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, Esq., employment law attorney at the The Grady Firm, P.C. in Beverly Hills, California, (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.
As the specifics of the law can be confusing, and it is risky if workers are not properly classified, Grady suggests contacting a qualified lawyer in your state to review your individual case.
“Every case is different,” Grady says. “The law has a presumption that a worker is an employee, so the burden is on the company to prove that the worker was properly classified as an independent contractor.”
This must be done with meticulous records, and by meeting the elements of the laws in your state.
Err on the side of caution, she suggests. If you have a contract worker that you’re unsure of whether or not they’re working “regular” enough or if they fall under the law, first speak with a lawyer. When in doubt, make them an employee. While the laws in other states may not have requirements that are as extreme, you must check the laws in your state to determine whether a worker is properly classified as an employee.
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.
For more information on the specifics of this change, read The Grady Firm’s blog article on this topic here: You can also contact Ms. Grady at (323) 450-9010, or [email protected] for an analysis of your company’s classifications, and to learn about the forms you need to make the conversion.