Assembly Bill 5 (AB-5)
Assembly Bill 5 (AB-5) is the new standard by which employers must classify employees. Business owners must now classify workers by using AB-5’s ABC Test.
Before AB-5 was signed into law, there were 13 criteria (the 13 Factor Borello Test) used to determine if a worker should be classified as a contractor or as an employee. The Borello test classified workers as either W-2 employees or 1099 independent contractors. This test is less straightforward than the updated AB-5 that includes clearer guidelines under its ABC test.
Even with the new AB-5 regulations, however, you can still reference the Borello test if there are exemptions, exclusions, or confusion in classifying independent contractors. Workers exempt from the ABC Test are not automatically considered independent contractors and must also meet the Borello factor’s requirements to be considered independent contractors.
EDD provides the full Borello Test worksheet with the following questions to help guide classification:
Answering “yes” to questions 1-3 would provide a strong indication that the worker is an employee. Answering “no” to questions 4-6 would indicate that a worker is not in business for themselves and would likely classify as an employee. Questions 7-13 indicate important factors to be considered.
While answering “yes” to any one of them may indicate that a worker should be classified as an employee, no single factor is enough to determine so independently.
The full worksheet provided by EDD provides further clarification on certain factors and circumstances.
EDD takes classification seriously and performs thorough audits because they directly impact payroll taxes—essentially the money the government receives. The agency doesn’t receive proper taxes owed from the business owner or the hired workers when they are misclassified.
These strict regulations are also in place to protect workers. Workers misclassified as 1099 independent contractors, when they are truly W-2 employees, do not receive the same type of benefits, such as employment benefits they are entitled to.
This strips employees of their benefits such as:
Misclassifying an employee as a 1099 independent contractor can trigger an audit by California Employment Development Department (EDD). Companies who are audited and whose 1099 contractors are reclassified as employees will be assessed for their payroll taxes on the total payments to these misclassified workers, which includes taxes, penalties, and interest.
A few of the top EDD audit triggers are:
If your business undergoes an EDD audit, and the agency finds you misclassified employees as workers, your business will be subject to fines, penalties, and possibly jail time.
Misclassifying an employee as a 1099 independent contractor can trigger an audit by California Employment Development Department (EDD). Companies who are audited and whose 1099 contractors are reclassified as employees will be assessed for their payroll taxes on the total payments to these misclassified workers, which includes taxes, penalties, and interest.
A few of the top EDD audit triggers are:
If your business undergoes an EDD audit, and the agency finds you misclassified employees as workers, your business will be subject to fines, penalties, and possibly jail time.