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Episode 8: AB5 - How California Events Have Changed
So what is AB5? We're going to look at what's changed in California that now limits your ability to classify workers as independent contractors, rather than employees. This is about equipping you with the information you need, to continue doing business in the state of California.
[00:00:00] Welcome back to another episode of corralling the chaos. Today, we are gonna talk about the lovely, yet complicated states of California. We're going to unpack AB5 and answer things like what is AB5? Who does it apply to? What are the misconceptions about it and how in the world am I gonna continue to do business in California and the cost?
[00:00:26] So there's a lot to unpack there. So many companies have pulled out of California. They're afraid to do work there. Many of you are seeing that your clients are putting in contracts obligating you to send W2 employees just because of the liability and the exposure, which we're also gonna talk about the implications of non-compliance there.
[00:00:49] So today's really about just equipping you with the information you need to continue to do business in the state of California. So what is AB5? [00:01:00] It is the assembly bill that was passed in September of 2019. And it is a California law that limits the use of classifying workers as independent contractors, rather than employees.
[00:01:14] So of course, they are trying to recoup revenue because when you 1099 people, obviously the states miss out on revenue. So the goal there is also to protect your crew and the employees, because as an employee, they're entitled to greater labor protection, such as minimum wage, sick leave, unemployment workers' comp, all those things that typically would not apply to your independent contractors.
[00:01:44] So concerns over employ misclassification, especially in the gig economy is really what drove support for the bill. So what is it? AB5 makes the ABC test for determining employment, [00:02:00] a standard in the state of California now. So the three part test instructs that a worker can only be considered a 1099 contractor
[00:02:09] if they meet all three of these circumstances that we're gonna talk about. The first one is they need to be free from the control and direction of the company they're working for. So as you know, in our industry and events, you tell your crew where to go, what to do, you're paying for travel, often you're providing a script and cues and you also give 'em a schedule to follow.
[00:02:33] So unfortunately, those people are not free from your control and direction. The second requirement is this is in addition to not, or so they must be performing work that is outside the course of your company's usual business. So an example of that is hiring a graphic designer. To do your company logo, right?
[00:02:58] So it doesn't [00:03:00] pass. Since you are hiring crew to do production work for you, a production company, or if you're an event staffing company, if you're hiring event staff to work for your company, neither of those scenarios are outside the course of your company's usual business. And then the third one is they must have their own independently established business trade or occupation.
[00:03:28] So again, if you can say all three of those are true, then you are in the clear to make your people a 1099 versus W2. So there's a lot of misconceptions that exist out there. And so the one that we often hear is, "if my crew has an LLC, I don't have to W2 them." And unfortunately, having their own LLC set up alone does not qualify them to be a contractor just because they want to be a [00:04:00] contractor.
You want them to be a contractor and the contractor says they're a contractor. That doesn't mean they are actually a contractor. The AB5 is what determines their classification, not what you or your crew wants them to be. It's unfortunate, but that's the truth. The next misconception is I don't have any liability.
[00:04:22] If I ask my crew to provide their own worker's comp policy. also not true, just because they carry their own workers' comp doesn't mean you are not exposed and not liable for misclassification. It just means you have an extra layer of coverage for workers' comp. At the end of the day, if they are injured on the job, they're going to go after you [00:04:46] and they're going to go after your client.
The third misconception is because I use labor agencies. I don't need to worry about AB5. This is a big one because in reality you do, [00:05:00] because if you are sending people, you can't play the shell game. If you are having people at your client's job site that you are directing and controlling, just because you give that to somebody else, and you source that work through a labor agency.
[00:05:16] It doesn't negate your liability that you have. And the last misconseption is AB5 only applies to California-based companies, and that is not true either. It applies to any work being done in the state of California and to anyone who resides in the state of California, but is doing work outside the state.
[00:05:38] So those are just some misconceptions that we wanted to clear up. When we talk about what's the financial impact of AB5 to event companies, there are a number of things, but there's good news at the end of this, don't worry, but there are additional cost to carrying w two employees. The first one is taxes.
[00:05:58] You now have to absorb the [00:06:00] employer portion of taxes. You also have to supply workers' compensation insurance. you have to pay them overtime. Unlike a 1099, obviously in our industry, there are some things that apply for 1099, but at the end of the day in California, overtime is after eight hours worked in a day, double time after 12 hours in a day, there's also a seventh-day consecutive work rule.
