The state of California recently passed a bill known as AB 5 (Assembly Bill 5). AB 5 has been at the center of an ongoing debate between app-based “gig economy” companies and the State of California, because AB 5 re-classifies many independent contractors as employees. The purpose of this bill, according to California governor Gavin Newsom, is to “help reduce worker misclassification – workers being wrongly classified as independent contractors rather than employees, which erodes basic worker protections like minimum wage, paid sick days and health insurance benefits.” Before we dive into the implications on your health club, let’s take a closer look at AB 5 and create more clarity on the bill itself.
The Difference Between an Independent Contractor and an Employee
According to the Internal Revenue Service (IRS), worker classification is important because “it determines if an employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an “employee.” Amid these discussions and debates, it is important to note that businesses do not normally withhold or pay taxes relative to independent contractors because such earnings are subject to self-employment tax. According to the IRS, an individual is an independent contractor if the payer has the right to control or direct the result of the work rather than how the work is accomplished.
AB 5 uses what legislators call the “ABC test” to distinguish an independent contractor from an employee. That is, (A) they perform tasks under a company’s control; (B) their work is integral to the company’s business; and (C) they do not have independent enterprises in that trade. AB 5 explicitly exempts several categories of employers:
- Some licensed professionals (lawyers, architects, engineers)
- Financial services
- Real estate agents
- Direct sales
- Commercial fishermen (until 2023)
- Builders and contractors
- Professional services (marketing, HR administrators, travel agents, graphic designers, grant writers, fine artists)
- Freelance writers, photographers (35 or less submissions to an outlet in a year)
- Licensed hair stylists, barbers (must set own rates and schedules)
- Tutors (must teach own curriculum, not affiliated with public school)
- AAA-affiliated tow truck divers
Impact on the Health Club Industry
AB 5 does not explicitly exempt health club, fitness, wellness or coaching professionals from its ambit. While most fitness and tennis professionals are certified, they are not considered “licensed.” As a result, club owners should likely assume that AB 5 impacts their organization until clearly told otherwise.
When thinking about the implications of AB 5, club owners should ask whether its instructors: (A) perform tasks under a company’s control; (B) if their work is integral to the company’s business; and (C) if they do not have independent enterprises in that trade. If the answer to all three of these is “yes,” your fitness and tennis professionals who are currently independent contractors may need to be reclassified as employees. While reclassification may prove expensive, statutory fines are significant.
While certain industries are lobbying for exemptions and amendments, the new requirements of AB 5 in California must be addressed by companies by January 1, 2020. As for other states, legal experts expect AB 5 to influence similar decisions as the focus on worker rights is increasing among state governments. Importantly, Massachusetts and New Jersey have already been focused on making it harder for companies to classify workers as independent contractors.
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