Everything contractors and freelancers need to know about navigating California's new Assembly Bill 5, which is set to drastically change the gig economy in the state
- California Assembly Bill 5 (AB5) goes into effect on January 1, 2020.
- AB5 is codifying a California Supreme Court decision made in April 2018 as a result of the Dynamex Operations West, Inc. v. Superior Court case.
- Once this bill is in effect, all workers are considered employees. The hiring party must use an ABC test to prove that they are independent contractors.
- Some occupations are exempt from AB5, but they must still pass the Borello test to determine their independent-contractor status. Freelancers can no longer submit more than 35 separate pieces of content to a single client in one year or less.
- Many independent contractors are misclassified and will be converted to full-time employees, have their workload cut to 35 content submissions or less, or lose their roles completely - unless they can figure out how to pass the ABC test.
- In addition to abiding by the 35-piece submission rule, freelancers who want to remain independent should talk to their employers, take steps to make sure they can pass both the ABC and Borello tests, and consider consulting a lawyer.
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Today, California Assembly Bill 5 (referred to as AB5) goes into effect.
Authored by Assemblywoman Lorena Gonzalez and signed into law by Governor Gavin Newsom in September, the bill's main purpose is to require California employers to adhere to a stricter definition of "independent contractor."
As a result, countless companies will likely have to reclassify many of their current independent contractors as employees, thus allowing those workers to benefit from traditional labor protections and minimum wage laws.
AB5 is codifying an April 2018 decision made by California's Supreme Court in a case called Dynamex Operations West, Inc. v. Superior Court, in which the court determined that a company called Dynamex incorrectly labeled their drivers as independent contractors.
Because of Dynamex, there's now a presumption that all California workers are employees, not independent contractors, unless the hiring party proves otherwise. Two other states already have a law like this - Massachusetts and Virginia - and New Jersey proposed a similar bill on November 7, 2019.
AB5 could affect over one million Californians, including rideshare drivers, approximately 70,000 truck drivers, freelance creatives, and more. Here's an overview of how it works, who exactly it'll affect, and what California freelancers can do about it.
The reasoning behind AB5Gonzalez proposed AB5 because she believes many employers have misclassified individuals as independent contractors in an effort to cut costs, a shortcut she thinks has unfair and detrimental consequences for those workers.
This is a nationwide problem. An IRS audit found that misclassification actually led to over $44 billion in unpaid taxes from 2008 to 2010.
In addition, Gonzalez stated in an interview that she's heard of way too many Lyft and Uber drivers who are barely able to make a living, despite the fact that when both Lyft and Uber went public, several of their current and former top executives became multimillionaires - and others made billions. Her solution to that? AB5.
How AB5 worksPost Dynamex, every worker is considered an employee - meaning they're entitled to any benefits the company offers, and the company controls when and how they do their work - unless all three parts of the following ABC test are true:
A. The worker must be free from the hiring company's control in how and when they do their job.
B. The worker must perform work outside of the hiring company's core business.
C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
There are several occupations exempt from AB5, such as accountants, insurance brokers, and investment advisors. For them, the ABC test isn't necessary, but those individuals do still have to pass the Borello test, which has been in place since before Dynamex.
"The Borello test looks at 11 factors, none of which are determinative, such as whether their work is part of the client's regular business, the degree of permanence of the working relationship, and whether or not the parties believe they're in an employer-employee relationship," explained Alicia Calzada, deputy general counsel of the National Press Photographers' Association (NPPA), an organization that represents and advocates for visual journalists all over the country. They filed a lawsuit against AB5 in mid-December.
Under the Borello test, Uber and Lyft could classify their drivers as independent contractors because not all 11 factors had to be met in order to achieve independent contractor status for their drivers. The main priority was to ensure that workers controlled when and how they worked. Since drivers can choose when they pick up passengers and how long they drive for each day, this wasn't an issue.
But now, thanks to AB5, Lyft and Uber are subject to the ABC test and must satisfy all three parts, which will be quite difficult for them to do. When it comes to part 'b,' drivers directly contribute to the core business. What would these rideshare companies do without drivers? And in regards to part 'c,' drivers likely aren't operating a rideshare platform of their own.
As for freelance creatives - writers, editors, photographers, designers, and so forth - they can no longer submit more than 35 pieces of content to a single employer in one year. According to the new stipulations of AB5, submitting more than 35 moves them out of the classification of independent contractor and into employee status.
AB5 will affect pretty much anyone who isn't already classified as an employee (whether full-time, part-time, or hourly), as they'll have to take a look at their role and ensure they're not incorrectly classified as an independent contractor. However, the burden of proving that someone is an independent contractor falls solely on the shoulders of the hiring party, not the worker.
Kiffanie Stahle, founder of Stahle Law, a law firm that serves creative businesses, and the artist's JD, a suite of resources that helps creative entrepreneurs understand the legal aspects of their businesses, said that the workers who'll feel the impact the most are those who never should've been labeled as an independent contractor in the first place.