[00:06:26] So you need to comply with those things. You also have to supply sick leave, and there's also minimum wage laws that apply, but it's not as applicable for our industry because these are, are well-paid folks because of the technical talent. So let's dig into the first one. What are the taxes?
[00:06:45] So the first tax you're gonna pay as an employer is social security. That's 6.2%. You also have Medicare, which is 1.4, 5%. Those two combined is what equals your FICA, which is 7.6, 5%. [00:07:00] there's also state unemployment. So in the state of California, that could range anywhere from 3.4% for a brand new company, all the way up to 6.2% of wages.
[00:07:10] Good news is it caps you're only gonna pay state unemployment on the first $7,000 of wages for California, then there's also federal unemployment which again, not a hefty expense. It's about $42 total because it caps at $7,000. And then you have a training tax, which is 0.1% up to $7,000. So again, there's a number of taxes you're gonna take on, but it does lower the tax burden for your crew, which we're gonna talk about in a minute.
[00:07:42] Other employment expenses. Again, workers'. Over time, the way sick leave works in the state of California, you have to provide one hour of sick leave for every 30 hours worked. So there is a cap on that and that the only the amount of sick [00:08:00] time that you would have to offer it caps at 48 hours per year or six days of sick time.
[00:08:06] There's also minimum wage laws. Again, not as applicable. Other compliance obligations are you have to verify, I-9 you have wage rules, there's EEO FLSA, which is the Fair Labor Standards Act ADA, American with Disabilities and then ACA which is the Affordable Care Act. So for medical insurance, so let's talk about how this affects the talent in our industry financially.
[00:08:31] So many people think if I become a W2, I'm gonna make less. And I wanna talk about that, because that is simply not true. So let's do a scenario where a tech works a three-day gig. So three 10 hour days making $40 an hour in the state of California, their income as an independent contractor is 30 hours, times 40, which is $1,200.
[00:08:58] Right. The problem [00:09:00] is they then have to pay double the taxes and as an independent contractor, cuz the government's gonna get their money one way or the other. So as a crew member, as a tech, they're going to pay the employer and employee taxes.
[00:09:13] Instead of paying the 7.65 in FICA that we talked about that independent contractor, because they're the employer and employee, they double that. So their tax burden on that $1,200 is not 7.65... it's 15.3%. If they're gonna go get their own workers comp, there's no volume discounts there. They're gonna pay roughly 5%.
[00:09:37] So the total cost for Individual in taxes and workers' comps about $245. That means it's gonna net them about 955. They can also write off expenses and they can submit invoices for their payment. So again, net wages on $1,200 is about $955 that they're gonna take home. That doesn't include income tax.
[00:09:59] Okay. [00:10:00] Now, if they're a W2 employee, they are gonna get six hours of overtime, right? Because we set overtime after eight in a day so they're gonna get paid six hours of overtime at $60 an hour, 24 hours of regular pay. So their total wages as a W2 is $1,320. Now, remember they're only gonna pay half the taxes, right?
[00:10:24] Because you, the company are gonna pay the other half. So taxes for all you crew members out there, your tax burden gets cut in half to only 7.65. You no longer cover your own worker's comp either. So your total cost and that is $100. So that means your net wages is $1,220. So that's $260 more.
[00:10:47] That you are going to take home by being a W2. Now all the companies out there, you're probably saying, well, gosh, that means it's gonna cost me a whole lot more. All is not lost. We're gonna talk about here, [00:11:00] what you have to lose by not doing that. So how is this gonna impact your company? So again, same scenario, $1,200 is what you'd pay as an independent contractor total wages.
If they're an employee, it goes up to 13. But your taxes again, you're only gonna pay half the taxes too. Right? So now you and the tech and the tech you and the company, you're splitting that tax burden. So as a result of that, the amount that companies will have to pay more now carries an extra cost of $340 on the same wages.
[00:11:37] So, what are your options to absorb this extra cost? Couple things you can increase prices to customers by educating them on AB5, which I promise you, your clients will appreciate knowing without a doubt, a hundred percent of the people you're sending are W2, because it creates loyalty. it creates there's safety [00:12:00] initiatives, right.
[00:12:00] You're going to, when people feel a part of your company, they're going to take the extra steps. And also, you know, they're covered for workers comp, right? Because a hundred percent of them are W2 you're no longer chasing around making sure people are keeping workers comp because at the end of the day, if a tech says, yeah, I've got my own worker's comp and they sign something.
