Why outsourcing your workforce to payroll companies could protect you from AB5 scrutiny

Handling HR requirements for even a small team is a boatload of work. Whether it be managing paid time off and maternity and paternity leave to payroll and benefits, for many small companies with limited resources HR is an intimidating task.

The recent passing of California’s Assembly Bill 5 (AB5)—legislation which establishes criteria around the classification of full-time salaried employees versus independent contractors—may make handling contractors even more of a headache for companies that rely on freelancers. 

That’s why many businesses worried about AB5’s impact are turning to EoRs, an acronym that stands for Employer of Record. An EoR has many functions, but the main duties include managing all aspects of contract work such as maintaining compliance regarding payroll, taxes, contracts, unemployment insurance and much more. 

Integrally, EoRs may be a key way to protect your business from the legal leverage AB5 now awards to your employees, the IRS and state agencies. “Companies route contract workers through EoRs so they are treated as employees of that payrolling service,” says Dan McCoy, chair of employment practices at the law firm Fenwick & West, who often recommends EoRs to businesses who frequently use contractors. “You are going to avoid virtually all of the legal scrutiny that you would otherwise have if you didn’t have that Employer of Record in place.” 

Be advised, there is a drawback: EoRs can be expensive. Using an EoR will cut into your margins. But it may be worth using an EoR if it means avoiding regulatory spotlight.

EoRs may be especially helpful if your company is rapidly growing, or if you work with multiple contractors who are based in other countries. “A lot of companies are using EoRs when they have scale and they’ve got a customer support team of 50 people in Czechoslovakia, for example,” says McCoy. “Bottom line, those are employees. And the right answer is to route those people through an Employer of Record in the same way you’d do so in the United States.” 

Are EoRs a good option for your company? If contractors are an essential part of your business, and you have the funds to invest in an EoR, it’s a solid option if you’re worried about the implications of AB5. “EoRs are a very reasonable solution for many companies,” says McCoy.