As a business owner, and wife of another business owner, I’m not at all bothered by Assembly Bill 5, the newly signed bill that attempts to clarify what an employee is and what an independent contractor is. The main reason? It reduces unfair competition to small businesses already held to very high standards.
California has 3.9 million small businesses with 7 million employees, who make up 49% of California’s private sector employees, per the U.S. Small Business Administration. The owners of those businesses are largely personally liable for compliance with taxes, worker rights laws, permitting, and more. Typically, the cost of an employee is estimated at 150% of their salary. This does not include other costs of compliance in a very litigious atmosphere, such as legal battles over lunch periods, sick days, termination, and overtime.
To be done right, it takes a lot of administrative time and still remains nerve-wracking. Many businesses with employees have been sued over something employment-related. In 2015, an insurer report found U.S. small and medium-size businesses face a 12% chance of being hit with an employment claim. Some states have higher risk. California business had an almost 17% risk of a claim according to that study.
Imagine if you are deciding whether to add employees, carefully balancing costs and risks. You know that if you are hiring another employee, it comes directly out of your own personal pocket. You have to weigh how much added work can get done, versus the added risk of claims (money and lost work) and cost of added administration and taxes.
In the last month I worked with two fabulous fully licensed local contractors who both told me they used to be larger but have downsized because the added administration costs didn’t equate to added income for them.
In the face of this – ta-da – imagine if you can get more bodies to get work done but not pay anything other than salary?
No federal and state taxes. No workers’ compensation insurance. No worries about health care or overtime or lunch breaks or lawsuits.
Wow – that makes it very easy to grow and also to undercut those who follow the law.
I run a small consulting firm. I have seen quotes in recent years to do an entire project for less than I would charge to drive to a site to look at it. “Cash under the table” workers are well known in certain fields like construction and in my husband’s profession, auto repair, and they undercut those who play by the rules.
I hope AB 5 further refines the “ABC Test” all businesses must follow. That test requires independent contractors to (A) be free from control and direction of the hiring entity, (B) perform work outside the usual course of hiring entity’s business and (C) be customarily engaged in an independently established trade, occupation or business of the same nature as the work they are performing.
Besides worker protection, another justification for AB5 is that the state loses some $7 billion a year in payroll taxes due to worker misclassification. Let’s be clear on that – the taxes are still due whether you are an employee or “gig” worker, but some folks aren’t paying them. Traditional workers and traditional businesses pay employment-related taxes, and plenty of them. About $7 billion a year is not being paid by those who owe them.
That leaves more for the rest of us to pay.
Here the state may have an enforcement problem more than a classification problem. Perhaps it’s easier to monitor business tax compliance than individual tax compliance? Improper individual reporting of earnings is unlikely to get caught, especially for those of modest incomes.
The average person had a 1 in 160 chance of getting audited in 2017; those earning over $200,000 had a 1 in 80 chance.
Who checks the tax returns of those with significant 1099 (self-employment) income to see if they are paying self-employment tax, paying quarterly, or even filing tax returns at all? This is a disservice to those who pay their often-painful fair share.
The much-touted flexibility of an independent contractor comes with both the ABC test and a pile of taxes.
Nothing precludes a business from offering workers flexible schedules. Flexibility is in demand and the state needs to make sure current and future regulations don’t impede that.
AB5 doesn’t, but it does take some initial steps to correct an unequal playing field. More work is needed, no doubt.
Maria Gutzeit is a chemical engineer, business owner, elected official, and mom living in Santa Clarita. “Democratic Voices” appears Tuesdays and rotates among several local Democrats.
