside), your subcontractors may need to get licenses just to complete that job.

To check the status of your contractor’s license, visit the California Contractors State License Board (CSLB) website. There, you can input your independent contractor’s eight-digit license (located on the contractor’s plastic pocket license), and the website will check if they are licensed under CSLB. The agency will then check the contractor’s:

  • License number
  • Business name
  • Personnel name
  • Home Improvement Salesperson (HIS) number
  • HIS name

Contractors’ licenses can expire or be revoked in the middle of a job so we recommend diligently checking that each contractor has a current license. This will help avoid the fines and penalties of an EDD audit. Click here to learn CSLB’s 10 tips for hiring a licensed contractor.

How Do I Verify My Worker’s Status?

If you are unsure of the correct worker classification there are services that will run independent contractor reports to verify the status of your 1099 hires as legitimate 1099 contractors.  Then you as a business owner can make an informed decision before an audit begins.

If your report uncovers that your workers are misclassified, you can then take the next steps to correctly classify them, or work together with your workers to ensure they then meet the criteria to become a 1099 contractor.

EDD audits are time-consuming and a hassle. Business owners undergoing an EDD audit should be prepared for each step of the process. Read our article on what to expect in an EDD audit for more information.

 

workers must meet all three criteria of the ABC test to be classified as an Independent Contractor

Working Men smiling

When The California Employment Development Department, EDD did a site sweep, Ryan Brown found himself facing an audit.  As he did research on his own as to what the ramifications of an EDD audit might be, he saw steep fines, jail time and high conviction rates reported time and time again.

Ryan was afraid he would lose his business.

Ryan called Milikowsky Tax Law and set an initial meeting.  Before we signed any kind of retainer, John started making calls to learn more about the audit and what steps they needed to take immediately to protect the business and provide accurate information to EDD and CSLB.

” I felt so much better coming out of the office that day.  John just starting helping me immediately”.

John and the Milikowsky Tax Law team got to work communicating with the EDD and CSLB agencies, clarifying the circumstances of Ryan’s unique situation and providing the documents the agencies asked for in a way that helped them understand his business.

After less than a month, EDD sent a final letter indicating that while minor fines were due, the case was closed.  For Ryan, the results were life-changing.  To go from the fear of losing everything to knowing his business was going to be fine was a tremendous sense of relief.

Ryan’s results are both exceptional and the kind of outcome our team strives for with every client.  And while we can’t promise any client’s outcome will be the same as another, we can say with utmost assurance, the team at Milikowsky Tax Law is your relentless advocate in the face of EDD, CSLB and IRS audit.

When you review your contractors, ensure that all of your workers are correctly classified by running a Verify1099 report.  The Verify1099 report checks for valid business license, EIN, web presence and professional licensing to build a strong case for defending your classification of certain workers as 1099s. Visit https://verify1099.com to learn more and get started. EDD audits are fast-paced and have serious consequences. Be sure you are classifying your workers correctly.
If your business is currently in an EDD audit, contact the attorneys at MIlikowsky Tax Law immediately.
Man writing on a book

If your business received SBA PPP loan funds here’s what you need to know to prepare for your 2020 taxes.

As with all elements of the forgivable loan, there are steps you should take right now to ensure forgiveness and compliance. In the video below we’ve outlined several scenarios to beware of, as well as suggestions for making the process more efficient and less likely to trigger an audit.

Elements to keep in mind:

  • At least 75% of all PPP funding must be used to cover payroll expenses for your employees.
  • No more than 25% of the loan can be used to cover costs associated with utilities, interest, and other business-related expenses.
  • No expenses paid with PPP loan funds can be deducted from your 2020 tax returns.

If you have questions about complex tax law issues or if you need assistance organizing your application to qualify for the PPP loan, please contact a representative at Milikowsky Tax Law.

