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CA-AB5: What It Means For Your Independent Contractors

iWorkGlobal and Littler Mendelson recently held a joint webinar to help de-mystify the meaning of the passage of California Assembly Bill 5 (AB-5). Our experts William Weissman, Shareholder at Littler Mendelson and Melissa Oliva, Senior Vice President of Client Solutions at iWorkGlobal reviewed the history of independent contractor (IC) tests from the Common Law Test to the passage of AB-5. They also covered the steps that organizations should take today, regardless of the ambiguity in AB-5, to ensure their workforce programs are compliant.

The webinar featured a robust Q&A portion and we captured some of the answers to attendee questions below:

Can you clarify how it is determined what state laws are applied to ICs? For example, client business is located in California but the IC works remote and lives in Colorado. What state laws will apply? Do you use the test used on the state where the work is performed?

The short answer to this question is the state where the work is performed. It doesn’t matter where a company is headquartered or located, it matters where the worker is located and is performing the services. The bigger challenge is if you have an IC from Colorado who comes to California for some limited purpose. That IC could be subject to California law for that time frame. One of the potential fallouts of AB5 is that ICs from other states may be reluctant to come to California to perform services.

In addition to state agencies, you should also look at federal agencies that may potentially audit you as well. There are different requirements for federal agencies such as Department of Labor, IRS etc.

What kind of documentation should I keep on my ICs?

This isn’t a comprehensive list but an organization should ask or ensure:

  • What type of business structure (Sole Proprietor, LLC, incorporation, etc)?
  • Is the business active within the state?
  • Does the business have a license?
  • Are there insurances in place?
  • Presence of an organization/IC contract
  • Proof that you’re not their only client
  • Provision of marketing materials (e.g. website)
  • Business Expenses (Rent, equipment, etc)

What is your thought as to whether this ABC test will apply only to individuals/sole proprietors and single-principal-only entities, or whether it will also apply to businesses with multiple W2 employees who you want to engage as independent contractors?

We find sometimes that individuals form a business but don’t maintain it (e.g. separate bank account, DBA form filing etc.). When the formalities of the business aren’t respected it’s easy to disregard it. It’s really important to verify that there is an entity established and that it’s valid.

At iWorkGlobal, when we do an independent contractor compliance risk assessment, we note that just because an IC is an LLC or has incorporated themselves, it does not mitigate the risk because there are still control factors. It’s also important to ensure that vendors that report to have W2 employees are not actually subcontracting the work – make sure vendor ‘employees’ are not independent contractors and are in fact employees of the vendor.

You mentioned continual oversight of the program. How often should an employer ask ICs for updated documents and verification of business status?  

At iWorkGlobal, we recommend for individuals/sole proprietors that you review their documents on a per project basis. This ensures you’re compliant and the current manager is still compliant with control factors. Re-evaluate either per project or on an annual basis, whichever comes first.

Is an IC required to provide services to other companies or can they be only providing services to one company?

It depends on their business history. If they can show they have different customers and are turning down business to work on this project with your company, the IC evaluation is valid. Continue to take a close look at financial dependence. You may be at risk if the IC is continually working just with you or using the majority of their time with you.

Can we ask ICs to sign arbitration agreements with class action waivers?

Yes, you can ask ICs to sign arbitration agreements with class action waivers. Consult with your legal counsel before entering into any legal agreements.

Interested in assessing your independent contractor workforce and its compliance with AB-5? iWorkGlobal’s independent contractor compliance services can take some of the burden off of your HR team.

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