Assembly Bill 5 (AB 5) was passed by the California Legislature last year (2019) and officially took effect in January.

This sweeping new legislation, which impacts the 2020 fiscal year and beyond, seeks to address what the California State Government sees as a gaping hole in the so-called “gig economy.” Outfits like Uber, Lyft, and the myriad food delivery services have all refused to grant drivers official “employee” status. Instead, insisting their legions of self-scheduling drivers are “independent contractors.”

There’s been a mountain of legal wrangling thus far, largely on the part of Uber + Lyft, who’ve spent tens of millions fighting the legislation in court. Most of which has failed thus far. And a ruling calling for an immediate application of the new legislation two weeks back had Lyft on the verve of ceasing all California operations. A subsequent ruling issued last week, however, allows both ride-share firms to continue under their current operational models. At least for the time being.

The overarching point being, AB 5 has stirred up a hornet’s nest of controversy. With the potential to have a huge impact on tax consequences for countless Californians.

Here’s a closer look at the “how and why” AB 5 could be a huge problem if you’re an independent contractor or small business owner.

Independent Contractor Status Affords Employers HUGE Savings

Classifying workers as independent contractors enable employers to avoid paying employment taxes (FICO, Social Security + Unemployment Insurance), negates overtime pay-scale regulations, and eliminates employee benefit requirements (health insurance, paid vacation + paid sick leave).

The State Seeks to Avoid Paying The Lion’s Share of Unemployment Benefits

From the State’s perspective, this refusal to extend benefits has left a huge number of workers vulnerable to financial crises should they be unable to work. Moreover, the State doesn’t look kindly at the prospect of taking on the financial burden of unemployed “gig workers” sans the employer subsidies that accompany workers officially defined as employees.

Where do “Traditional” Independent Contractors + Freelancers Fit into This New Legislation?

What AB 5 fails to take into account, however, is the “gig economy” that has already long existed in Southern California. Countless actors, writers, “above and below the line” production staff, musicians*, and live performers, along with many others working in the entertainment biz have always operated as “independent contractors.”

The transitional nature of short-run television and movie production, as well as live events and other one-off or limited run live performances, necessitates these staffers being treated as independent contractors, rather than full-time employees.

And AB 5’s monolithic shift in employment status regulation doesn’t end at gig economy or entertainment industry workers. Trades ranging from landscapers to janitors to maids and housekeepers, and even yoga instructors, music teachers, and academic tutors, among possibly many others that have traditionally operated as independent contractors, could all potentially be impacted.

*Musicians have been granted a reprieve from AB 5’s onerous requirements — A coalition of music trade groups negotiated an amendment to AB 5’s original legislation that grants exemptions for singers, composers, songwriters, recording artists and other music workers impacted by the bill. This move obviously takes a huge burden off the shoulder of those in the music trade. And perhaps it points the way toward similar exemptions for other trade groups currently operating as independent contractors?

How do You Determine if You Qualify as an Independent Contractor Under AB 5?

What’s most frustrating about AB 5 is the uncertainty. No one seems to be 100% clear who does and does not qualify as a legitimate “independent contractor” as defined by the new legislation.

At this point, the only clear definition is provided by the so-call “ABC Test.” This “test” includes a set of three standards by which workers and employers should supposedly be able to judge whether they qualify as an independent contractor or a traditional employee:

A. The worker is free from the employer’s control or direction in performing their work.

This indicates you don’t have an immediate supervisor or anyone responsible for directly overseeing your work. Which leaves you free to handle tasks at your own pace and complete your work based on mutually agreed terms.

B. The work takes place outside the usual course of the business of the company and off the site of the business.

This indicates that you do not have set workdays or work hours, and you are not required to perform your work at an employer’s offices.

C. Customarily, the worker is engaged in an independent trade, occupation, profession, or business.

This indicates you can do the job in question by yourself and under your own steam.

For example, a screenwriter writes a script by themselves, with no direct intervention. And similarly, a graphic designer creates layouts on their own, without immediate oversight.

Conversely, an assembly line worker needs the manufacturing plant infrastructure, construction materials, and co-worker support to complete assemblies. And a fry cook at a fast food restaurant needs the kitchen equipment, foodstuffs, and support staff to prepare and deliver food.

Regardless of the ABC Test, Many Questions About Independent Contractor Status Linger…

As you can see, even applying the ABC Test leaves many potential questions open for “gig” and freelance workers. Questions that employers and employees, as well as labor lawyers, and even some accountants are struggling to answer.

Thus, if you’re a gig worker or freelancer, or a business owner that hires such workers, it’s imperative that you consult a qualified tax professional to unravel your current tax-filing status.

A Biden Win Could Take AB 5 Nationwide

I’ll be talking more about Presidential candidate Joe Biden in the near future, as Biden’s proposed tax plan is likely to have a significant financial impact on countless Americans.

And that impact includes Biden’s seeming intention to enact changes to the federal tax code very similar to California’s AB 5. Such a shift would obviously bring the same angst, consternation, and potential financial peril independent contractors + small businesses in California face to similar operators in the other 49 states. Not to mention increasing the tax burden many Californians already face.

Stay tuned for more on this and the rest of Biden’s tax plan in the coming months

Have Questions About How California’s AB 5 Will Impact Your Tax-Filing Status?