small business risks with AB5
Classifying workers as independent contractors is about to get more difficult in California. The state has recently passed a new law, Assembly Bill 5, which establishes new rules for gig work. The law goes into effect on January 1, 2020, and it could have major implications for any business that uses contract workers. If you own a business and hire any independent contractors, you need to speak to a business lawyer immediately.
Only engage in business-to-business payments.
This is the number-one priority. Only engage with independent contractors who have gone through the process of creating their own company. That way, you’re only ever making payments to a business, not an individual. I once knew of a firm that employed a full-time lawyer whose only job was to help independent contractors set up their own businesses. While it was expensive, the cost was worth it. Even without an attorney, it’s extremely easy for individuals to set up an LLC, and can get even easier depending on what state you’re doing business in.
Ensure you’re not the sole provider of income.
To be truly independent, a contractor needs to be working on more than one project with more than one company. If you’re providing all their income, even if it’s a big job and it seems reasonable, you could get pegged as an employer. Even if you’ve got contractors on a major project, they need to be working for multiple companies to be truly considered independent.
Demand proof.
To ensure your contract will hold up in court, you’ll need to make sure your contractor is doing their part. It’s not enough for them to tell you they secured their own insurance. You need to see the proof. Also, get your hands on some kind of proof that your contractors are paying their taxes properly, because if the IRS comes knocking on their door demanding loads of cash, it’s all too easy to point the finger back at you and claim you should have been paying employment taxes and withholding all along.