Small business owners will have to hire lawyers and CPAs to figure out how to classify individuals they sometimes contract with for services for which they don’t require a built-out team of specialists, he said.
For example, a small business owner may occasionally hire a tech-savvy cousin to help with the company website, said Holman. The cousin may not pass all the tests that exclude him from being an employee, but under the California law “the presumption is that you’re an employee unless you can prove otherwise,” he said.
Although Holman thinks the intent of the law is correct, “classifying someone as an employee in California comes with a lot of hurdles and obstacles,” he said. Business owners have to make sure employees are complying with legally required lunch breaks, rest periods and overtime, he said. Yet someone consulting on a project might want to work more hours one day, especially if they’re juggling work for multiple businesses.
“Trying to fit people into the right employment box—especially in today’s world with technology making it so easy for people to work their own hours and respond to emails when they want—is not as easy as the clock-in, clock-out method that the employment laws are put around,” he said. “There’s potential liability for the employer,” he said, even if the employee is the one failing to comply with the legal mandates.
Business owners looking to avoid legal expenses and minimize their share of paying employment taxes and employee benefits might decide to stop working with relatives or other gray-area individuals and instead establish a relationship with a firm that clearly functions an independent contractor, said Holman.
Independent contractors who move into employee relationships should also consider the possible financial impact. Employers that hire them might pass along their added costs by reducing compensation, said Holman. The newly classified employees may also lose their ability to deduct business-related expenses, he said, and they may be more restricted on how much they can save in tax-deferred retirement plans.
Owners of SEP IRAs can contribute up to 20% of their annual income into these accounts, noted Holman. This may exceed the contribution limits for employer-sponsored 401(k) plans—$19,000 for 2019 and $19,500 for 2020 (plus catch-up contributions for workers over age 50).
Holman encouraged independent contractors to revaluate where they are financially and to take a close look at how they can reduce their debt and expenses. Expenses grow with income and sometimes “the fish get as large as the bowl,” he said.
Although Holman is concerned the legislation could have a largely negative financial impact on business owners and some independent contractors, he is hopeful the scrutiny it’s receiving will ultimately help business owners who’ve long been at risk of misclassifying workers amid a backdrop of ambiguous employment laws.
“There are so many different employment relationships that exist and so many versions, that it’s really hard to know if you’re classifying somebody correctly,” he said. “To the extent that this starts to clarify all the different scenarios, I think that would be positive.”