[00:12:19] If they're hurt on the job, you absolutely are reliable for that. And so there's no more of that kind of looking over your shoulder. So that's one option. The other is renegotiate your rates with crew. And this is what this does not mean. It does not mean you pay them less or they make less learn the numbers and how they affect everybody.
[00:12:41] You're splitting out your tax burden. So again, it doesn't mean the tax need to make less. It just means you're contributing less for taxes, cuz it's a split bill. Also be diligent about shopping your worker's compensation. And lasso part of the things we do is help companies understand their true burden to [00:13:00] employ people.
[00:13:00] And so if part of that is we collect their workers' compensation to build their total cost. And the majority of the time we find that companies are not correctly coded. So a lot of them are, are coded under furniture building. Right? That's part of the challenge we have as an industry. There's no SIC or NAICS code.
[00:13:17] There's no SIC codes. There's no, workers'. Event production code, but there are certain codes out there that are truly applicable. One. I'll give you a hint, 9, 9 54. If you don't see that on your worker's comp declaration page, you're probably coded incorrectly depending on your state. Another option you have to absorb the cost is higher a company to help you which is called employer of record.
[00:13:41] models out there, which means, Hey, I'm gonna decide who I hire, who I fire. I'm gonna direct them, what their daily activities are, but I'm gonna hire a company to absorb that liability. It's called an employer of record. There's also, what's called a P E O, which is a professional employer organization, [00:14:00] similar to an employer of record, but the services are more comprehensive that you can tap into.
[00:14:06] And then there's certainly payroll. So. The most important thing you can do though, is educate yourselves. Educate your customers and educate your techs.
[00:14:16] So what steps can you take to address AB5? The first thing is you cannot ignore it happened just last month. The US Supreme Court turned down an appeal that the trucker's association made to hear their case. So what that says is, that the train has left the station.
[00:14:36] Misclassification is a thing and it is here to stay. Not only that AB5 that's happening in California, it's going to begin moving to other states. Other states have their own misclassification rules, right? Because it's revenue that these states are missing out on when companies don't w two. So you cannot.
[00:14:57] second thing is get legal counsel [00:15:00] third, assess your risk. Understand what your exposure is. If you have far more, 1099's than W2, it's a red flag and you should assess that. Also automate and leverage technology that gives you good information to make good decisions, and that makes it easier to convert your workforce.
[00:15:19] So put a process in place to simplify reclassification. It is not a difficult thing to do. Companies do it. All day, every day in our industry we talk to customers who say, Hey, we 1099 now, which you can absolutely do with us, but we want to move towards a more compliant process. Will you help us reclassify?
[00:15:40] It's not difficult. It's not even overly expensive. You just have to commit to doing it. And the last step you can take is again, evaluate employer record PEO and other HR models that can. So what happens if you don't comply with AB5? So a lot of this is yet to be seen, but the [00:16:00] current iteration of AB5 allows for the state of California to go back and collect, missed taxes prior to the passing of AB5.
[00:16:09] So here's what some of those fines are. There's fines per person. That's been misclassified there's penalty. They can go back seven years and collect back, pay and taxes for those that you didn't pay. There's also a civil penalty up to $25,000 per violation of employers that willfully misclassify. So it is obviously a very, very hot topic for our industry right now.
[00:16:38] So just to recap, what did we learn? First and foremost, this is possible. AB5 is a real thing, and it is possible to become compliant in a cost-effective manner. Many companies in our industry, actually, most companies in our industry have successfully reclassified their workforce and are still thriving [00:17:00] companies.
[00:17:01] We did a survey a couple years ago, and of those that we surveyed, 82% said they solely W2 their workforce. The other thing is ask for input from your peers. Don't be afraid that you're gonna have mutiny on your hands with your techs saying I'm not gonna be a W2. The reality is most of your techs are probably already a W2 for another company that they freelance for.
[00:17:26] So you can still be a freelancer, still have complete control over your schedule, but also be issued at W2. There's also great benefits in it for the techs. They get access to unemployment benefits. Over time wages. They don't have to chase their invoices and wait on payment terms of 60 days. So there's a lot of advantages for them.
[00:17:47] So do your homework, know your cost over, communicate with your techs, your customers, and your vendors, put systems in place to help you manage the process and control your cost. And most of [00:18:00] all, AB5 is not going away, so would love to hear your feedback and comments and input.
You can always reach out to firstname.lastname@example.org
Thanks so much for joining us today.