For the past several months, we have been commenting on AB5, California’s new law that codifies the Dynamex ruling and fundamentally changes the way that Independent Contractors are engaged in the state. Since its passage there have been a lot of opinions about what the law actually does and what is in and out of scope for companies doing business in California. We’ve written before about what’s actually in the law in our ‘Get a bigger boat: AB5 is now law’ blog, and about how some professions are exempt from certain aspects of the legislation in our ‘Find hope and take action: Understanding AB5 carve-outs’ blog. Today we want to concentrate on how companies ought to react to the law and prepare themselves for the eventual increased enforcement that will undoubtedly follow.
First what not to do…
Don’t panic. The reality is that most of your ICs (assuming you’ve been properly categorizing them heretofore) are probably still in compliance with the law. When we did an analysis of our clients use of ICs in light of the Dynamex ruling (see our related webinar), we found that the majority of them were already in compliance and that few were affected by the rise of Prong B of the ABC test.
The fact that most of our clients use ICs as a means to acquire special skills that their organizations didn’t have (the best use case for IC engagement), meant that there was little to worry about when it came to “normal course of business” as a measure of compliance. Our methodology had already taken this factor into account. But the worry was that whilst prior to Dynamex, this was one factor of many; after Dynamex, it became the knock-out factor after all of the other IC classification factors were satisfied.
Cutting off your nose to spite your face. There is a strong business case to be made that in this very tight labor market, the conservative instinct to stop using ICs until the dust has settled is short-sighted. Your competitors are leveraging the unique skills that independent workers bring to an organization and if you aren’t, then you’ve put yourself at a competitive disadvantage. In addition, ICs are less expensive to engage than staffing or other third-party sourced talent. So, strategically, stopping the use of ICs as a part of your talent strategy is costly.
I assumed above that most of you have an IC management program. If not, the first piece of advice I should give is to get one! Whether you use TalentWave or another qualified organization, you need to hire a firm that will:
- categorize your workers appropriately, and
- provide indemnification to your organization for that service.
Furthermore, you should audit your own data to make sure that there is no leakage in the program. Make sure that all of the spend is analyzed and that you don’t have rogue at-risk spend that exists outside the program.
If you haven’t done so, and again assuming you have a formal program, you should ask your IC partner to perform an audit and a look-back on all of the ICs you’ve paid in California to make sure they still qualify. Our best practices assume retroactivity, so make sure you look at not only your currently engaged ICs, but also take into account a look-back period of three years. You won’t be able to do anything about those workers that have already disengaged, but you’ll be prepared should an audit by a taxing authority take place.
Finally, make sure that whatever method you are using to engage ICs takes into account the AB5 law (including exceptions) and that you are confident in your program’s ability to properly categorize workers in light of Prong B.
As always, TalentWave is available to help. Contact us to schedule a meeting today.