AB5: Hellish Audits, Six-Figure Penalties, Small Businesses Ruined And A Dangerous Political Weapon—Now In the Hands of the Powerful.
by Kirsten Mortenson
Small businesses, independent contractors, and freelancers have been crying out for months about the horrendous fallout from Assembly Bill 5, California’s so-called “anti-gig” legislation that went into effect on January 1, 2020.
The situation is far worse than many of us even imagined.
A new presentation by Los Angeles attorney Deann Chase, available on YouTube, describes the consequences facing California businesses that run afoul of AB5: hellish audits and staggering fines.
Chase, whose practice focuses on helping small businesses negotiate issues such as incorporating, forming partnerships, establishing trademarks, and contracts, begins the presentation by reviewing the history of AB5, including the “ABC test” established by the April 2018 California Supreme court Dynamex case and the Borello test that preceded Dynamex (and was, Chase notes, more flexible, forgiving, and business-friendly).
However, Chase says, the “very convoluted and not well-drafted” AB5 codified and extended Dynamex. California businesses must now show that they’ve satisfied a bewildering laundry list of conditions to prove contractors they’ve hired are not “misclassified.”
Then, around 40 minutes into the presentation, Chase begins describing the penalties businesses face if they’re found to be out of compliance with the AB5 statute.
Kiss Your Small Business Good-Bye
At the state level, businesses found in violation of AB5 face the risk of enormous financial penalties, including:
They may be subject to additional federal penalties and fines.
It gets worse. Businesses may be assessed these penalties for “violations” that precede AB5.
Hard to believe, but it’s true: because fines for misclassification were established by prior legislation (SB549, signed by then-Governor Brown in 2012) businesses could, in theory, be punished for “violations” going back for years.
Own a small business in California? If you’re audited by the California Employment Development Department (EDD) they may hit you with fines for “violations” that you “committed” years ago—long before AB5 went into effect.
Big Brother EDD Is Watching!
And there’s more.
Under AB5, you also need to report to the EDD every time you hire a contractor, if you pay that contractor more than $600.
You have 20 days to file that report. Miss the deadline? “Next thing you know,” Chase says, “you have an EDD tax audit.” In other words: more fines.
These Audits Are Happening Now
None of this is merely theoretical.
This is not something that might happen, someday in the future.
It’s happening now. Today. Small companies—the one- and two-person businesses that are the lifeblood of our economy—are being audited and slapped with six-figure penalties.
Declaring bankruptcy won’t help them, because these are “back taxes.” Business owners who can’t pay their fines will be slapped with liens on their homes. They’ll end up homeless.
Backers of the brutal AB5 claim that the bill’s intent is to protect workers.
Maybe it is, maybe it isn’t. But what is stunningly obvious is that this law will quickly decimate California’s small businesses. It will shred our state’s economy.
Worst Of All, AB5 Can Be Used As A Political Weapon
Another key point Chase makes in her presentation is that, chillingly, in cities of over 750,000 residents, the law also empowers city attorneys to impose injunctions against businesses, effectively shutting them down.
This shocking language means that AB5 equips powerful interests in our state to target political opponents. Consider this scenario: a media outlet speaks out against a special-interest politician. What’s to stop the politician from accusing the media outlet of employee misclassification and requesting an injunction to shut it down?
Dare to challenge someone who is politically connected? Don’t be surprised if you get a call shortly after from the EDD.
It is chilling. It is outrageous.
We need to wake up.
We need to Repeal AB5 before it’s too late.
We're a loose coalition of freelancers and independent contractors trying to centralize information about AB5 and empower ICs across the state to fight for their livelihoods. We tell stories and make plans.
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