The California state legislature has passed various clean-up bills and exemptions to its disastrous AB5 bill. So how does AB5 actually affect independent contractors and companies in California? 

Everyone loves the party game “Two Truths and a Lie.” Can you identify which of the three following statements about AB5 is a lie?

A. Starting your own business will not exempt you from AB5. 
B. California will only enforce AB5 on big companies. 
C. AB5 did not result in companies hiring all their independent contractors as employees. 

Let’s take these statements one at a time: 

A. TRUTH. Having an LLC or S-Corp does not exempt anyone from AB5. A hiring entity is also not protected from fines and penalties for contracting with an independent contractor (IC) deemed to have been misclassified, even if the IC has an LLC or S-Corp as well.

B. LIE. Worker classification audits, conducted by California’s Employment Development Department (EDD), frequently take place on solo businesses and mom-and-pop operations regardless of how few ICs a business contracts with, how often, whether there is a written contract, or if the contracting relationship is mutually agreeable. 

The onus is on the hiring entity to prove that its contracting relationships comply with AB5. Failure to prove compliance can be costly. Penalties and fines for misclassification include $10,000 workers’ comp fines, back taxes, back wages, overtime, breaks, back benefits, expense reimbursements, and more. Civil penalties range from $5,000 to $25,000 per violation for willful misclassification. 

C. TRUTH. AB5 does not force a business to actually hire their ICs as W-2 employees, nor does it require that the employee be full-time, thereby receiving benefits. As history shows, businesses will terminate their IC contracts rather than hire all ICs full-time or part-time. It’s irrelevant how many hours the IC is working either. A one-off who only works for a day or an hour could be considered misclassified and would have to be put on the payroll if the working relationship were to continue.

A California-based business can contract with out-of-state independent contractors so long as the work is not being done in California. An out-of-state business must adhere to AB5 when contracting with ICs based in California. Because of this, many companies that used to hire contractors in California have stopped hiring in California altogether.

Bottom Line: 

AB5 has destroyed the livelihoods of thousands of Californians and has been costly for businesses. Freedom to choose when and how to work should not be taken away by federal or state lawmakers.