These days, independent contractors are a popular hiring approach for all kinds of businesses. Companies like Uber rely largely on staff with no benefits and little rights within the company. With the recent passage of Californiaâs AB 5 law, the way an independent contractor works in the state is about to change. Hereâs what you can expect from the new law, and a few ways it might affect your contracting business.
What Is the Difference Between an Employee and an Independent Contractor?
Independent contractors have been a prominent feature of the construction industry for decades, so it may be difficult for people in the industry to understand why California passed this new law. After all, an independent contractor has a lot of flexibility that a regular employee of a business does not. If you want to set your own hours and select the projects you think will be the best fit for you, being independent helps you achieve that. Itâs why a lot of people start a contracting business in the first place. However, being your own boss also means that you lose a lot of the protections that state and federal laws guarantee employees. These include:
- minimum wages
- tax withholding
- access to health insurance
- retirement planning
When youâre not someoneâs employee, itâs on you to provide these things for yourself. You may even pay higher taxes as a result.
What Triggered AB 5âs Passage?
Nationwide, companies have been switching from a workforce primarily made of employees to one mostly made up of contractors. For people who want the benefits of running their own businesses and working for a variety of clients or organizations, this can be a benefit. However, a number of businesses have recently been called out for abusing this system as a way to pay lower wages while still confining their workers to employee-like conditions. Businesses that rely on a large workforce to provide remote services, like Uber, are the primary targets of this new legislation.
What Is the AB 5 Law?
The AB 5 law was passed in September 2019 and will take effect in California January 1st, 2020. Although the law only carries weight in the state of California, it may affect companies located in other places that hire contractors based in California. Basically, the law requires that businesses that use independent contractors be able to prove that the people they hire in this capacity function as independent contractors. In order to classify as an independent contractor, people must:
- be able to select their own work and generally control how it is done
- perform work other than that which the business generally does
- have an independent line of work or their own business
This means that someone who runs a business as an independent contractor wouldnât be classified as an employee under this law. However, someone who works under the dictates of the business owner and performs tasks related to the core of the business may be ruled an employee under AB 5.
What Does AB 5 Mean for Construction Businesses?
When you first start out as an independent contractor, it makes sense to establish yourself as a separate business. This will provide an easy form of proof against any claims when you work as a subcontractor under someone else. Once you get to the point of hiring employees, make sure that anyone you bring on as an independent contractor can meet these requirements. Companies that treat regular workers as contractors when they really should be employees can get hit with a higher tax liability and penalties.
Being an independent contractor is part of what many people love about the construction industry. You get to control your own destiny. Just make sure that you know what the local laws are, so you can do it right. To get started on the path to building your future, visit CSLS today!
