What is the AB-5 legislation in California?
Independent contractor or employee? California’s strict new law addressing the classification requirements relating to engagement of independent contractors (ICs) became effective on January 1st, 2020.
Under this law the legal presumption is that any worker engaged by a business is an employee unless the company can show:
- that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
- that the worker performs work that is outside the usual course of the hiring entity’s business; and
- that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Failure to prove all three of these criteria results in the classification of the worker as an employee of the business with entitlement to all employee rights set forth under the law.
Read more from our webinar on CA-AB5 and independent contractor compliance.
What does this mean for IC regulations across the U.S.?
California is not the first state to adopt the ABC test. States such as Massachusetts and New Jersey already use the test. Similarly, states like New York and Pennsylvania have enacted new independent contractor laws directed at potential misclassification in the construction industry. Other states like Connecticut, Illinois, Maryland, Minnesota, New Mexico, Oregon and Washington have enacted various restrictive worker misclassification laws designed to address unfair labor practices in other industries.
Still, many other states do not follow strict standards like the ABC test. Federal standards have recently become less strict, reflecting a change in the political climate at the federal level.
Business uncertainty will continue to increase in this era of inconsistency. California’s new law is already facing many legal challenges in court as the recently filed action by independent truckers seeking exemption from the law shows. Many businesses in the gig economy are also seeking legal exemptions while simultaneously spending over $100 million dollars in an effort to pass new legislation to change the law.
What is the IR-35 legislation in the U.K.?
The intermediaries or off-payroll working legislation, commonly referred to as IR35 is not a new piece of legislation.
The original legislation was enacted in April 2000 with the objectives of:
- ensuring workers and employers pay the correct amount of employment taxes
- harmonizing the level of taxes paid by workers and self-employed individuals who provide similar work.
One of the main amendments to current legislation due in April 2020 is that the client (the beneficiary of the services provided by a contractor) is now the party that must decide the IR35 status – is the worker an independent contractor or employee? Currently, the contractor has the responsibility of deciding status.
Top 3 Things to Know About IR-35
- The April 2020 amendments now include the private sector. The amendments rolled out in 2017 were limited to the public sector.
- Under the proposed 2020 amendments, the client will have the obligation of issuing a Status Determination Statement to each independent contractor (in relation to each assignment), which must include:
– the worker’s employment status that was identified after carrying out an IR-35 assessment.
– the reasons that led to the conclusion of the employment status. The client must demonstrate that it has taken reasonable care to establish the IR-35 status by taking independent legal advice and assessing each individual assignment.
- If the client concludes a worker qualifies under IR35, the client will then be responsible for deducting and paying all employment taxes. However, in situations where there are additional parties involved in the contractual chain, the responsibility of dealing with all the deductions and payments will sit with the party closest to the contractor (e.g. a recruitment agency). For those identified as being outside IR35, their current engagement can carry on with no withholding applicable.
In the U.S., all businesses will have to navigate the challenges presented in properly classifying workers as independent contractors or employees in an era of inconsistency. Worker class actions continue to increase while state and federal agencies will continue to perform audits in an effort to ensure that businesses follow the regulations on independent contractor classification.
In the U.K., legislation is still in its draft form, with no clarity as to when the final legislation text will be published. All parties affected by the upcoming changes are highly encouraged to stay abreast of developments as part of their preparation and implementation processes.
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