California Assembly Bill AB 5, a 2019 California law in effect as of Jan. 1, 2020, limits the use of classifying workers as independent contractors. The long overlooked Senate Bill 459 (which made it an expensive violation to willfully misclassify employees) will now be more seriously policed with $20 million dollars of allocated enforcement funding. AB 5, developed in response to Uber, Lift, and the entertainment and "gig" industry, has hit performing arts organizations and performance artists particularly hard.
While we cannot offer tax or legal advice, we can provide advice regarding how AB 5 affects your business' workers compensation coverage. Chances are, you have been wrongly advised that 1099 workers are exempt from workers comp and that you don't need to provide workers comp for them. Do you know for certain?
In determining whether a worker should be W2 vs 1099, the "ABC Test" requires that:
1. The 1099 worker must be free from control of the hiring entity
2. The 1099 worker must provide services outside of the normal activities and nature of the business entity hiring them. (Ex: An accounting office who hires a web designer will likely pay him on a 1099. Performing arts organizations hiring individual dancers or musical artists most likely must pay them on W2, since a performing arts group cannot provide its services without performers.)
3. The 1099 worker should be engaged in an independently established business of the same nature as that of the work being performed (has multiple contracts for the type of services being provided)
In order to best limit your employer liability with 1099 workers and ensure compliance with AB 5:
1. Hire all workers who are providing services that are within the nature of your business, even if part-time, seasonal, or temporary, as a W2 employee and provide workers compensation coverage to them.
2. Instruct 1099 workers to complete the W9 with “Individual/Sole Proprietor/ Single Member LLC” checked, and EIN number (You can also accept the social security number but EIN is more secure. Contact IRS for additional instructions)
3. Instruct 1099 workers to provide a copy of their business license and a copy of liability/workers comp coverage. If they have no employees and meet all conditions for 1099 worker, you may accept a waiver, however, always be sure keep these documents on file and to consult your broker or HR attorney to help you make a final determination.
4. Employers should include 1099 workers on workers comp payroll if 1099 worker is not exempt from workers comp requirements.
5. Sole proprietors can purchase their own workers comp insurance (Available for film production and certain other classifications) starting at $500 a year.
6. Booking agencies, referral agencies, and talent management agencies have more specific rules. For example, you may not keep a commission or a percentage of the contract, you need to bill a separate “booking fee” for your booking services in order to avoid liability as an employer. Operating as both booking agency AND a production company complicates workers comp further and special rules apply. Be sure to discuss this with your HR attorney or broker to ensure your insurance properly reflects your business operations.
If you are in doubt, contact us! We have 15 years of experience in helping our clients correctly classify workers comp employees. We will be happy to help you properly navigate AB 5 and the insurance rules that apply. Don't guess! The fines are very large ($5k-25k per violation) for noncompliance.