über and Lyft car

California Sues Uber and Lyft, Claiming Workers Are Misclassified. In January, 2020 Assembly Bill AB-5 went into effect redefining the criteria for a 1099 contract worker as opposed to a W-2 employee. The bill was aimed at the employers who drive the Gig Economy and in the subsequent months, Uber, Lyft and Door Dash poured 10s of millions of dollars into combatting the law. Last week California’s Attorney General and the Attorneys General of San Francisco and Los Angeles together filed suit against Uber and Lyft claiming that their workers are misclassified and they must pay $2,500 per misclassified worker for their violation of AB-5’s criteria.

To review: AB-5 states that, in order for a worker to be classified as a 1099 contract worker and not an employee, the worker: 1. must be free from time and financial control of the hirer 2. must perform work outside the core function of the hiring entity’s function and 3. must have their own business entity. It appears that the timing of this lawsuit is driven by budgetary concerns as the State of CA has seen apx 4M people file for unemployment during the Coronavirus pandemic.

Lyft responded by saying they would cooperate with the AG and find a solution. Uber responded in a more aggressive way saying they would prefer to take the issue to court. The New York Times article does note that, “Uber and Lyft have reported that they have substantial cash reserves to weather the downturn caused by the pandemic. Uber said it had more than $8 billion, while Lyft said it had more than $2 billion.”. It remains to be seen what will happen with the suit against the largest Gig Economy companies.

For the small business, this serves as a warning that, despite the fact that many people are out of work and may want to seek employment as contract workers as they wait for a new position in their chose career fields, California EDD will not soon be relaxing the stringent criteria for classification as a 1099. Business owners beware: your classifications must be air tight to avoid EDD audit. If you have questions about your worker classification, reach out to the experts at MIlikowsky Tax Law. We have defended employers who have been audited by EDD, accurately conveying their company’s situation to the government and saving money, and time as well as saving businesses from serious financial hardship associated with 1099 reclassification, including fines and back taxes they would have owed if not for our detailed defense.

contractors files

As many companies work to reorganize their business model in light of COVID-19, hiring a 1099 to replace your full-time employees might be a great solution.  However, there are a few things to consider before taking the step in hiring these workers. The passing of the new AB-5 regulations in January 2020 created more regulations to consider. Here are the classifications to ensure that your employee is listed as an independent contractor rather than a full-time employee. 

First, the IRS uses the “control and direction” test to identify is the employee is free from behavioral, financial, and relationship control. Then they look at the employee is performing work that could be done outside the core functions of the company. Lastly, the AB-5 ensures that the employee is conducting their work along with the work they are doing for the company. 

As the new AB-5 regulations take effect, there are a few exceptions to the independent contractor’s rules. Occupational exemptions, like doctors, lawyers, and real estate agents are excused from the AB-5 rules. Other professional services are also able to be considered independent contractors, such as marketing professionals, freelance writers, and barbers/ cosmetologists. There are a few qualifications they must abide by to be considered, these include:

They must have an established business location.

They must obtain the required business or occupational licenses.

Their rate must be negotiable.

They can set hours outside of project hours.

They must have other work with different companies.

They must use discretion and judgment on their work.

Other exemptions from AB-5 include, the referral agency exemption, which includes home cleaning service, dog grooming, graphic design, and other service listed here. The referral agency exemption also much adhere to a few qualifications including:

They must be established as a business entity.

They must be free from the control and direction of the referral agency.

They cannot be penalized for refusing service to clients/ contracts from companies.

They are allowed to work with other companies and have separate their clients.

Their services are under their name rather than the referral agency.

They set their prices, set their hours, and use their own equipment.

They must hold their business licenses and have registered for business tax.

The last two exemptions under AB-5 include the construction industry exemption and the narrow business-to-business exception. The construction industry exemption includes special regulations for subcontractors within the construction industry. With the narrow business-to-business exception any work done must be done by a sole proprietor, a partnership, an LLC, or a corporation. For more information on the exceptions to AB-5, here is a detailed list of requirements and qualifications for each category.

With all of these potential options in hiring a 1099 employee, we can help you figure out just what will work for your specific company. Contact us to see exactly how you can change your business model to allow you to hire independent contractors and cut costs during these uncertain times.

