Since the passage of California’s new law on independent contractors (Assembly Bill 5, which is often referred to as “AB-5” or the “Gig Worker Protection Bill”), many businesses are faced with the question of how to go about reclassifying their independent contractors to employees. If you are still uncertain whether you need to reclassify your workers, please read our article on the new law, which discusses the new law and summarizes the exemptions to the new law. In today’s article, I will explain the steps that a business should take to reclassify independent contractors to employees. While the below steps apply to many businesses, you should always consult an experienced employment lawyer to assist you in the reclassification process and ensure that all necessary steps are taken. The failure to properly classify employees can result in costly misclassification lawsuits.
Letter to the Worker
Once you have determined that an independent contractor should be reclassified to an employee, you should notify the worker in writing of the change. A written letter will document the date on which the transition occurs, which will help you and the employee for record keeping and tax purposes.
Employment Agreement
The new employee should be required to sign a written employment agreement that sets forth the employee’s duties, hours, rates of pay, benefits, and other pertinent information. A well drafted employment agreement sets forth the expectations of the employment relationship and can be used as evidence in a later wrongful termination lawsuit to demonstrate that the employee was falling short of your expectations. Employment agreements can also include important legal protections for the employer such as arbitration provisions, waivers of class action rights, confidentiality provisions, background checks, and drug screening. Employees must also complete government mandated forms such as form I-9 and W-4.
Prepare Employee Personnel File
When a new employee is hired or an independent contractor is reclassified to an employee, the employer should create a new folder (electronic or hard copy) and treat the folder as the new employee’s personnel file. Consider including the below items in the employee’s personnel file. Employers should also be mindful of who has access to the personnel file. Confidential information, such as medical information and social security numbers should be kept confidential.
Employee Handbook
Employee handbooks set out employer policies and employee benefits. If you already have an employee handbook for other employees, you may not need to take further action on this point. If you do not have an employee handbook, you should request one from an employment lawyer.
Update Payroll
The newly classified employee will need to be setup in your payroll system. This may mean contacting your payroll provider or updating the information yourself. Of course, with the reclassification comes additional payroll and employment taxes. Be sure to consider these additional expenses when determining the newly classified employee’s rate of pay.
Consider a Release Agreement
When an independent contractor is reclassified as an employee, they may wonder whether they were misclassified all along. California law limits employee’s ability to release their claims for unpaid wages, but a carefully drafted release agreement can limit the employer’s potential liability for misclassification claims.