The Nightmare that is AB 5, Prop 22, and AB 2257

Make no mistake about it, AB 5 is bad law and nothing more than a Money Grab on the part of the State of California. So, in an attempt to fix it, rather than repealing it, we have Prop 22 and AB 2257 that carve out certain powerful segments of the economy hoping to appease them. Instead, it has bastardized it and left the rest of us forced to comply. Right or wrong, this is where we are. 

What AB 5 and AB 2257 does is presumes workers in the State of California are employees with very few exceptions.  

There are two tests deployed to determine if your worker(s) are employees or Independent Contractors.  They are the “ABC” test and the “Borello” control test. (S.G.Borello & Sons, Inc. v. Dept of Ind Rel (1989) 48 Cal.3rd 342)
They are complicated and too long for this article but suffice it to say, as California Employers, we are left not in a good place.

In particular, people hired for a temporary or limited post must now be entered into the company payroll system, additional taxes paid by the employer and the State wins. While the Federal government requirements do not conform to these new rules, they end up winning too, so they’re not commenting.

The ABC Test:

A: Is the worker free from “control and direction” of the employer

B: Does the worker perform work that is outside the usual course of the employer’s business. i.e. nightly janitorial services, professional services such as a lawyer or accountant.

C: Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed by the employer? If so, then the employer must be able to prove that work was in existence prior to hiring. And they must be a legitimate business engages with other clients, has a business license, advertises for new business, etc.

This is left very much up to interpretation by the government. California has adopted the ABC Test for the purposes of “Classifying” workers.

I encourage you to reach out to your HR departments and/or tax preparers to help you make your way through this very challenging set of new rules. Because, AUDITS are coming. This law went into effect on January 1, 2020 and the State as indicated that the Department of Industrial Relations and EDD is beginning to conduct audits of employers in an attempt to reclassify workers and levy penalties. These costs may be HUGE.

An example of some of these are:

$5,000 or $15,000 for EACH violation and this can be increased to $10,000 to $25,000 if it is determined there is a “Pattern and Practice” to misclassify. Each means PER EMPLOYEE. And, there are more penalties which can be assessed for failure to provide Workers Compensation. Late payment penalties and more.

What’s worse is, that since the Federal does not conform, a worker potentially would qualify as and Independent Contractor while at the state level he/she doesn’t. This will put into play the need to prepare a separate tax return for both the Federal and State. That means more Tax Prep fees to the worker.

In future articles, I will delve into the “Borello” test.

PLEASE, PLEASE, PLEASE. I encourage you to reach out to your HR department and your tax preparer. I stand by the ready to assist you if you don’t have one.

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