AB-5: California’s Worker Classification Problem

Businesses with workers in California are dealing with a new tax headache this year. In the fallout from the 2018 Dynamex ruling, California lawmakers passed Assembly Bill 5 (AB-5), which makes significant changes to employee classification rules. The new rules drastically limit the pool of workers who can qualify as independent contractors and shifts a greater part of the tax burden to the employer.

Under the new law, California moved away from the previous “right-to-control” standard in favor of a new ABC test to determine whether to classify a worker as an independent contractor or an employee. The ABC test requires that all three of the following conditions be met in order to treat a worker as an independent contractor:

A) The worker is free from the control and direction of the hiring entity in performing the work.
B) The worker performs work that is outside the usual course of the hiring entity’s business.
C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Workers in certain industries and occupations are exempt from the ABC test.

While the new legislation introduces daunting compliance costs for businesses, potential legal challenges are already brewing. Major companies in the gig economy space, such as Uber, Lyft and DoorDash, have filed paperwork to put a referendum on the California ballot this year that would create additional exemptions to AB-5’s far-reaching scope. Companies are also looking to differences between federal and state laws that allow workers to be classified as independent contractors for federal purposes and employees for California purposes.

Employee classification has become an increasingly hot topic in California, and AB-5 only turns up the heat. Employers should carefully review their existing contractor lists for compliance with the new rules and consider planning techniques to minimize the impact to their bottom line.

The experienced professionals at RJI CPAs can help you navigate AB-5 and the potential impact to your business.

Manuel J. Ramirez, CPA MST FABFA is Chairman/International Tax Partner at RJI CPAs, with specific experience in international and multistate taxation, M&A transactions, and representation before the IRS and state regulatory agencies. Manuel can be reached at (949) 852-1600 or mramirez@rjicpas.com.
Fernando Jimenez, CPA, MST, CEO is the Chief Executive Officer/ Tax Partner of RJI CPAs. Fernando has experience in corporate re-organizations, buy/sell transactions, representation before the IRS and state agencies, succession and operations planning and transactional analysis. He can be reached at (949) 852-1600 or fjimenez@rjicpas.com.

About RJI CPAs
Established in 1980, RJI CPAs specializes in audit, accounting, corporate and international tax issues for publicly traded and privately held companies. RJI CPAs is PCAOB-registered and is the Southern California member firm of DFK International, the 7th largest global accounting network.

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