Dec. 11, 2019—On Jan. 1, 2020, A.B.5, a law that reclassifies many independent contractors as employees, will take effect in California. Although it’s California-specific, laws that are set in this state tend to start trends throughout the country. In addition, owners in other states may already be violating similar laws in their states without their knowledge. A.B. 5 serves as a reminder to check-in and make sure your business, and how you handle your employees, is compliance—or risk a hefty fine, audit, or employee lawsuit.
Jennifer Grady, an employment law attorney (and whose parents own an auto repair shop), shares why all independent shop owners need to be paying attention to this—regardless of their location.
In her role as a business and employment lawyer, Grady says that both employees and business owners have already expressed their frustrations with this law and its potential impact. Some have contacted her because they already received an EDD audit, or a demand letters from plaintiff’s lawyers threatening to file misclassification lawsuits or Labor Claims.
The law (parts of which are technically retroactive to 2018), is troublesome to small business owners who fear they will go out of business if they have to reclassify contract workers. Independent Contractors are also frustrated because they enjoy the flexibility of creating their own schedule or working for multiple companies, and don’t want some of the restrictions put on them by becoming an official employee.
While there is talk of fighting this new law by large “gig economy” companies such as Uber and Lyft, this new law will take effect January 1. Therefore, shop owners must prepare for it now, or risk legal repercussions. For example, if employers fail to reclassify independent contractors as employees, they could face any or all of the following: tax fines for federal or state taxes that should have been withheld but were not because the person was not on payroll; fines for employee benefit obligations; workers’ compensation fines; unemployment compensation penalties and interest; unpaid overtime and meal and rest break penalties; minimum wage violations; waiting time penalties, and other penalties and interest levied by government agencies.
The California law affects most workers, unless they qualify for the exceptions in the law. Certain professions, such as lawyers, accountants, and insurance brokers, along with estheticians, licensed electrologists, licensed manicurists etc. may qualify for the exemption if they meet certain requirements. For a full list of exceptions, see the text of the law here.
Converting Contractors to Employees
Once you have determined that you need to convert your independent contractors to employees, follow these steps:
Step 1: Notify the employee in writing of the change in status
Step 2: Create an employee file including at least the following documentations:
Personnel file checklist;
I-9 form (must be completed in person within 3 days of hire);
W-4 form or W-2 form;
Job Offer letter designating terms of the job, including whether the employee is exempt or non-exempt;
Detailed Job Description;
Insurance and benefits enrollment forms if they are offered to other employees at your company;
Company property checklist to record what items are provided to the employee and must be returned upon separation from employment;
DFEH-185 pamphlet on sexual harassment;
Employee Handbook (should be updated annually);
Signed safety policies and procedures; and
Any other information you collect from new hires.
Step 3: Update your payroll to include the new employee and specify any required deductions
Step 4: Onboard your new employee
Step 5: Provide Paid Sick Leave if your state and city requires it
Step 6: Implement timekeeping measures for non-exempt employees, and provide meal and rest breaks and overtime for them in compliance with your state’s laws.