Assembly Bill 5 ("AB5") went into effect on January 1, 2020. The new law creates a rebuttable presumption that workers are employees unless the business proves that the workers satisfy all three prongs of the new ABC Test or that they fall under one of the law's enumerated exemptions. Many workers who had previously been classified as independent contractors do not satisfy all three prongs of the ABC Test and are being reclassified as employees. For nonprofits in California, there has been a scramble to meet the requirements of hiring on these workers as new employees, and, in some instances, transitioning volunteer positions to employee positions.
With the implementation of these compliance requirements also comes the cost of implementation, both in terms of time and money. The cost incurred is not just the administrative cost and time of reporting new employees to California's Employment Development Department, but also includes the business's portion of payroll taxes and unemployment insurance; updating or creating employee handbooks; offering employment benefits to more employees, and any additional legal or accounting fees associated with new hires. The transition of independent contractors into employees also means that businesses must think about reimbursements, for expenses such as travel/mileage and business purchases, where previously independent contractors wrote those costs off on their Schedule C's.
Additionally, nonprofits should consider the following issues of transitioning volunteer and independent contractor positions into employee positions:
- Type of wage reporting used: 1099-MISC v. W-2
- Ensure that policies and procedures reflect a distinction between volunteers and employees
- Reconsider the use of stipends and understand the tax consequences of fringe benefits
- Determine if there are any current employment positions that can be expanded from part-time to full-time to cover the duties of previous independent contractors
- For many nonprofits, January 2020 was the middle of their fiscal year, which means that the budgets approved in the spring and summer of 2019 more than likely did not include funding to cover compliance. Unlike for-profit businesses, nonprofits work with grantors and funding sources that direct how their funds may be allocated.
What can nonprofits do if there isn't room in the budget to cover these additional costs? Fundraising is always an option, but many nonprofits may have to make emergency contribution requests of their Board Members or request an amendment to grant/funding agreements to apply those awards towards the unforeseen costs.
AB5 compliance comes down to analyzing current worker classifications, making an action plan to clarify policies and procedures, and making sure your team members—Board Members, legal counsel, accountant, etc.—are working together to minimize the nonprofit's liability. How is your nonprofit handling AB5 compliance?