In 2020, California determined it was time to clarify and regulate how employees are classified in the workplace. As a state with a massive gig economy, that decision had a major impact on worker rights and benefits, and how organizations must employ and pay independent contractors.
If you’ve landed here, you may want (or need) a better understanding of the AB5 Law in California and its implications for both workers and companies. Whether you’re curious or you’re directly affected by it, we’ll cover the ins and outs to help you navigate this significant piece of legislation in the simplest terms possible.
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What is California’s AB5 Law?
AB5, short for Assembly Bill 5, is a California state law designed to contextualize and define the parameters that classify workers as either employees or independent contractors. To do so, they created the ABC test, a method of criteria for determining whether or not a worker should be classified as an employee (with all the benefits and protections therein) or as an independent contractor.
Independent Contractor vs Employees: The AB5 Law’s ABC Test
There are many benefits and safeguards that laws offer to employees that are not extended to contractors. AB5’s ABC test was devised to determine and distinguish just that. Here are the parameters:
The worker is free from control and direction of the hiring entity in performing the work.
In sorting out whether someone is an independent contractor, the IRS will rely on what they call the “control and direction” test. It’s pretty straightforward and focuses on three key aspects: behavioral control, financial control, and the nature of the working relationship.
- Behavioral Control: This is all about who gets to call the shots when it comes to how, what, and when the work gets done. If the person or business hiring the worker has a say in these aspects and is directing their every move, it’s more likely an employer-employee relationship. On the other hand, if the worker has the freedom to decide the specifics of their work, they lean towards being an independent contractor.
- Financial Control: This aspect looks into whether the worker has the opportunity to take on financial risks or losses. Independent contractors often have more financial control and can potentially experience both gains and losses from their work, while employees usually have a generally predictable income and fewer risks.
- Nature of the Relationship: This aspect examines whether the worker is exclusively tied to a business or can work for multiple clients or companies. If the worker is limited to just a single employer, an employment relationship is likely at hand. If they instead have the flexibility to take on other gigs, they are more likely an independent contractor.
The worker performs work that is outside the usual course of the hiring entity’s business.
This piece describes whether the work being done falls outside the general or core operations of the business, i.e. tasks that a company can easily delegate to external parties. If the work is something a business can likely outsource rather than handling it in-house, it’s more likely to be considered contract work.
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.
This last bit delves into whether the worker is running their own business outside of the work at hand. If those individuals with specialized skills have their own gigs or small business, they are likely a contractor rather than an employee.
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How AB5 Impacts Independent Contractors
Models & Actors
Modeling and acting are huge industries in California. The strange hours and freelance, freedom-based nature of the work may be affected by the need to classify the business exchange with standards under AB5.
While modeling and acting work is often “one and done,” there’s always room for exception, as in the case of many ongoing theater shows or television shows. D. Under the ABC test used by AB5, models, and actors could potentially be classified as employees, entitling them to employee benefits and protections.
Production Crew Members
Crew members, such as production assistants, camera operators, and grips, could also be affected by AB5. Oftentimes these roles are ongoing, so it’s best to be sure of their specific workflow as it relates to the ABCs of the AB5.
One of those ABCs requires independent contractor work to be unrelated to the hiring entity. In film production, this can mean crew members may have to be classified as employees.
Hair & Makeup Artists
Similar to actors and models, these roles are often project specific. Because hair and makeup artists perform services that are “within the usual course” of a salon’s business model, the hiring party can never truly meet part B of the ABC test, which states: “the worker performs work that is outside the usual course of the hiring entity’s business.”
However, there could be a chance that these talents are affected by AB5 in other nuanced ways, so it can be helpful to seek legal guidance to be certain you’re classifying these folks by the book.
Freelance writers are interestingly affected by AB5. Considering the nature of their work deliverables and publishing companies, there are now specific parameters for freelance writers to meet the “B” criterion of the ABC test.
In California, AB5 limits the number of content contributions that writers can make to media organizations to 35 per year. For instance, SB Nation, a sports site owned by Vox Media, recently announced that they’ll be letting go of around 200 freelancers and instead hiring about 20 full-time and part-time employees to comply with AB5. Be sure to check with legal counsel for these roles to be sure you are classifying talent correctly.
