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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. 

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:

Criteria A

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.

Criteria B

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.

Criteria 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.

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

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

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. 

AB5 Exemptions

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. 

While navigating AB5 (and any other talent and entertainment payroll management hurdles), LÜK can help you put together your next production. 

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.

California takes the rights of its contractors seriously. In addition to the AB5 law, California also has waiting time penalties for employers that don’t pay their employees correctly and on time. 

For production companies, the legal and financial consequences of a non-compliant contractor payroll system can be disastrous. 

If you don’t pay your freelancers accurately and on time, you could find yourself owing tens of thousands of dollars in wait time penalties–or getting seriously sued.

Sounds pretty bad, huh? Well, LÜK is here to help! LÜK offers producers and talent the perfect payroll solution that handles payroll, compliance, worker’s comp, and more–so you never have to worry about California waiting time penalties again. 

But first, let’s break down waiting time penalties in California and how they may apply to you. 

What are Waiting Time Penalties in California?

In California, waiting time penalties are imposed on employers who willfully fail to pay final wages to an employee immediately upon termination or within 72 hours if the employee resigns without notice. These penalties are authorized under the California Labor Code Section 203.

California Labor Code 203

So, what is the California Labor Code 203? 

The California Labor Code 203 imposes a waiting penalty on employers intentionally withholding final paychecks from employees who have quit or were terminated. The penalty amount is the employee’s daily wage for each day the check goes unpaid, which can last up to 30 days. 

Employees who believe they have been wronged under Section 203 may file a wage claim with the California Division of Labor Standards Enforcement or file a lawsuit to be paid the wages owed, plus waiting time penalties, attorney’s fees, and court costs.

Waiting Time Penalties in California for Final Paychecks

To be eligible for waiting time penalties, an employee must generally be entitled to receive wages that weren’t paid promptly. The penalties are not awarded if the employer can demonstrate that the delay in payment was due to a good faith dispute over the wages or if there was a genuine inability to pay due to circumstances outside of the employer’s control.

Employee Resigns

If you informed your employer within 72 hours or more before your last work day, it’s mandatory for them to pay your final pay. This paycheck has to be issued on your final day. 

The employer cannot wait until the next period to send you your final paycheck since you no longer work there. Your employer must settle your final paycheck on your departure date, which can be done via direct deposit or a paper check.

In the event that you resign without providing a minimum notice of 72 hours—effectively resigning immediately—your employer is given a window of 72 hours to process and issue your last payment.

If the employer does not pay the employee on time or within the 72-hour window, they will have to pay the employee’s daily wage at work. This can last for up to 30 days, and if the former employee worked from Monday to Friday, the penalty will also include Saturday and Sunday.

Employee is Terminated 

Employees terminated from their role or job must be paid for all the hours worked, including the day of their termination. Payment must be made the same day as the termination–not the next day, next week, or the next pay period. 

However, there are a few exemptions: 

• Seasonal employees working in specific food industries can be paid up to 72 hours after their termination date
• Any employee who is working in the film industry must receive their final pay on the next regular payday
• For an employee who works in the oil industry, their final pay must come no later than 24 business hours after their last day

If the employer fails to pay the employee or tampers with the paycheck’s amount in any way, it will result in the employer receiving a misdemeanor charge.

Vacation Pay

In California, taking a vacation or PTO is considered the same as other wages. Any employee with leftover PTO who has been terminated or resigned from their position must be paid their remaining PTO amount. 

There are a few exceptions to this; however, the employer puts in place a probationary period or waiting period before vacation time can be used. Or the employer places a cap on how vacation days accumulate. There is no cap limit, but California vacation laws are extremely strict on what they view to be a reasonable cap limit. 

Overtime Wages 

For overtime wages, the waiting time penalty can apply if the overtime wages are part of the final wages owed to the employee at the time of termination or resignation. This means that if an employee is not paid their earned overtime wages in their final paycheck, they may be entitled to receive a day’s worth of wages for each day the payment is late for up to 30 days.

The penalty is calculated by multiplying the employee’s daily wage by the number of days the wages are late, not exceeding 30 days. The daily wage would include any overtime the employee would have normally worked.

Amounts Missing 

If an employee receives a paycheck with an amount withheld or missing, the employee is allowed a two-week waiting penalty. This is also true for employees who were not paid their remaining PTO wages. 

Late Paychecks

The practice for late payment of wages or paychecks is similar to the waiting penalty for overtime wages. 

For any employer who fails to pay an employee their final paycheck for any reason receives a waiting time penalty each day that employee is not paid. The penalty is the equivalent of the employee’s daily wage, and this waiting period can last up to 30 days. 

In addition to the final paycheck and daily wage accumulated during the waiting period, employees may also receive interest for their unpaid wages and the cost of the lawyer and court fees. 

More About Waiting Time Penalties in California

Exceptions to Waiting Time Penalties In California

While waiting time penalties are strictly enforced in California, there are some exceptions and circumstances under which an employer might not be required to pay these penalties. Here are some of the key exceptions:

• Good Faith Dispute: If there’s a legitimate, good faith dispute over whether any wages are due, waiting time penalties may not apply. A good faith dispute that any wages are due occurs when an employer presents a defense based on law or fact, which, if successful, would prevent any recovery on the part of the employee.

• Voluntary Resignation Without Notice: If an employee voluntarily quits without adequate notice, the employer has 72 hours to provide the final paycheck. Waiting time penalties would not start until after these 72 hours have passed.

• Employee’s Fault: If the failure to receive timely payment is due to the employee’s actions, such as failing to provide the correct address or not submitting required paperwork, the waiting time penalties may not be set against the employer.

Can an Employee Claim Waiting Time Penalties If They Resign Voluntarily? 

Yes, an employee in California can claim waiting time penalties even if they resign voluntarily, provided the employee did not receive any pay before the state’s deadline. The timing for paying final wages in the case of voluntary resignation depends on whether a 72-hour notice was given before their resignation. If so, their final pay should include any remaining PTO or vacation. 

However, as stated before, if the employee doesn’t provide the employer with a minimum of 72 hours notice, the employer has 72 to pay the employee without penalty. 

How to File Waiting Time Penalties in California

To file waiting time penalties, you can file a wage claim through the Department of Division of Labor Standards Enforcement. After you’ve filed your claim, you’re assigned a Deputy Labor Commissioner who will determine how best to proceed based on the circumstances of the claim and information presented. The action that can be taken regarding your claim can be a referral to a conference, hearing, or dismissal of the claim.

An employee can also file a lawsuit in civil court for their claims. 

Avoid Wait Time Penalties in California

As an employer or someone who hired talent for their production, you need to pay your talent for their work and on time. You could face waiting penalties if you don’t pay your employees on time. So, how can you avoid missing payments? 

Start using a payroll service to help manage and send payments to all talent, employees, crew members, and any other independent contractors. And we have the perfect payroll solution for you! 

LÜK streamlines the payment process for employers and contractors, offering a centralized platform for all entertainment payroll needs. We handle the billing and legal, giving you the peace of mind that your talent is paid accurately and on time. On top of that, LÜK makes sure you’re in compliance with local state labor laws so you avoid paying out of pocket for other fees and penalties. 

We’d love to show you how it works.