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How California Assembly Bill 5 Disrupts The Gig Economy – Episode 196

California Assembly Bill 5

IRA Financial’s Adam Bergman discusses California Assembly Bill 5, that plans to reclassify independent contractors of certain professions as employees, and what it means for the gig economy.

Recently, California Assembly Bill 5 (AB 5) was passed. This could turn the gig economy upside down. In his latest podcast, Mr. Bergman discuses what the bill is about and who is affected by it. Further, he discuses the retirement impacts the bill may have on the gig worker.

What is California Assembly Bill 5?

The bill, which was passed on September 10, 2019, aims to transform a good number of contractors into employees. The companies most affected are those that are app-based, such as Uber, Lyft and DoorDash. Many workers that are considered contractors are exempt from the bill, such as doctors, real estate agents and barbers.

Obviously, there are many pros of being considered an employee of a company. Employees get benefits, such as health care, minimum wage guarantees, and paid sick time. However, both employers and contractors are not at all thrilled with the bill’s passing. Many ride-share drivers and other contractors enjoy the freedom to set their own schedule. However, AB 5 may limit when (and how much) the employees may work.

While receiving benefits and given the right to form a union is nice, following a strict set of company rules is not for everyone. Afterall, many gig workers left their corner office so they can set their own rules and rates.

Under the new law, an “ABC” test has been enacted to determine if a contractor may be considered an employee. All three conditions must be satisfied to avoid becoming an employee –

A. the worker is free from the control and direction of the hiring company “in connection with the performance of the work, both under the contract for the performance of the work and in fact”;

B. “the worker performs work that is outside the usual course of the hiring company’s business”; and

C. the worker is “customarily engaged in an independently established trade, occupation, or business of the same nature” as the work performed for the hiring entity.

https://www.natlawreview.com/article/abc-test-here-to-stay-california-governor-signs-ab-5

Satisfying all three conditions may prove difficult for many contractors.

The Bill and Retirement

The biggest concern we have as a financial company (along with many contractors) is retirement planning. While many companies have said they will comply with AB 5, we’re not seeing a lot about retirement plan options. Will these companies now offer their employees a 401(k) or similar plan? Who knows.

As is, since independent contractors are self-employed, there’s a wide range of retirement plans designed for them. These include SEP and Simple IRAs, and most importantly, the Solo 401(k). While IRAs are nice, the Solo 401(k) is still the best plan for the self-employed. It features high contributions limits, unlimited investments options and the ability to borrow up to $50,000.

However, once independent contractors are labeled as employees, they can no longer utilize a Solo 401(k). While companies may offer a 401(k) or similar plan, they don’t compare to the Solo 401(k). Limited investment options, lower contributions limits and high fees make the workplace plan inferior.

This is very concerning for those who use their self-employed income to save for retirement years. The ability to save up to $56,000 (for those under age 50 in 2019) is a huge advantage. Note: for current contribution limits, please click here. Other contract workers, such as real estate agents, are thrilled they can invest in alternative assets, including (you guessed it!) real estate.

AB 5 – The Final Verdict

Governor Newsom signed California Assembly Bill 5 into law on September 18 and will go into effect at the beginning of 2020. While many consider the bill to be the right move for contractor benefits, others consider it a detriment to their way of life. Gone will be the days of flexible schedules and the ability to work for yourself. Further, other states such as New York are considering a similar move. Pretty soon, we may see AB 5 as a federal law.

Lastly, it’s important to consider the impact the bill will have on the companies affected most. Many might not be able to hire thousands of employees. Price hikes will be inevitable with an increased payroll. Employee compliance (and happiness) may also be hard to maintain. AB 5 will have a far reaching effect on the entire state of California.

Get in Touch

If you have any questions about AB 5 and how it may effect your self-employment, feel free to give us a call at 800.472.0646. We’ll gladly help you sort out your retirement plan options, whether you are an independent contractor or now.

Thanks for listening and be sure to check out all of our podcast over on our SoundCloud page!

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