Unless your company already does business in California, you should avoid having workers based in that state.
California AB 5 – Many Contractors are Reclassified as Employees
California Assembly Bill 5 (AB 5) essentially shifted the burden to business owners to prove a worker isn’t an employee. And made it hard to meet that burden.
The law provides in part, “a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:
(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
(B) The person performs work that is outside the usual course of the hiring entity’s business.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”
Why is that important?
Because if you’ve got an employee working for you in California, you get all of the regulatory and tax baggage that comes with that.
If your company is located elsewhere, you get to register as a foreign entity doing business in California (and pay taxes accordingly).
You also are likely to get hit with penalties for the years you’ve been doing business in the state but didn’t register your entity.
Plus you’ll get to deal with employer withholdings for Social Security, worker’s compensation, unemployment compensation, and any “entitlements” the State of California decides to impose on your company.
At some point, you can expect California’s government to mandate you fill your management positions based on “social justice “ criteria unrelated to skill or performance.
Of course, the government also has no problem stopping workers at the drop of the hat for COVID-19. Who knows what the next reason will be to shutter business? And you can’t count on being exempt from whatever comes down either.
In short, it’s just not worth the downside of using California-based workers unless you’re already stuck in that trap by doing business in the state.
Exemptions From California AB5 For Some Workers
In September 2020, California’s Governor signed a new law that carved out exemptions for freelance writers and certain other workers (e.g. youth sports coaches) from AB5. It’s California Assembly Bill 2257 (AB2257)
But you can’t rely upon piecemeal exemptions like this to protect your company when it’s the policy of the state to loot your business (no matter where you’re based) in order to prop up a social welfare state that’s insolvent.
An experienced business contracts lawyer can help you avoid traps like the ones California sets by preparing the right type of worker agreements that protect your company. And advising you on business-friendly jurisdictions where it’s okay to get the workers you need.