Assembly Bill 5 #AB5 1099 Independent Contractor

Assembly Bill 5 (AB5), passed in California last year and which recently went into effect on January 1st, places severe restrictions on how businesses can contract and work with independent workers. This law not only affects the rise of freelance work through the “gig economy”, but also obligates employers to classify most independent contractors as employees.  Thousands of businesses across the country rely on independent contractors for a number of different business tasks. From hiring out delivery services, to contracting freelancers for photography work, and everything in between, independent contractors across the country play an extremely important role in the economy.

Below, we offer a complete rundown on how Assembly Bill 5 affects businesses that work with independent contractors and offer some simple solutions for managing your “new” hourly employees.

What Does California Assembly Bill 5 Say?

In essence, the state of California is requiring companies that operate in the state to make their 1099 employees hourly staff. According to FUNDERA, “1099 employees are self-employed independent contractors. They receive pay in accord with the terms of their contract and get a 1099 form to report income on their tax return. … The employer withholds income taxes from the employee’s paycheck and has a significant degree of control over the employee’s work.”

Despite the vast importance that independent workers and freelancers play, many companies unfortunately exploit workers that are not employees. The rationale behind Assembly Bill 5 is to increase worker protection. Governor Newsom, when he signed the bill into legislation last September, stated that the bill “will help reduce worker misclassification — workers being wrongly classified as ‘independent contractors’ rather than employees, which erodes basic worker protections like the minimum wage, paid sick days and health insurance benefits.”

While major companies such as Uber, Lyft, and DoorDash (all of which consider their drivers as independent contractors) are continuing to fight the bill, most companies are now required by law to treat every person who does work for their company as an employee. Furthermore, the bill also puts the burden of proof on employers to make sure that all workers are properly classified as independent contractors. Most companies simply don’t have the ability to hire salaried employees for every task that needs to get done. Thus, an increase in hourly-paid employees across the state of California is expected in the coming months.

What Do Businesses with Operations in California Need to Do?

If your company has never managed hourly employees, there are a whole new set of challenges that need to be addressed. Most importantly, you need to be able to track the time of your employees. The independent contractors that you formerly hired most likely worked for an established and agreed upon cost for a given project or set of tasks. With this sort of agreement, a timeline for deliverables is often the only time consideration. With hourly employees, however, tracking the amount of time worked is essential for both productivity and legal reasons.

Much of the work done by independent contractors is remote. Now that AB5 has been passed, companies need to find a way to track the time worked while simultaneously ensuring that their employees stay on task and comply with productivity goals and targets.

Furthermore, time tracking software and tools can also help businesses avoid potentially hefty financial losses that occur through employee time fraud. A recent study by Nucleus Research found that 19% of the workforce participates in buddy punching, a practice wherein employees clock each other in and out to deceitfully increase their wages. This deceptive practice can result in losses of up to 3 percent of gross payroll and is costing U.S. employers $373 million each year.

Important Features of the Best Time Tracking Software Tools

While you could simply install a punch clock for your employees to clock in and out, there are several drawbacks to this solution. Companies wanting to get the most out of their new hourly employees, need to develop sound HR policies that ensure the employees, managers, and everyone in between understands how to use the new time tracking technology.

The top time tracking software options, such as those offered by the company MitreFinch, can be designed to offer a number of unique and business-specific functions.

For California businesses who need technologies that will make the transition towards hourly employees more hassle-free, employee time tracking software should include some of the following features:

  • Transparent Accountability: Employee time tracking systems should be developed as part of a larger strategy to encourage employee accountability. For employers who fear that time fraud might be a possibility, biometric time tracking software can be employed. For remote employees, time tracking can ensure that they stay on task even when they are on the other side of the world.
  • Unify and Control Payouts: Time tracking systems also need to unify and control payouts to hourly employees who are working on given projects. For example, managers can establish ceilings for the maximum amount of possible hours worked on a given project or deliverable. Once completed, the hours worked can be easily connected to your existing payroll system.
  • Simple and Straightforward Clock-In and Clock-Out Functionality: Clock in and clock out errors can lead to headaches for HR and payroll departments. For this reason, time and attendance software needs to include simple and straightforward functionality that can be easily learned and used by hourly employees.
    • Ability to Verify Time on a Daily Basis: For a company working with remote employees, the ability for managers and other higher-ups within the company to verify the amount of time worked on a daily basis is essential, especially when certain projects have tight time frames.
    • Ability for Managers to Verify their Down Lines: Lastly, time and attendance software should also allow managers to verify and update their down lines. This can help to alleviate workloads while still maintaining control over employee labor.

    The best time tracking software tools on the market can allow for a relatively easy and straightforward transition that comes with the passing of the California Assembly Bill 5. Even if your business has never hired or relied on hourly employees, time tracking tools can actually help companies improve their productivity levels through keeping employees honestly transparent and motivated.


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