AB5 & Compliance
Payrolling crew and talent is a necessary consideration in the wake of AB5. We can help you make the transition.
What is AB5?
California redefined the criteria for classifying workers with the passage of AB5 in 2018, mandating that certain workers be classified as employees rather than independent contractors. Failing to correctly classify workers makes an employer vulnerable to severe financial liability. Other states are moving in similar directions and Joe Biden has indicated that he will pursue a federal standard modeled on AB5’s “ABC Test.”
Despite the recent passage of Proposition 22 in California, production crew and talent are not included in AB5’s current limited exemptions.
What is the “ABC Test”?
Under AB5, the "ABC test" must now be used to determine whether a worker providing services in California is an “employee” for purposes of the California Wage Orders, Labor Code, and Unemployment Insurance Code.
If the answer is “No” to ANY of the following questions, a worker should be classified as an employee and must be paid W-2 wages.
A:
Is the worker free from the control and direction of the hirer?
B:
Will the worker perform work outside the usual course of the hirer?
C:
Is the worker regularly engaged in an independently established trade of the same nature as the work to be performed?
By payrolling your talent and crew with OOTB Solutions, you ensure that they are properly classified and covered by workers’ compensation and other necessary insurances. You will have peace of mind knowing that your workforce is compliant with the applicable labor laws and that you have appropriate protection from workplace liability.
What about hiring independent contractors?
It is important to note that both federal and state employment laws classify a worker as an employee unless proven otherwise. The U.S. Department of Labor and many states, including California, use the ABC Test (for more information about the ABC Test, refer to “What is AB5?”) to determine worker classification. The IRS and other states, including New York, use common law rules to make these determinations.
The IRS states that “A worker is an employee when the business has the right to direct and control the worker.” Even if a business gives a worker freedom of action, having the right to direct and control them is what determines classification. Examples of direction and control include:
Determining when and where to do the work.
Specifying what tools and equipment to use.
Determining what order or sequence to follow when performing the work.
Producers should be aware that having a written contract that designates a worker as an independent contractor is not sufficient to determine the worker’s status. The duration of work also has no bearing on classification. If a worker should be an employee, it does not matter if they only work a one-day shoot once a year. They are still an employee. The IRS only considers how the parties work together to determine classification.
If a business misclassifies workers as independent contractors, they can be liable for employment taxes, fines, and penalties.
What are the risks of misclassification?
Misclassifying workers exposes a business to serious legal and financial consequences. In California, there are civil penalties of between $5,000 and $25,000 per violation for the willful misclassification of workers. State agencies and the IRS may require businesses to pay unpaid state and federal payroll taxes, Social Security and Medicare taxes, and unemployment and disability insurance. Additional penalties, fines, and criminal charges may also apply.
If a misclassified employee files an unemployment, disability, or worker’s compensation claim, it can trigger an audit of the employer’s payroll and other financial records. Misclassified employees may also file a complaint with the state or federal Department of Labor or take legal action against employers to recover unpaid wages and benefits. Legal action can result in further fines and penalties.
Give yourself peace of mind.