The passage of Assembly Bill 5 (AB 5) will have a significant impact on workforce planning for many California businesses.

Tax strategies

California Employers: Evaluate Your Staffing Needs Before the New Year

  • Chris Wall
  • Jennifer Rohen
  • 12/4/2019

Determining whether a worker is classified as an employee or as a contracted worker took on added significance for California businesses after the recent passage of Assembly Bill 5. The new law will require employers to reclassify many of their contracted workers to full time employees starting January 1, 2020.

In order to remain an independent contractor, a worker must now meet the following three requirements:

  • The worker is free to establish his or her own schedule
  • The worker performs duties in a line of business that is distinctly different from the employer
  • The individual has the ability to work independently for multiple clients

Why AB 5 matters now

With California being at the forefront of the gig economy, many employers may find themselves in a position to hire dozens to hundreds of employees in the near future. This new requirement will bring the additional costs of extending benefits and insurance policies to the newly acquired employees.

WOTC may provide relief

While the new law is not set to go into effect until January 1, 2020, there is one major reason why businesses should consider making their employment offers by the end of 2019: the Work Opportunity Tax Credit (WOTC).

This federal credit offers up to $9,600 per qualified employee hired and an employer must apply for the credit within 28 days of hiring the new employee. In order to be eligible, this new employee must be part of a targeted group. These groups include veterans, ex-felons, the long-term unemployed, those on food stamps/SNAP, and several other categories. With approximately 4.1 million Californians participating in state assistance programs, the odds of hiring an eligible employee are high. 

WOTC Tip

Attach a WOTC eligibility survey to every new hire packet issued by your human resource department to help speed up processing times.

It is important to note that the WOTC is currently set to expire on December 31, 2019. However, there is legislation on the floors of both the House and the Senate with bipartisan support to permanently extend the credit. Since its inception, the WOTC has expired and been extended 11 separate times with the option to capture employees hired within the transition window. With the potential for the WOTC extension being delayed into 2020 and a presumed increase in filers due to this new standard, we strongly encourage you to start taking advantage of the credit as soon as possible so that no hires are missed due to the 28-day deadline.

Should the credit expire, CLA advises employers to continue to file the forms in a timely manner in 2020 while legislation is pending approval. Timely submitted applications tend to have faster processing times and attaching a WOTC eligibility survey to every new hire packet issued by your human resource department can help you speed up the process.

Combine WOTC with R&D tax credits and NEC when possible

This one-time hiring event may create an opportunity for many businesses to become eligible for additional tax credits. For example, the wage increase may positively affect the amount of the research and development tax credit if the new employee works toward the development of a new product or process.

State tax credits such as the California New Employment Credit (NEC) may also apply. NEC is available for businesses located in designated growth areas. If the new employee qualifies, there is a tax credit of up to 50% of that person’s first-year wages for work that is done within the designated regions. Businesses such as food service and retail are excluded, and the starting wages must be at least 150% of the state minimum. The calculation is based on the first 60 months of employment but could offer up to $87,360 in credit for each qualified employee.

Examine your overall workforce plan

The passage of AB 5 will have a large impact on the employment landscape in the state of California, and it provides an opportunity to revisit your overall workforce planning. Consider the following as you build a plan:

  • Evaluate decisions on a person-by-person, position-by-position basis before making future employment offers. Simply converting a current contractor to a full-time employee may not change or improve that person’s output.
  • Evaluate your corporate structure and organizational chart to understand how new hires might affect supervisory loads, physical space and facility needs, payroll, and onboarding.
  • Consider how an influx of new employees might add stress to management and human resources duties, and prepare to offer support during the surge of work.

How we can help

CLA can help determine your eligibility for WOTC tax credits prior to transitioning your staff from contractor to employee. We can also help your workforce planning through an HR assessment and ease the pressure on your internal staff through outsourced human resources offerings. These personnel issues are complex and you should also consult with experienced employment law attorneys.