California New Law AB-5  


AB-5 is California new law addressing employment status when a business owner or employer claims that the person it hired is an independent contractor. Under the AB-5 test, a worker is considered an employee and not an independent contractor, unless the hiring employer or business owner satisfies all 3 of the following conditions:


1. 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;


2. The worker performs work that is outside the usual course of the hiring entity’s business; and


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.

Per AB-5, any willful misclassification of workers as independent contractors, there are civil penalties between $5,000 and $25,000 per violation.

Employees or Independent Contractors 


Workers may receive 1099-Miscs these days for their compensated services instead of W-2s. In many situations, these may create confusions and potential tax treatment issues to employers or business owners. Per IRS Publication 1779, it is critical that business owners determine whether the workers (payees) providing services are their employees or independent contractors. Though there is no magic set number of factors that makes the worker an employee or an independent contractor, willful misclassification of employees as independent contractors is a serious issue, and could cost business owners money and liability.


Some factors that provide evidence of the degree of control and independence fall into three categories:


  1. Behavioral: Does the business control or have the right to control what and how the worker does his or her job, such as who provides tools, supplies?

  2. Financial: Are the financial aspects of the worker’s job controlled by the payer, such as how worker is paid, whether expenses are reimbursed?

  3. Relationship: Are there written contracts or employee type benefits such as pension plan, insurance, vacation pay? 

If business owners misclassify employees as independent contractors and they have no reasonable basis for doing so, they may be held liable for penalties and employment taxes for those workers.

A. Business owners or employers must be careful in classifying their workers as independent contractors because they must comply with both Federal and new California AB-5 law that was passed in September 2019. The penalties are huge. If the business is located in California, even though the workers are classified as independent contractors by Federal law, California AB-5 may not accept it.


B. California AB-5 employment laws are very strict and penalize or even sue any employers or business owners who willfully violate California laws. Even though the employers or business owners have already had a contract or agreement with the workers as independent contractors, if all the requirements of AB-5 are not met, the workers are considered employees. 

C. As employers or business owners, you should discuss with your employment lawyers or tax advisors to ensure what you have done or will plan to do in hiring workers may not cause you any potential issues. Contact us at (949) 387-4321 if you need our consultations or advisory.

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