Why Entrepreneurs Should Be More Worried About Uber Than AB5 Small-business owners have much more to lose when it comes to California's confusing law change.

By Bruce Willey

Opinions expressed by Entrepreneur contributors are their own.

Sean Gallup | Getty Images

On one side of the street were truckers, blaring horns and demanding the right to stay independent. On the other, Uber and Lyft drivers, demanding the right to become employees. This recent scene on the streets of San Francisco acted as a microcosm of the confusion and complexity that California Assembly Bill 5 (AB5) has introduced. Meant to restrain the gig economy created by Uber and Lyft, AB5 essentially makes it tougher for workers to be classified as independent contractors.

And while the law is limited for now to California, it is likely the template for legislation to come from other states around the country. AB5 has set off intense debate about what constitutes an employee, and whether the law is really about protecting workers or more about generating additional tax revenue.

Uber and Lyft are worried for obvious reasons, but it's small businesses that should be wringing their hands the most. The highest burden of cost will fall, just like it always has, on them, not the large corporations that have not only the resources to help navigate new legislation, but a much lighter tax bill -- about 21 percent compared to 28 percent for small businesses. Of course, this is a fight that's been brewing for many years. Small-business owners have already been squeezed, and how to classify their employees is just the latest example.

Related: An Entrepreneur's Guide to Compliance

The distinction between big and small is crystalized in the recent uptick of wage-and-hour suits, which purport workers are actually employees instead of independent contractors. Amazon might be able to withstand such a lawsuit with little to no fanfare, but this kind of litigation can put smaller companies out of business. That's because if a court decides you treated a worker like an employee, you now owe all of the taxes you never paid on their behalf, and potentially all the cost of covering their healthcare. It can get more complicated if you're in an industry that requires workers-compensation insurance. You could be found liable for that as well.

For example, I once had a client who ran her own massage-therapy studio. She successfully rented out unused rooms to other therapists until the day one of them suggested they were employees and demanded back taxes and wages. All it takes is one disgruntled worker to raise the red flag, and if you don't have your affairs in order, you're vulnerable.

It seems with each new rule designed to make it harder for companies to classify workers as independent contractors, the burden on small businesses gets bigger. The good news is there's a lot you can do to protect yourself.

Only engage in business-to-business payments.

This is the number-one priority. Only engage with independent contractors who have gone through the process of creating their own company. That way, you're only ever making payments to a business, not an individual. I once knew of a firm that employed a full-time lawyer whose only job was to help independent contractors set up their own businesses. While it was expensive, the cost was worth it. Even without an attorney, it's extremely easy for individuals to set up an LLC, and can get even easier depending on what state you're doing business in.

Ensure you're not the sole provider of income.

To be truly independent, a contractor needs to be working on more than one project with more than one company. If you're providing all their income, even if it's a big job and it seems reasonable, you could get pegged as an employer. Even if you've got contractors on a major project, they need to be working for multiple companies to be truly considered independent.

Demand proof.

To ensure your contract will hold up in court, you'll need to make sure your contractor is doing their part. It's not enough for them to tell you they secured their own insurance. You need to see the proof. Also, get your hands on some kind of proof that your contractors are paying their taxes properly, because if the IRS comes knocking on their door demanding loads of cash, it's all too easy to point the finger back at you and claim you should have been paying employment taxes and withholding all along.

Related: The Legal ABCs of Running a Transportation Service

Decide what's best for your business.

While getting your books, payroll and contracts in order will go a long way towards protecting yourself, there's nothing that's foolproof. As legislators and tax collectors begin to potentially undo the gig economy, the burden will continue to fall on small-business owners. The fact remains that they pay higher taxes and states have more revenue to gain from ensuring they're paying up.

If, despite all these challenges, you decide to stick with independent contractors, don't take the risk of assuming it's a problem for the Ubers of the world. Stay up to speed on what's happening in your state, cover your bases, and perform your due diligence in every case. It could literally mean life or death for your business.

Wavy Line
Bruce Willey

Entrepreneur Leadership Network Contributor

CEO of American Tax & Business Planning

Bruce Willey, JD, CPA, has been working with small to midsize businesses across the country for more than a decade, helping them navigate business and tax law in a variety of situations. His services include assisting with start-ups, operations, growth, asset protection, exit and estate planning.

Editor's Pick

She's Been Coding Since Age 7 and Presented Her Life-Saving App to Tim Cook Last Year. Now 17, She's on Track to Solve Even Bigger Problems.
I Helped Grow 4 Unicorns Over 10 Years That Generated $18 Billion in Online Revenues. Here's What I've Learned.
Want to Break Bad Habits and Supercharge Your Business? Use This Technique.
Don't Have Any Clients But Need Customer Testimonials? Follow These 3 Tricks To Boost Your Rep.
Why Are Some Wines More Expensive Than Others? A Top Winemaker Gives a Full-Bodied Explanation.

Related Topics

Business News

'I'm Not a Very Good Businessman': Kevin Costner Is Risking a Ton of His Own Money on New Project

The "Yellowstone" star discussed how he bankrolled his new epic movies — and his accountant isn't happy.

Business News

'I Am Just Floored': Woman Discovers She Won $1 Million Lottery Prize While Checking Her Email at Work

Initially, she thought the email was a scam, but went to lottery headquarters and walked away with a six-figure check after taxes.


How to Be an Ally to the LGBTQ+ Community During Pride Month and Beyond

Recent actions from Bud Light and Target have created more polarization on diversity issues in the workplace. Pride Month is a special time to celebrate with the LGBTQ+ community.

Growing a Business

A Teen Turned His Roblox Side Hustle Into a Multimillion-Dollar Company — Now He's Working With Karlie Kloss and Elton John

Rush Bogin, a 17-year-old fashion designer, learned firsthand how finding market gaps and listening to customer feedback can bring major success.


The Rise of Nano-Influencers: How the Smallest Voices are Making the Biggest Impact

The bigger an influencer is, the more beneficial it is for a brand to collaborate with them, right? Not necessarily.