Q: I have a question regarding AB 5, and how it relates to subcontracting in California.
In the situation where the company holds a C-6 license for example, and is able to produce 1 cabinet per week in house for example. If an opportunity presents itself where 3 cabinets per week would need to be produced for a limited time of 1 month. The manner in which I would imagine going about this is to outsource the work to 2 similar sized companies using 1099's for the work. However when I was reading through the AB 5 information it seems that due to them performing an identical task to my own, they do not qualify as an independent contractor... and they should be considered to be an employee? How exactly am I supposed to handle this legally, with respect to state law requirements, taxes, and insurance coverage?
Thank you,
A:
Under California law, AB 5 introduces the "ABC test" to determine if workers are employees or independent contractors. This test is stringent, particularly regarding work that is similar to the hiring company's primary business activities. In your case, outsourcing work to companies that perform the same services as yours (cabinet making) would indeed raise concerns under this legislation.
To comply with AB 5 while meeting your production needs, you might consider a few options. First, ensure that any subcontracted companies can pass the ABC test as independent contractors, which might be challenging if the work is identical to your primary business. Alternatively, hiring temporary employees for the duration of the increased workload could provide a straightforward solution, although this comes with its own set of employment obligations, such as taxes and insurance.
Regarding insurance and taxes, hiring employees (even on a temporary basis) requires adherence to state labor laws, including workers' compensation insurance, unemployment insurance taxes, and adhering to minimum wage laws. If outsourcing to other companies, it's crucial to have clear contracts in place that outline the nature of the relationship, ensuring that these entities operate independently and are responsible for their own tax and insurance obligations. Consulting with a legal professional familiar with California labor laws can offer tailored advice, ensuring compliance while addressing your business's specific needs.
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