California leads the way again, as it pertains to 1099 workers. That’s right! California legislators recently approved a bill changing the way employers classify independent contractors.
Now, people who are in the payroll industry are familiar with states that have unique laws. Furthermore, California is a trailblazer on many fronts. Therefore, it is no surprise that the Golden State is making a move concerning 1099 workers.
However, this bill didn’t pass without debate. Here is what you need to know about the proposed law, and how it will affect your 1099 workers.
California, Not Cookie-Cutter
California has a reputation for being anything but cookie-cutter. So, I don’t feel wrong to say that when I think of California, I picture “edgy” and “unique.” Well, that’s my own opinion, therefore it can’t necessarily be wrong.
However, I can back up my opinion about California with evidence. Namely, there are quantifiable ways in which California is a leader, in certain regards. So, before we dive into this proposed 1099 law, let’s identify some other labor laws unique to California.
For starters, California is among the first states to push the bounds of the minimum wage. In fact, they mandated a gradual minimum wage increase to $15 per hour. Furthermore, employees in at least 20 California cities have it pretty good. Specifically, they earned a higher minimum wage than the state minimum, as of January 1, 2018.
Also, California also has a unique setup for overtime pay. For example, most states require employers to pay overtime after 40 hours worked in a week. However, California requires overtime pay (time-and-a-half) after 8 hours worked in a day. Then, they earn double-time pay after 12 hours worked in a day.
In addition, workers must have a bi-weekly pay period, at minimum. This means they must receive a paycheck within two weeks of performing work.
Finally, there are hefty penalties for employers who do not comply with labor laws.
As you can see, California is not afraid to make bold moves, concerning labor. Furthermore, they are mindful of protecting employee rights. So, if you are going to set the trend in anything, why not for a good cause?
Details of the Proposed 1099 Law
Now, let’s get down to the nitty-gritty of this proposed law.
First of all, let’s give this bill a name. In the media, you will hear the bill referred to as Assembly Bill 5. In a nutshell, the law requires employers to take a hard look at how they classify employees. If companies misclassify employees, they must amend their classification. Consequently, those who do not make the amendments will face a penalty.
So, why did the California government deem it necessary to propose the bill in the first place? Well, it always comes down to two things concerning labor laws.
On the one hand, there’s money. Of course, the government must make money somehow. So, classifying employees as W-2 workers ensures payment of various employment taxes. Now, think about if every company claimed all their employees as 1099s. In that case, do you think people would properly assess and pay taxes? It’s doubtful.
On the other hand, there are labor protections. Although the driving force behind labor is money, checks and balances still need to be in place. Namely, checks and balances related to protecting employees. Prior to the labor laws as we currently know them, it was easy for an employer to exploit and overwork employees. Now, however, the government will shut down employers if they don’t comply with labor laws.
Still, it should be noted that this proposed law doesn’t mean that no one can be an independent contractor. Rather, the purpose of the law is to improve clarity, encouraging proper classification.
Employee vs. Independent Contractor
In essence, the proposed law requires employers to properly classify employees. At present, the classification process involves three simple statements related to companies and their workers. Now, the good news is that the legislators reduced the number of steps from 11 to three! So, that should make the classification process simpler. These three statements are essentially the determining factor. In other words, they identify an employee vs. an independent contractor.
The following items are necessary to determine 1099 classification:
- 1) You don’t direct or control your independent contractors.
- 2) You do not depend on your independent contractor’s work as your main source of revenue.
- 3) Your independent contractors perform work in an independently established trade.
Therefore, if any of these statements is untrue, then the worker is likely an employee, and not a 1099. Oops! So, that means you probably made in error in classification.
The Proposed Law and Your Employees
Now, as we learn the details of the proposed law, we are seeing that it affects certain 1099 giants. Most notably, employers such as Uber, Lyft, and DoorDash. These companies make their mark hiring droves of contract workers to create revenue. Furthermore, they brand themselves as a way for people to work when it’s most convenient for the worker. Particularly, they work without the commitment of being a W-2 employee. Furthermore, they claim that life is better for people who do not have to work an eight-to-five job.
However, the purpose of the eight-to-five wasn’t intended to be a burden or a drag. Notably, the purpose of eight-to-five was to protect employees. In other words, once your eight hours are up, then you don’t owe the company anything else. (Well, except they expect you to show up again the next day!) Additionally, if you are a regular fulltime employee, you are eligible for benefits. These benefits include vacation time off, sick days paid, and a 401k, among other things. Now, does that sound like a burden? Not to me!
Conversely, if you are a 1099, you won’t get paid unless you are working. Sure, you can have all the vacation time you want as a an independent contractor. However, you won’t get a paycheck. If you have health insurance, you will pay for it out of your pocket. Speaking of this, do you know how expensive private health insurance is? Let me tell you, it’s expensive. Also, you can forget company contributions or match to your 401k. Do you know why? Well, it’s because 1099 workers are not considered employees, and that is a list of employee benefits. So, welcome to the freedom of contract work.
Plus and Minus of the Proposed 1099 Law
Upon hearing this, you probably understand why people debate the 1099 issue. On the one hand, there is flexibility. The 1099 classification allows workers to have side gigs to supplement regular income. Additionally, sometimes the side gig becomes a fulltime job. This allows employees to work when and how they want. On the other hand, some people recognize that certain parties benefit more from this type of work. Namely, the company contracting out the work. This is where the debate lies. Keep in mind that we’re not only talking about taxes here. Most importantly, we are also talking about employee rights.
Coming Down the Pike: From California to Your Independent Contractors
Now, perhaps you don’t employ workers in California. So, you might be wondering how this proposed law will affect your company and your workers. Ultimately, time will tell. However, some say California’s actions predict other states’ actions. In that case, we can anticipate some other states to follow suit.
So, what is the takeaway here? For starters, the government will be taking a closer look at independent contractors. Also, they will be looking at companies employing the 1099s, and how they are classifying them.
In summary, it is wise to properly classify employees. Be diligent about having a clear divide between your employees and your 1099 workers. If you do that, then you should be able to sleep at night. You will know that you are being fair to your workers, and complying with labor laws.
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This is not meant to provide legal counsel or advice. Every situation is different. Please contact an HR professional or employment attorney before taking any action.
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