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Multi-level marketing giant Amway was sued in a proposed class action earlier this year for misclassifying its Independent Business Owners (IBOs) as independent contractors instead of employees. The challenge to Amway’s long standing business practices comes as the impact of AB5, and how it redefines who is an employee, ripples throughout the California economy.
AB5 went into effect January 2020, and requires employers to treat contract workers like employees, unless they meet certain requirements.
The bill effectively expands the definition of the word employee: “…a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that the person is free from the control and direction of the hiring entity in connection with the performance of the work, the person performs work that is outside the usual course of the hiring entity’s business, and the person is customarily engaged in an independently established trade, occupation, or business.”
Gig Economy giants Uber and Lyft have also felt the impact of the changes in the definition of employee brought about by AB5. They were sued earlier this month in a lawsuit brought forth by attorneys from Los Angeles, San Diego and San Francisco which “accuses Uber and Lyft of depriving workers of benefits, such as a minimum wage, health care, overtime pay, reimbursement for business-related expenses, access to disability insurance and paid sick leave” according to a post by Forbes.
Earlier this year, Instacart faced legal action from the city of San Diego for classifying thousands of its grocery packaging and delivery workers as independent contractors. The trucking industry too is facing challenges in complying with AB5, as there has been a lack of guidance for complying with AB5, specifically for trucking companies that carry out business with owner-operator truck drivers.
While the jury is out on how all of these cases will resolve, it is clear that there is going to be a sea change in California regarding how many businesses classify their workers. One of the biggest impacts for all these companies, and California employers in general, will be offering benefits to these newly classified employees, potentially including the requirements of providing healthcare coverage under the ACA.
While the IRS uses a different test than California for determining independent contractor status. It is unclear how the IRS will be able to differentiate between the state and federal standards with respect to ACA reporting. For workers that are reclassified as employees under AB5, prudent employers should account for tracking hours of services, wages, and other employee level details for ACA compliance and reporting purposes, as required by the Employer Shared Responsibility Provisions, also known as the Employer Mandate.
As a reminder to employers in conjunction with the Employer Shared Responsibility Payment (ESRP), the ACA Employer Mandate, organizations with 50 or more full-time employees and full-time equivalent employees are required to offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV) and is Affordable for the employee or be subject to Internal Revenue Code (IRC) Section 4980H penalties. The healthcare law defines full-time employees as workers who average 30 hours of work a week or 130 hours a month.
Employers will need to incorporate these newly classified employees into their ACA compliance process. Employers will also need to extend offers of health insurance coverage to more employees, and reporting requirements will grow in complexity. The volume of forms to be processed will increase, along with the costs associated with distributing 1095-C Forms to employees and submitting required ACA information to the IRS annually.
Failing to get this right can result in penalty assessments from the IRS. The agency is currently issuing ACA non-compliance penalty notices in Letter 226J for the 2017 tax year. Employers should seek out expert ACA compliance consultants to prepare for increased ACA compliance as more independent contractors become full-time employees under the ACA.
