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  • Lindsay Spiller

Is a "loan-out" LLC or Corporation exempted from California's AB 5 law?

Updated: Dec 24, 2022

After my last blog post a couple weeks back, in which I argued that film producers could not rely on AB 5's business-to-business exemption to classify workers as contractors, I got an earful from a number of film producer clients who claimed that many of their workers had rebelled against my interpretation and the notion that AB 5's ABC test applied to them.

This is a somewhat strange reaction given that AB 5 was designed to protect workers from being misclassified as contractors and therefore being denied such employee protections as minimum wage, overtime pay and workers' compensation. It is often presumed that producers would be the ones angling for workers to be classified as independent contractors, but in the entertainment business, it appears that it is the workers (i.e., actors, directors, cinematographers and others) who are clamoring for it. Reasons for this vary --- some workers want to have more freedom in choosing how and when to work while others fear that the increased costs of classifying them as employees would lead to reduced job opportunities or cause film production to relocate to other states. Whatever the reason, producers are facing pressure from individual workers to classify them as independent contractors.

But before we revisit the question of whether the "business-to-business" exemption permits film producers to classify workers as contractors, let's look again at AB 5.

AB 5 and the Dynamex case.

The expressed intent of the California Legislature in enacting AB 5 was to codify the California Supreme Court's Dynamex case [1] in which the court ruled that Dynamex Operations West, Inc., a nationwide package and document delivery company had misclassified it's delivery drivers as contractors rather than employees for purposes of the applicable state wage order governing the transportation industry. [2] The court ruled that such a misclassification posed "a very serious problem depriving the federal and state governments of billions of dollars in tax revenue and millions of workers of the labor law protections available to which they were entitled." [3]

Addressing the problem, the Dynamex court applied a much more rigorous standard for classifying independent contractors than the standard it applied in the court's 1989 Borello decision. [4] In Dynamex, the court said that a worker could be properly classified as an independent contractor only if the contracting entity established the following:

(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that 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.[5]

This standard is now law under AB 5 and its application to a typical film production scenario means that the film production workers, who are generally always under the "direction and control" of the producer, should be classified as employees. And while certain vocational workers and professionals are expressly exempted from AB 5's test, film production workers are not among them.

So what about the business-to-business exemption? Under the business-to-business exemption, should a "business service provider" formed as an llc or corporation perform services to a "contracting business," the employee or contractor status shall not be determined under AB 5's ABC test but instead under the Borello test, but only if the contracting business satisfies all twelve (12) of the identifying criteria of a bona fide business-to-business relationship. [6] However, the first of the twelve criteria is that the worker be "free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact." [7] As noted above in reference to part A of the ABC test, it is unlikely that a film producer would ever be able to satisfy this freedom of control portion of the standard, which would mean that a film producer could rarely rely on the "business-to-business" exemption to protect the producer from misclassification claims.

Section 4 and the Loan-out entities exemption.

However, it appears that Section 4 of AB 5 and the use of loan-out entities may allow producers to classify workers as contractors. Section 4 of AB 5 amends Section 605(d) of the Unemployment Insurance Code to read: