When California’s Assembly Bill 5 (AB5) went into effect at the beginning of 2020, its intent was clear: draw a clear distinction between what it means to be an independent contractor and what it means to be a traditional employee. Quite a few companies have struggled with AB5 compliance, leading to unforeseen legal troubles and even a successful challenge to the spirit of the measure via Prop 22.

These classification struggles typically stem from a simple lack of understanding, which is why it’s so essential to build a strong HR team. Most executives don’t have a thorough understanding of HR and labor laws, leading to incorrect assumptions about classification rules. One of the biggest misunderstandings is employers incorrectly believing that classification is ultimately up to them as a matter of business — not a matter of law.

Further compounding this confusion is the fact that these laws are still evolving and can vary from country to country and state to state, causing everyone to feel like they’re chasing a moving target. The landscape might still be evolving, but a concentrated effort can help bring everything into focus. To be successful in today’s employment landscape, companies must find ways to gain a clear understanding of this constantly changing landscape.

How to Avoid Employee Misclassification at All Levels

If you operate outside of California, AB5 compliance might not seem like an issue that deserves your attention. In reality, the impact of AB5 is spreading beyond California as other states implement similar laws.

Now is the time for HR leaders to familiarize themselves with AB5 and any other similar regulations in the works. Here are three strategies that can help you avoid any employee compliance issues — now and in the future.

1. Prioritize understanding.

Business leaders had more than two years to learn about AB5 compliance, but many ignored the situation and hoped it would somehow go away. Now, many are learning a lesson they already should have known: Ignorance doesn’t justify noncompliance, and it can be incredibly costly.

Willfully misclassifying an individual as an independent contractor carries a civil penalty of $5,000 to $25,000 per violation. The government isn’t shy about enforcement, either; Vox Media and Uber have already been sued. Classification laws may change, but they aren’t going to disappear. It’s up to HR leaders to pursue a thorough understanding of any relevant laws before they come back to bite them.

2. Set your HR team to work.

HR teams need to have adequate resources to maintain an up-to-date knowledge of federal and state classification requirements. If your HR department isn’t big enough to handle worker compliance, you might consider outsourcing this task to a vendor or a service platform that can help shoulder the burden.

HR serves as a company’s in-house experts and go-to resource for a litany of employee issues. Keep your team members in the know about upcoming hiring initiatives to ensure they can help mitigate any potential pitfalls.

3. Classify before you engage.

The best time to apply the AB5 independent contractor test is when you’re creating a job description and defining its duties and responsibilities — not after you’ve engaged a worker. If you don’t classify your worker correctly until after they’ve been engaged, you’re setting yourself up for fines, an audit, or even a retroactive lawsuit.

When it comes to employee classification, one truth rises above all else: Neither the company nor the worker can influence the law. AB5 compliance is a matter of answering three simple questions. It’s your job to make sure your team has the right answers.

Employee classification issues — specifically related to independent contractors — can take a bite out of efficiency and the bottom line. See the fallout of AB5 as a chance to get out in front of similar regulations and mitigate potential compliance complications.

Antonio Barraza is a business development representative and contingent workforce expert at Innovative Employee Solutions (IES), a leading nationwide employer of record that specializes in payrolling and contractor management services for today’s contingent workforce. Founded in 1974, IES has grown into one of San Diego’s largest women-owned businesses and has been named one of the city’s “Best Places to Work” for 10 years in a row.