AB-5 can it stand?

As we look forward from April into the second quarter of 2020 the question on many business owner’s minds is: will the rules outlined in AB-5 stand in the face of coronavirus? At the start of 2020, business owners’ level of concern about California EDD’s newfound power to audit businesses was high.  EDD was empowered and emboldened to audit businesses whose workers were misclassified as 1099s instead of W-2’s in the wake of the “Gig Work Bill”.  Concerns around the new criteria for worker classification outlined in Assembly Bill 5 were common at the start of the year, and many business owners chose to reclassify large portions of their workforce as W-2 wage earners from their previous roles as 1099 independent contractors.

And then there was coronavirus.

With the social distancing, quarantine and shelter-in-place rules that have been put into place to try to #flattenthecurve of infections from the novel coronavirus, businesses have laid of large percentages of their workforce.  As of today, April 2nd, 2020 over 6.6 million workers have filed for unemployment, 87,900 of them in the state of California. When all of this is over and businesses reopen, can the California Employment Development Department really audit businesses using the strict independent contractor classification rules set forth in AB-5?

AB-5 can it stand?

The post-COVID-19 world of work will look different.

One thing is certain in this time of uncertainty, the world of work will be transformed by this “new normal” we are all experiencing.  While many workers are struggling to implement home-based work regimens, others are discovering the benefits of a flexible schedule and more family time. When business resumes, there is sure to be a shift in the expectation of many employers.  With that shift and the slow restart to the economy that will accompany the recovery post-coronavirus, many businesses will choose to hire part time contractors as opposed to diving into the commitment of a full-time W-2 employee. And while workers will have a different set of criteria they desire in order to go to work in an office again, business owners will also have choices.  business owners will have to choose wisely how to spend money as they try to restart what has come to a halt during the outbreak.

Even if they want to, many business owners will not be able to employ W-2 workers.

The US economic recovery may take years after this downturn and the massive unemployment caused by the COVID-19 crisis.  If an employer can start creeping back into some semblance of their previous business, would CA EDD really leap in and audit that business? The answer is yes.  If an employer categorizes their independent contractors incorrectly, CA EDD will audit and under AB-5 they have every right and a responsibility to do so.

What can a business owner do to allow for 1099 contractors?

The most important step a business owner can take is to examine the way their business is structured.  There are exemptions to AB-5 and service models are one of those exemptions.  If a business can be restructured to fall into one of the exempted categories, then that business could legitimately hire 1099 contractors.  However, it is important to note that EDD can investigate any business.  So, if you do restructure and choose to hire 1099 contractors, be sure they are legitimate businesses in their own right.  Verify 1099 contractors using tool like clear1099.com or call the team at Milikowsky Tax Law.  We can review your corporate structure and make recommendations based on your industry and goals for the next stage of your business.

We don’t know if AB-5 will hold in the face of Coronavirus.

It is impossible to know what the next few months will hold.  As business owners we have to do what is best for our businesses and our families.  That may be a restructure to allow more flexibility in hiring.  The pandemic will not last forever and, as business gets back to normal, the last thing anyone wants it to be targeted for an audit.  If you are concerned about EDD audits, please reach out to our office.  We are working from home too and happy to take your call. (858) 450-1040

COVID-19

Unemployment claims are in the millions as a result of the coronavirus epidemic and the ensuing quarantine and lockdown. Small businesses are being deeply impacted by the downturn and many are having to lay off over half their workforce. Since the start of the outbreak, 3.2M people have filed for unemployment in the U.S. and more than 1M people filed for unemployment in California.  As restaurants and other businesses reliant on in-person services, foot traffic and face to face interactions reduce their workforce by large numbers to try to stay afloat and ride out the COVID-19 crisis, many more workers will be forced to file for unemployment.  

