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The passage and implementation of Assembly Bill 5 (“AB5”) in California has become a reckoning for employers who engage with large numbers of independent contractors and has potentially put thousands of employers out of compliance with California employment law. The most publicized of these employers have been the leaders of the so-called Gig Economy.
Instacart became the most recent victim when a San Diego court enjoined Maplebear (Instacart’s official corporate name) from classifying its thousands of grocery packaging and delivery workers as independent contractors. While the injunction only covers San Diego, the writing appears to be on the wall for Gig Economy. Uber and Postmates were denied their request for an injunction against enforcement of AB5 in January 2020.
While the effect on the Gig Economy is clear, to truly understand the potential impact of AB5 to most employers they will need to look beyond the headlines and at the law itself. The law codifies the California Supreme Court decision in Dynamex Operations West, Inc v. Superior Court of Los Angeles that found that a worker was presumed to be an employee unless the employer can pass a three-part test, commonly known as the “ABC” test, proving the worker is an independent contractor. The three prongs of the test are:
(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
(B) The person performs work that is outside the usual course of the hiring entity’s business.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
AB5 then went further and expanded the use of the ABC test beyond the wage orders that were the subject of the original Dynamex decision to include the Unemployment Insurance and Labor Code. AB5 then carves out numerous industries and professions from its scope, creating a veritable Swiss cheese of compliance obligations for employers often depending on the specific type of worker they employ.
Employers need to be careful as they work through their numerous compliance obligations to ensure they are classifying their workers correctly and complying with both federal and state law while they do it.
One area generating significant confusion amongst California employers is the overlay of AB5 with the federal Affordable Care Act (“ACA”).
As a reminder to employers in conjunction with the Employer Shared Responsibility Payment (ESRP), the ACA requires Applicable Large Employers (ALEs) (organizations with 50 or more full-time employees and full-time equivalent employees) 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.
Not surprisingly, the ACA does not utilize the ABC test to determine who is an “employee.” Under IRS rules, they use “common law standard.” According to the IRS, the employer-employee relationship exists when “the person for whom services are performed has the right to control and direct the individual who performs the services.” While this standard runs parallel to the “A” element in the ABC test, it does not take into account the “B” and “C” prongs. This could lead to a scenario where a worker is considered an independent contractor under federal law (e.g., worker is free from employer’s control), but an employee under state law (e.g., worker performs work that is the same as the employer’s usual course of business).
Complying with two different legal standards will add significant stress to an employer’s compliance operations and worker misclassification can have a profound impact onACA compliance .If an employer mistakenly fails to offer coverage, or misstates their full-time count on their ACA reporting, it could open them up to significant ACA non-compliance penalties.
The IRS is currently issuing Letter 226J penalty notices to employers identified as having failed to comply with the ACA’s Employer Mandate for the 2017 tax year through mid-May. Following the issuance of said letters, the agency will begin to issue Letter 226J penalty notices for the 2018 tax year.
The agency also stated that there will be an increase in the number of Letter 226J penalty assessments of the 2018 tax year.
This news indicates that the agency has become much more detail-oriented in their penalty assessment process, making sure that every employer liable for a penalty receives one.
Employers struggling with divergent federal and state requirements should partner with experts in data, regulations and analytics, and software. These three elements make up the Triangle of TrustSM. Click here to learn more.
We’re committed to helping companies reduce risk, avoid penalties, and achieve 100% ACA compliance. For questions about the ACA contact us here.