Will AB-5 Withstand Coronavirus?

As we look forward from April into the second quarter of 2020 the question on many business owner’s minds is: will the rules outlined in AB-5 stand in the face of coronavirus? At the start of 2020, business owners’ level of concern about California EDD’s newfound power to audit businesses was high.  EDD was empowered and emboldened to audit businesses whose workers were misclassified as 1099s instead of W-2’s in the wake of the “Gig Work Bill”.  Concerns around the new criteria for worker classification outlined in Assembly Bill 5 were common at the start of the year, and many business owners chose to reclassify large portions of their workforce as W-2 wage earners from their previous roles as 1099 independent contractors.

And then there was coronavirus.

With the social distancing, quarantine and shelter-in-place rules that have been put into place to try to #flattenthecurve of infections from the novel coronavirus, businesses have laid of large percentages of their workforce.  As of today, April 2nd, 2020 over 6.6 million workers have filed for unemployment, 87,900 of them in the state of California. When all of this is over and businesses reopen, can the California Employment Development Department really audit businesses using the strict independent contractor classification rules set forth in AB-5?

The post-COVID-19 world of work will look different.

One thing is certain in this time of uncertainty, the world of work will be transformed by this “new normal” we are all experiencing.  While many workers are struggling to implement home-based work regimens, others are discovering the benefits of a flexible schedule and more family time. When business resumes, there is sure to be a shift in the expectation of many employers.  With that shift and the slow restart to the economy that will accompany the recovery post-coronavirus, many businesses will choose to hire part time contractors as opposed to diving into the commitment of a full-time W-2 employee. And while workers will have a different set of criteria they desire in order to go to work in an office again, business owners will also have choices.  business owners will have to choose wisely how to spend money as they try to restart what has come to a halt during the outbreak.

Even if they want to, many business owners will not be able to employ W-2 workers.

The US economic recovery may take years after this downturn and the massive unemployment caused by the COVID-19 crisis.  If an employer can start creeping back into some semblance of their previous business, would CA EDD really leap in and audit that business? The answer is yes.  If an employer categorizes their independent contractors incorrectly, CA EDD will audit and under AB-5 they have every right and a responsibility to do so.

What can a business owner do to allow for 1099 contractors?

The most important step a business owner can take is to examine the way their business is structured.  There are exemptions to AB-5 and service models are one of those exemptions.  If a business can be restructured to fall into one of the exempted categories, then that business could legitimately hire 1099 contractors.  However, it is important to note that EDD can investigate any business.  So, if you do restructure and choose to hire 1099 contractors, be sure they are legitimate businesses in their own right.  Verify 1099 contractors using tool like clear1099.com or call the team at Milikowsky Tax Law.  We can review your corporate structure and make recommendations based on your industry and goals for the next stage of your business.

We don’t know if AB-5 will hold in the face of Coronavirus.

It is impossible to know what the next few months will hold.  As business owners we have to do what is best for our businesses and our families.  That may be a restructure to allow more flexibility in hiring.  The pandemic will not last forever and, as business gets back to normal, the last thing anyone wants it to be targeted for an audit.  If you are concerned about EDD audits, please reach out to our office.  We are working from home too and happy to take your call. (858) 450-1040