COVID-19

Coronavirus global pandemic outbreak

Business owners who lay off portions of their workforce, both 1099 and W-2, due to the global slowdown from COVID-19 should communicate clearly with those people who are let go, informing them of their ability or lack of ability to file for unemployment.  To quickly review: a 1099 contractor can only file for unemployment if their independent business is folding, not if they lose contract work with one of their clients (you). A W-2 worker can file for unemployment benefits listing their most recent full time employer with no negative ramifications to the business entity listed on the unemployment documentation. 

As small to mid-sized businesses (under 500 employees) prepare for the many possible repercussions of the coronavirus outbreak they should be aware that one of the possible effects could be an uptick in EDD audit activity.  The California Employment Development Department audits businesses for many reasons. One of the surest ways to trigger an EDD audit, however, is to have a 1099 contractor incorrectly file for unemployment. If your company has released 1099 contractors due to the downturn from coronavirus and those 1099 contractors in turn file for unemployment listing your business as their most recent employer (whether through ignorance or malice), EDD is likely to audit your company. 

Communication and education are the best friends of business owners looking to protect themselves from unnecessary, time consuming and potentially damaging or even criminal investigations and audits by CA EDD. As a business owner you must: 

Inform workers who are let go of their status.  

Remind them that 1099 contractors cannot file for unemployment unless their own independent business has folded. 

Keep impeccable records. 

The following business records should be kept for each 1099 contractor you hire: EIN’s, evidence of a contract, copy of the contractor’s business card, the contractor’s website or evidence they are promoting their own business, business tax license, and Professional Licenses.

Do your research

The law changed at the start of 2020 and EDD is auditing businesses who hire a large number of 1099 contractors.  Know the new criteria and when in doubt, double check a 1099 contractor’s status using a tool like clear1099.com or other reliable reference. 

Above all if you are audited by CA EDD, reach out to a qualified ta attorney.  We can help mitigate the damage an EDD audit can cause.

Ride Share Drivers Are among those who will be impacted by AB-5

The Potential Consequences of AB-5:

The potential impact of AB-5 on workers, employers, and consumers may be far reaching.

The US Government requires all employers to verify that employees are eligible to work in the United States.  Verification includes providing passport, Driver’s License or Green Card at the time of hire. This regulation applies only to those workers hired as W-2 wage earners, not of those hired as 1099 independent contractors. One of the perhaps unintended consequences of AB-5 therefore is the impact it will have on undocumented populations and their ability to find full-time employment. The economy in many sectors relies heavily on workers who are undocumented to perform tasks and jobs that are necessary but less desirable.  For example, delivery people, ride-share drivers and agricultural workers will likely be negatively impacted by the stricter rules around worker classification.

Some experts estimate that ineligible workers may make up as much as 25% of the total Uber/Lyft workforce in some areas*

In addition to the impact fewer workers will have on the end user experience of ride share, consumer grocery experiences or delivery options there are wider implications in terms of unemployment, poverty, education and health care.  Already lower income communities may be adversely impacted by increased unemployment, lack of health coverage causing higher costs in emergency room visits and increased poverty’s impact on society on a larger scale.

For employers, classifying workers as W-2 wage earners as opposed to 1099 independent contractors can increase costs by up to 35%.*

In industries with already narrow margins, that increase will mean fewer employed persons or increased cost to consumers. Uber/ Lyft estimate that fares will necessarily  jump 20%+ to cover increased costs to those corporations.*

The intent of AB-5 was certainly the protection of the very population who may find themselves negatively impacted by the new regulations.  For example, janitorial staff who were previously working as 1099 contractors 35 – 39 hours/ week without benefits, workers compensation or other protections offered to W-2 wage earners will now be required to be reclassified.  That reclassification will give those workers some form of health coverage, among other protections. If, however the employing company can only afford to keep 65% of the workers, given the 35% increase in costs, the negative impacts to that population would be significant.

The coming months of implementation of and likely, litigation of, AB-5 will certainly provide more data with which to accurately assess the impact of the new regulations on business, consumers and the workforce it was intended to protect.

* https://www.jdsupra.com/