GIG COMPANIES ROSE FROM THE ASHES of unemployment, foreclosures, and evictions after the last recession, offering people quick and easy ways to make money. Meanwhile, more and more industries relied on freelancers and contractors to survive, especially with rising regulations that made it challenging for businesses to afford employees.
But some politicians and labor groups say these companies are “misclassifying” workers, thereby depriving them of benefits and evading about $7 billion a year in payroll taxes.
Enter AB 5, which Gov. Gavin Newsom signed into law last September. To send a message on how seriously he regards the bill, Newsom designated $20 million of the state budget to enforcing AB 5. Bill author Assemblywoman Lorena Gonzalez, D-San Diego, has hailed AB 5 for “setting the global standard for worker protections for other states and countries to follow.” Democrats in other states are proposing similar bills, and most Democratic presidential candidates have voiced support for a federal version of AB 5.
With AB 5 taking effect on Jan. 1, 2020, many companies scrambled to figure out how to comply with the law. Few want to risk doing business as usual—penalties range from $5,000 to $25,000 in fines per violation, and that’s not including legal fees and back wages.
Since the new year, some businesses have reclassified all or some of their independent contractors as employees, often transferring the costs to their customers or cutting employee pay. Some are asking their contractors to set themselves up as independent businesses so they can qualify for the “business-to-business” exemption in AB 5. Some are paying under the table. Others have chosen not to work with California-based contractors at all.
Under AB 5, all workers in California are presumed to be employees unless the employer can prove that the worker meets a stringent set of criteria established in a unanimous 2017 California Supreme Court ruling known as the Dynamex decision. In this case, truck drivers sued their employer for lost wages when the employer abruptly reclassified them as independent contractors. To determine the legal standard for independent contractors, the Dynamex decision introduced the “ABC test.”
The test presumes that a worker is an employee unless the hiring company can show that (a) the worker is “free from the control and direction of the hiring entity”; (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.”
Who meets all three prongs of the ABC test? It’s unclear. For example, a freelance cellist who has to show up at a certain time to play for a wedding and play a specific music set may not meet the “a” prong, or if subcontracting with a band, she might not meet the “b” prong—at least according to the strictest interpretation of the law. That’s the problem, said Lizelle Brandt, a Los Angeles–based attorney who specializes in entertainment and small business law: “The law as it’s written is not black and white.”
When her business clients asked her how to comply with AB 5, Brandt couldn’t give them a clear answer. Instead, she could only rate them as being at high, middle, or low risk of violation. For example, a person who forms an LLC to meet the “business-to-business” exemption under AB 5 would still have to meet all 12 criteria of another test.
More ambiguities in the law: AB 5 allows exemptions for certain professions but doesn’t clearly define those professions. Does “fine artists” include dancers, graphic designers, and cartoonists? The bill also sets an arbitrary cap of 35 submissions that freelance writers can submit to a single publication in a year, but it doesn’t define what “submission” means. All these definitions are based on the interpretation of California’s Employment Development Department (EDD), the state agency tasked to enforce AB 5.
“The practical effect of AB 5 is that lawyers will always give the safest answer to their clients,” Brandt said. That means even if someone might seem to meet the requirements of AB 5, “they’re viewed as toxic right now. … The general advice among lawyers is, ‘Stay away from independent contractors.’”