Jacob Lee* realized he needed to make a drastic change to the way he was classifying and paying his workers. Like many fellow business owners in Los Angeles, Lee comfortably relied on a small army of independent contractors to take care of his clients and get the job done. Then, on September 18, 2019, California’s governor, Gavin Newsom, signed Assembly Bill 5 (AB 5), into law making the “A-B-C” the new standard for the classification of workers and changing the way businesses in the state were permitted to classify workers going forward. “I was surprised,” Lee remarked. “Suddenly I had to completely rethink the way my workforce was organized.”
When AB 5 went into effect, many California employers like Lee, as well as industry leaders and business advocacy groups rallied against the law and its broad categorizations. Lawsuits were filed by different groups to gain exemption from the “A-B-C” Test, with little to no success. Only a very select few categories of occupations or business are exempt from the rule, yet, qualifying for exclusion from the “A-B-C” Test simply means the employer must use an 11-factor test instead.
Not finding his industry among those exempt, Lee’s only choices were to continue operations as-is and risk being audited or move forward in transitioning a workforce of contractors into employees. While the former could mean costly penalties and back payments for each individual misclassified worker, the latter could increase costs by as much as 25%, eating into his razor-thin profit margins. Additionally, classifying his workers as employees created even more concerns for Lee. “Then I would have this huge burden of making sure I’m complying with a whole new set of regulations,” Lee explained. “And it was more than I could handle at that time.”
The lack of and difficulty in obtaining exemptions from this rule make the intended purpose very clear: Employers should reevaluate the way they classify their workers and consider converting 1099 contractors to W-2 employees to avoid costly misclassification penalties. However, the process of converting contractors to employees involves more than just filling out a new tax form. Determinations must be made, job descriptions may need to change, and new hire onboarding will need to be performed. Even if the transition is done correctly, the employer may still be flagged for an audit due to the changes, which could lead to costly fines, penalties and possibly even back taxes.
Business owners like Lee are turning to Professional Employer Organizations, or PEOs, to shoulder the burden of complex employment laws and costly insurance expenses. When Lee reached out to Emplicity for assistance in the conversion process and support in moving forward with his newly transitioned workforce, he was met with a holistic approach that begins with evaluation and includes customizable options that can be tailored to meet the needs of each individual organization. “It took a lot of the worry away, and allowed me to move forward in a way that didn’t feel like a burden on the company or on myself,” said Lee. “They made it seem so simple.”
*Name changed for privacy.
For further information on Emplicity’s Independent Contractor Conversion Services (ICCS), click here.
Since 1995, Emplicity has provided a smarter, more secure, and integrated platform of employer services to its 300 business clients and their 8,500 employees. As a Professional Employer Organization, or PEO, the California-based HR outsourcing firm simplifies the compliance, administration, and support businesses need in the areas of employee benefits, payroll, and human resources technology.
NOTICE: Emplicity provides HR advice and recommendations. Information provided by Emplicity is not intended as a substitute for employment law counsel. At no time will Emplicity have the authority or right to make decisions on behalf of its clients.