Every year, the list of new bills passed increases the complexity of remaining compliant while operating a small business, but even more so for small to medium-sized churches. Most churches do not have a team of human resources or legal professionals to decipher and apply the seemingly endless legalese used within each new bill. While these bills are well-meaning and written to provide protections, especially for employees, the overwhelming amount of administration and application puts a heavy burden on churches to remain compliant. Often, this burden means shifting the already stretched financial resources from pursuing the church’s mission to creating and implementing policies. California Assembly Bill 5 (AB 5) provides the perfect example of shifting resources from ministry to administration and the impact on the ministry. To fully understand the impact on small to medium-sized churches, it’s helpful to understand AB 5, the ABC Test, and healthy church employee ratios.
What Is California AB 5?
On January 1, 2020, California Assembly Bill 5 (AB 5) passed, impacting California law’s classification of workers (as employees or independent contractors). While we can all agree it’s important not to misclassify employees as independent contractors, this bill defines childcare workers as employees, not independent contractors. The crux of AB 5 hinges on applying the ABC Test when determining if a worker is an employee or independent contractor.
What Is the ABC Test?
Per the California Department of Labor and Workforce Agency, the ABC test uses three conditions to determine if a worker is an employee or an independent contractor:
- A. The worker is free from the control and direction of the hiring entity 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 entity’s business; and
- C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed
On top of the ABC Test, updated FLSA guidance by the U.S. Department of Labor (DOL) provides six factors to determine whether a worker is an independent contractor receiving a 1099 or an employee receiving a W2:
- Behavioral Control: Factors that indicate the nature and degree of control over how the worker does the work.
- Financial Impact: Factors that indicate whether the worker’s financial gain or loss depends on the organization or the worker.
- Financial Investment: Factors that indicate whether the equipment and materials required for the work are the responsibility of the organization or the worker.
- Skill Level: Factors that indicate how much skill and initiative is required of the worker to do the work.
- Degree of Permanence: Factors that indicate how the church and the worker perceive the permanence of their relationship.
- Integral Work: Factors that indicate to what degree the function the worker performs is an integral part of the “business.”
When applying these rules, it becomes clear that childcare workers are very rarely considered independent contractors receiving a 1099. The extensive behavioral control needed to provide safe childcare points to a childcare worker being an employee.
With the groundwork complete to better understand AB 5 and how the ABC Test applies to childcare workers, be sure to read part two of “How California AB 5 Impacts Childcare Workers and the Church Budget.” Part 2 covers healthy church compensation ratios and the impact of AB 5 on church budgets.
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