Employees or Contractors? The Impossible task of complying with AB5
The ABC Test.
Since California's Assembly Bill 5 ("AB5") became law on January 1, 2020, any person who provides labor or services in California must now be considered an employee rather than an independent contractor unless the "hiring entity" demonstrates that all of the following conditions are satisfied ("The ABC Test" ):
A. The person is independent of the hiring organization in connection with the performance of the work, both under the contract for the performance of the work and in fact.
B. The person performs the work that is outside the usual course of the hiring entity's business.
C. The person is routinely engaged in an independently established trade or occupation. or the business is of the exact nature as that involved in the work performed.
The confusion surrounding the passage of AB5 has given rise to over thirty bills currently in the State Legislature to either amend or repeal the law and has spawned at least four lawsuits to contest it. In particular, the law has wreaked havoc on the independent film industry, populated by many workers and service providers previously considered independent contractors.
New Hires can't meet the ABC Test for Independent Contractors.
Independent contractors have been the backbone of the business. They have lowered the overall cost of film production enough to permit independent filmmakers to make a living. However, the new ABC Test threatens to end independent film production as we know it. Applying the test to a typical film production, if a film producer hired a cinematographer for a presentation, the producer could successfully show that the cinematographer met the third prong of the test — that of being engaged in an independently established trade, occupation, or business of the exact nature as that involved in the work performed (mainly if the cinematographer operated as an LLC or an S-Corp). However, the producer would have a more challenging time proving that the cinematographer met the remaining two prongs of the test. For example, could the producer successfully argue that a cinematographer performed work outside a film producer's business? Possibly, but the cinematography is central to film production. Similarly, could the producer say that the cinematographer was free from the control or direction of the film producer in connection with the performance of his work when call times, location choices, etc., were entirely under the producer's power? Not successfully.
Does the Business-to-Business ("B2B") Exception Apply?
Business service providers argue that they are exempt from AB5 restrictions under the Business-Business exception to AB5, which allows a business (the "contracting business") to contract to receive services from workers employed by another company ("business service provider"). However, to qualify for the B2B exception, the contracting business must show that the business service provider meets all of the 12 requirements of this exemption.
In a recent article, Laura Curtis, a policy advocate for the California Chamber of Commerce, argues that, upon close examination of the actual language, the B2B exemption is virtually inoperable. Laura Curtis, ["Oh, What a Relief It Isn't — AB5 and the B2B Exemption," Capital Insider, January 21, 2020, capitolinsider.calchamber.com/2020/01. Accessed 20 August 2020.]
Ms. Curtis writes that, while many of the factors are problematic, she cites four elements that make it nearly impossible for businesses to benefit from this ABC Test exception: (B). The business service provider is providing services directly to the contracting business rather than to customers of the contracting business. (G). The business service provider contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity. (H). The business service provider advertises and holds itself out to the public to provide the same or similar services. (K). Consistent with the nature of the work, the business service provider can set its hours and location of work. Factors (B), (G), and (H) would require that the contracting business have some personal knowledge of the service provider's business. If it merely relies on the service provider's assurances, and those assurances are not trustworthy, the contracting business could face misclassification liabilities that could include penalties relating to unpaid minimum wage, overtime, unpaid Federal, State, and local income tax, paid sick time, unpaid work-related expenses, workers' compensation premiums, and unemployment compensation, to name a few.
But Factor (K) is the most concerning to film producers because the service provider will rarely be able to set its hours or location of work in film production. The producer usually is exclusively in charge of such things. Ms. Curtis concludes that, for these reasons and more, the current B2B language is not workable and can potentially eliminate most independent contractors in California. For film producers and other media creators that have historically relied upon independent contractors, complying with AB5 is complicated and fraught with risk, at least until either the law is repealed or modified to include carveouts favorable to filmmakers or until caselaw is further developed to lend some predictability as to the likely outcomes of the application of the law to specific business scenarios.
[See an updated blog post about AB 5 here]
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The information provided in this article is for general informational purposes only and should not be construed as legal advice or opinion. Readers are advised to consult with their legal counsel for specific advice.