"Those [independent contractors] providing services integral to the hiring party's business will be most affected because those businesses will start understanding the risks," she said. And they're not going to want to take those risks any longer, she added.
Workers incorrectly classified as independent contractors will either be converted to employee status, experience reduced work loads (such as freelancers who'll go from more than 35 submissions a year to less), or lose their role completely, should the employer not want to make them full time or lack the funds to do so.
"Both freelancers and publications based in California will need to adhere to the 35-submission limit," said Calzada. "All of this will have a chilling effect on those who have been freelancing as journalists and news photographers for years."
Michael Grecco, an award-winning photographer and film director in California, can't predict exactly how much AB5 will affect his livelihood, but he doesn't think it'll be favorable.
"[AB5] will limit the number of shoots I can do for any one client before they have to move on to the next [photographer]," he explained. "I can only deal with it when the situation arises, though." A recurring client could reach out to Grecco and request a shoot the very next day. But if he has already reached his 35-piece limit for them, he'll have to say no to the opportunity - and probably a good chunk of revenue, too.
Though the law isn't in effect yet, many have already felt its impact. Vox Media, for example, has already cut 200 freelancers due to AB5, opting to replace them with 20 full-time employees.
For some independent workers, AB5 could be a good thing. Already, a group of Uber drivers has sued Uber in an effort to receive back pay and retroactive benefits dating back to the Dynamex decision in April 2018.
Conversely, Uber, Lyft, and DoorDash are fighting the bill by trying to get a referendum on the 2020 ballot, the California Trucking Association is actively challenging the bill because it will prevent so many truck drivers from being able to do their jobs (even though many have invested $150,000 in their own equipment), and a few companies claim AB5 is unconstitutional because it violates equal protection and due-process clauses of the Constitution.
For many freelancers - especially those who want to remain independent - AB5 could be detrimental. Two groups representing freelancers have filed a suit to get the part of the law that will affect them removed.
"The heart of the bill is a good idea - get freelancers who are regularly working for one particular client benefits," Grecco shared. "This would've been great 15 years ago, but these days photographers, writers, and outlets are barely hanging on. It's not a good time to try to give benefits in an industry that will end up cutting jobs because they can't afford to provide benefits."
If you're a freelancer in California and you want to stay independent, here's some advice from Stahle and Chas Ramphenthal, general counsel of LegalZoom, an online legal tech company.
Figure out your clients' intentions
Just because the law goes into effect on January 1 doesn't mean all employers will act right away. Don't just sit around waiting to see if they'll say something.
"The first thing a worker who wants to stay independent should do is get an idea if their hiring company is planning to treat them as an employee [going forward] or worse - terminate the contractor relationship based on the law," Ramphenthal advised.
Take steps to pass the ABC test
If you don't pass the ABC test as is, try to work with your employer so you can. This includes: tweaking your job description and duties, having a written contract that stipulates that you have control over how and when you do your work, establishing an official business entity, and marketing your business.
"It can be as simple as building a website showing you're open for business, including a way for potential clients to request you to work for them," said Rampenthal.
To ensure you can also pass the Borello test, Stahle said you should get a business license, have a W9 form on file that you automatically send to new clients, and be able to easily provide proof that you work with other clients, such as building out a sales page discussing the services you offer or getting referrals from current clients.
"Get the name of one or two current clients who are willing to function as a reference and confirm that you work for them," Stahle said. "Under the business-to-business exemption [of the Borello test], one of the requirements is that you actually have other clients."
Ramphenthal also advised providing your own tools, vehicles, and workspace. And, if you happen to work out of a company's office, "try to spend as little time there as possible, and do it in a manner where it's up to you, not the company." In other words, you decide when you go there and how long you stay - not them.
If you only have one client, it's time to start branching out, as it will be nearly impossible to be classified as an independent contractor if you only do work for one employer.
Adhere to the 35-submissions-per-client limit
As Grecco mentioned, this could be very hard to plan for, as you never know when a client might need work. It also will impact your income. But as of now, unless the previously-mentioned lawsuit succeeds, this is a rule you need to abide by.
So, as much as you can, take steps to estimate how many submissions you have planned for each client, and make sure to track them consistently throughout the year.
Take note: If you submit work to publications of different names that have the same parent company, you need to talk to them to ask if the 35-piece submission rule is per publication or for the parent company as a whole.
Consult with a lawyer
Seeking advice from someone who knows the ins and outs of the law is never a bad idea, especially because you can ask about details specific to your situation.
Of course, legal advice can be expensive, so Stahle suggested California Lawyers for the Arts, an organization she worked for while she was in law school. For a low cost, they'll pair you with an attorney with whom you can have a 20-minute consultation. (Stahle also has a webinar about AB5 that you can check out.)
Take a good look at how you currently operate as an independent contractor to see if you'll be affected. If you think the bill will negatively impact you, figure out your next steps. And don't hesitate to reach out to a lawyer to make sure you're on the right track.
