Impact of California AB5 on Construction Companies

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The end of the year is typically the time when California construction business owners’ step back and review the company’s performance over the last twelve months. Key areas analyzed include sales goals, operational efficiencies, and changes to costs (i.e., materials, supplies, and labor) are analyzed for improvement opportunities. It’s also a time when construction companies strategize for the coming year laying out staffing needs, new sales goals, and budget planning. Finally, the focus turns to tax planning to ensure the company is not missing any opportunities. This year companies have an additional issue to review, California AB5. Effective on January 1, 2020, the state has changed the test used to determine if a worker is an independent contractor or employee. This means companies will need to review each contractor to ensure they meet the new California standard. To help clients, prospects, and others, JLK Rosenberger has provided a summary of key points below.

The ABC Test

Under the new law, companies will need to use the ABC Test to determine if a worker is an employee or contractor. To be considered an independent contractor, a worker must meet all three criteria of the test. These include:

  1. The worker is permitted to complete their work free from the hiring company’s control or direction, both in the contract and in fact.
  2. The worker performs work that is outside the usual course of the hiring company’s business.
  3. The worker performs this particular work in an established trade or business they run themselves.

For contractors, it’s important to note #2 because it makes it quite difficult to engage a worker who has experience in a specific area – electrical, plumbing or other construction skills – and not classify them as an employee.

The new law has some notable exceptions. It allows transportation companies to continue to hire independently contracted drivers. This is good news for industry companies that have these workers built into their business model. It also permits business-to-business relationships to qualify for independent contractor status.

What’s the Impact?

Beyond changes in policies and practices, when a worker classification is changed from independent contractor to employee, the company will need to pay additional taxes and benefits. This often includes payroll taxes, unemployment insurance, workers’ compensation coverage, and premiums, PTO, and overtime pay. In other words, the change from an independent contractor to an employee can be expensive and will require insurance policies to be reviewed.

Contact Us

The new changes will require California construction companies to carefully review each independent contractor’s status to ensure compliance with the new regulations. This will allow management to make any needed changes as soon as possible. If you have questions about AB-5 or need assistance with a construction tax or accounting issue, JLK Rosenberger can help. For additional information, call us at 949-860-9890 or click here to contact us. We look forward to speaking with you soon.