Drivers in the gig economy have been greatly impacted by AB5. In the past few years, there have been several debates on whether these folks should be protected by employee classification and all the benefits therein. There are varying opinions from folks who drive for a living as to which classification is preferable. Many would like to remain independent contractors and retain all the flexibility, tax, and logistical implications, while others would prefer to enjoy the benefits and protections of employee status.
Prop 22 was created to maintain these roles classified as contractors, which also sparked a lot of debate.
There are indeed exemptions to AB5 for specific professions and industries. As mentioned, Proposition 22 was passed in California in November 2020. Proposition 22 created an exemption for app-based rideshare and delivery drivers, allowing them to continue working as independent contractors with some additional benefits and protections.
Similarly, AB2257, a revision passed in 2020 added additional exemptions and clarifications to AB5 for certain jobs, such as freelance writers, photographers, translators, graphic designers, musicians, and more.
Individuals and businesses should consult legal professionals who specialize in employment and labor law to understand the exemptions that may apply to their specific circumstances and ensure compliance with applicable regulations.
How To Stay Compliant Under the AB5 Law
1. Understand Employee Requirements vs Contractor Requirements
There are requirements for each classification that are important to understand as you work through the details here. Below is a high-level overview of a handful of those differences.
Control and Independence: Employees typically work under the “control” of their employer. The employer determines how and when the work is done, and provides necessary tools or equipment. On the other hand, contractors have more independence and control over how they perform their work, as well as their own tools to see it through.
Benefits and Protections: Employees are most often entitled to various benefits and protections under labor laws. These may include minimum wage, overtime pay, workers’ compensation, unemployment insurance, and access to employer-provided benefits like health insurance and retirement plans. Contractors, on the other hand, are responsible for their own benefits and do not receive these perks.
Tax Responsibilities: Employees have taxes withheld from their paychecks by their employer, and the employer is responsible for paying certain taxes on behalf of the employee. Contractors, on the other hand, are responsible for paying their own taxes and are typically considered self-employed for tax purposes.
Length of Relationship: Employees typically have an ongoing and long-term relationship with their employer, while contractors work for specific projects or periods of time. Contractors are not typically considered permanent employees of the hiring entity.
2. Determine Worker Classifications
To determine your worker’s classifications, be sure to use the ABC test as your guide. As a reminder, those three determinations are dependent on the following data points:
A. The worker is free from control and direction of the hiring entity in performing the work.
B. The worker performs work that is outside the usual course of the hiring entity’s 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.
If you are in the photo production world, LÜK is ready, willing, and able to lend a hand in navigating the worker classification process under AB5. Our team is fluent in the ins and outs of the ABC test and will help you look at three important factors to make the call.
Keep in mind that AB5 and its classification rules apply specifically to California — other locations have their own tests and rules for determining worker classification. In any case, we’ve got the scoop and would love to help.
3. Reclassify Workers if Necessary
AB5 can be a bit of a puzzle, so reclassifying workers should be done with the utmost care and help from legal experts or seasoned AB5 pros. With information gleaned after conducting an ABC test, you may find yourself needing to reclassify independent workers as employees or vice versa. In this case, it’d be necessary to reconfigure their corresponding tax forms (1099 or W2) or add or remove certain benefits from their employment structure.
4. Adjust Schedules, Payments, and Taxes as Needed
If you find after determining classification through your ABC test that you’re toeing the line between two classifications, you can make adjustments to the role to course correct your classification in the intended direction.
For instance, if you’re a casting agency and your workers are classified as employees, you may need to modify their schedules to ensure compliance with labor laws. Review and update work hours, breaks, and any overtime policies to be sure you’re doing so by the book.
Ensure your workers who are employees are receiving minimum wage and any applicable overtime pay. If using contractors, ensure that payments are made per the terms outlined in their particular contractor agreements.
As taxing goes, for employees you must withhold the required taxes from their paychecks and remit them to the relevant tax authorities. For contractors, provide them with the necessary tax forms (e.g., Form 1099) at the end of the year and ensure they are responsible for their own tax obligations.
Make It Simple to Follow the AB5 Law
We hope this guide has lent you a better understanding of AB5 and its implications for both workers and companies alike.
Whether you’re working with LÜK to reinforce and support your payroll workflow, and worker classifications, or to defer that process entirely, we’d be thrilled to be a part of the process. While you’re at it, let us cast the project too. It’s our thing.