Monday, December 30, 2019

Independent contractors both helped and hurt by California's AB5

[Breaking 1/1 - the CA trucking industry managed to get a fed judge to temporarily block AB5 implementation. The law is still in effect for all other indy contractors, which goes to show you if you have organizing power -- a guild, association, or a lobby -- some open negotiation can be achieved.]


While I am out of full-time activism since shuttering my blog, Pam's House Blend, back in 2013, this is a topic that runs at the foundation of what I have done as a working professional -- I've been a small business owner, an employee of a large company, and  a freelance reporter and project manager as an independent contractor. Now living in California, a landmark piece of legislation, AB5, takes effect on January 1, 2020, and it will have nationwide implications for other states that may take this up (link to final bill as signed). Lawmakers in NY and NJ are considering similar legislation.

Does it affect you? Understanding AB 5 - California’s New Independent Contracting Rules  

The intent is laudable -- so many large companies hire independent contractors to avoid benefits like overtime, paid time off, disability and unemployment, etc. that are paid by the state. Such a company that raised the red flag is the ride-share giant Uber, whose drivers are considered by the company to be unattached to it, only contractors hired. The state of California believed that these workers are actually employees by definition in any other circumstance, and thus are misclassified. And this is why Assemblywoman Lorena Gonzales (D-San Diego), authored sponsored the bill that was passed and signed into law by Governor Gavin Newsom. It must also be added that the state estimates it loses around $7B annually in payroll taxes due to worker misclassification, so it's not only altruism for the self-employed professional involved here.

The problem here is, of course, the unintended consequences on the hundreds of thousands of independent contractor/hiring entity relationships that are EXACTLY what the two parties want - the freedom of the freelancer to set their own hours, bring their own tools and expertise to the project, and numerous other benefits of a different kind that are erased by AB5. A host of professional groups made sure that exemptions were made (doctors, lawyers, agents, etc.) so that they could continue to flourish as independent contractors, acknowledging that the self-employed do not desire or require benefits as employees by choice. 

Supporters of the bill argue that by avoiding unemployment insurance taxes and workers’ compensation premiums, businesses shift the burden to the state — and its taxpayers — when workers get laid off, get sick or get injured on the job. 

Freelance writers are one group felt the immediate impact, even though AB5 has an inadequate exemption, that they can contribute up to 35 pieces to a publication without being considered an employee. Vox's layoffs this year in anticipation of AB5

In 2020, the company will create a new team of SB Nation employees to cover California sports that have largely been covered by independent contractors since 2003. Vox Media will end contracts with about 200 people, including non-California freelancers who cover teams based in the state, and replace them with 20 new part-time and full-time staffers, according to a source familiar with the decision

...Ness wrote in the memo that California contractors were encouraged to apply for full-time or part-time positions [at Vox]. For those who do not snag a job but want to keep contributing, Ness wrote that “they need to understand they will not be paid for future contributions.”  

Here is the obvious need for a law like AB5:


In September, California adopted a new law aimed at combatting the misclassification of workers. The legislation, Assembly Bill (AB) 5, will take effect on January 1, 2020. AB5 adopts the “ABC” test that has been used by courts and government agencies to determine employee status. Under this test, workers can only be classified as independent contractors when a business demonstrates that the workers:

  • Are free from control and direction by the hiring company;
  • Perform work outside the usual course of business of the hiring entity; and
  • Are independently established in that trade, occupation, or business.

Workers who don’t meet all three of these conditions must be classified as employees for purposes of state wage and hour protections. AB5 will help ensure that California’s workers who perform core work under company control versus as independent businesses have access to basic labor and employment protections and benefits denied independent contractors, including minimum wage and overtime protections, paid sick days, workers’ compensation benefits, and unemployment insurance benefits... 


But as I said above there is a serious CON side, and a very vocal reaction from independent contractors who are not harmed by their status in the least. From Markos Moulitsas, progressive activist and founder of Daily Kos:

In terms of the specifics of AB 5, a number of professions have been exempted, including doctors, lawyers, architects, and graphic designers—presumably, because they are less likely to be exploited by companies that hire them. But many others—specifically freelance writers, but also musicians, editors, and photographers—now face crippling new limits on their ability to work for themselves. Writers, editors, and photographers will be limited to a total of 35 submissions per year to “hiring firms.”


UPDATE: on Dec 30 I was on the Michelangelo Signorile show on Sirius XM 127 to discuss this with my friend Joe Sudbay...

MY Take...

Here is a letter I wrote to a musician to let them know about the impact on mom and pop and sole proprietorships that will be pushed to the brink of collapse to comply when the independent contractor WANTS the freedom of working for themselves without encumbrance of being an employee of many businesses. 
AB5 affects, among many other groups, independent (non-union) musicians. It also affects the many freelance writers I know (as a former national indy journalist/blogger). Many have been fired from their freelance positions this month in the wake of AB5, because the newspapers and magazines they write for on a regular basis are otherwise required to hire them as employees after Jan 1. What some publications are choosing to do is fire the CA writers, and hire out of state writers (see VOX) -- that they CAN hire those people as independent contractors because the writers do not live in CA, subject to AB5. The writers fortunately have a guild (The American Society of Journalists and authors) and  the state is being sued on their behalf over this. 

So it makes California-based writers, musicians and many other kinds of contractors immediately less desirable to hire. Unbelievable.  All it takes is for a professional to earn $100 in a quarter by those hiring them to be now classified as an employee. It means independent contractors paid for those gigs now will go on a payroll, receive a check with state withholdings on it to cover state unemployment tax, disability insurance, family leave insurance, etc. just like you would receive from a regular day job.

Now, I have no doubt that AB5 will be amended to fix this mess. Too many individuals and small businesses are negatively affected (an unintended consequence of trying to get large companies like Uber and Lyft to give benefits to their drivers who operate as indy contractors). AB5 needs to enumerate its language to include musicians in the exempted Fine Artists category, because the bill as signed into law does NOT specify musicians.

Where things stand

Musician Ari Herstand (@aristake) contacted the sponsor of the bill, now law, Assemblywoman Lorena Gonzalez (district 80, San-Diego) and met with her on December 18, AFTER the bill had already been signed into law. And he did so because musicians are not specifically exempted from AB5 under the Fine Artists exemption. His petition:

Nov article on AB5

Dec article on meeting

The state Assembly reconvenes on January 6. That is when possible amendments will be discussed for the various categories, but do not expect a full Assembly vote to clear this up until SeptemberUntil then compliance is required. And it WILL be enforced, as it clearly says on the state web site by the Employment Development Department and the Franchise Tax Board. Here are FAQs.   

For those that hire contractors on a regular basis,1)  ignorance of the law is not an excuse to avoid AB 5 requirements; 2) not complying is a choice, but not a smart one, as relayed here from the meeting with Assemblywoman Gonzalez. (BTW, no state entity -- the FTB or the EDD -- I contacted in the last few days said to bypass the law until it is "fixed" and handled retroactively).  

What to do in the interim
1. Musicians need to contact all entities they've worked for as contractors to see 1) if they are aware of AB 5; and 2) what do they plan to do to handle your work with them re: the law come Jan 1.

As I said above, the Employer Development Department makes it very clear about enforcement on its web site. They are looking not only for 1) fraud (submitting 1099s for indy contractors that should now be employees), but also for 2) these new, inexperienced employers to make mistakes in the mountain of regular state paperwork submissions for payroll required to take on employees. Up to 1/3 of businesses file paperwork with mistakes because of the complexity and receive fines. From the EDD:

Important: Starting January 1, 2020, workers will be considered employees unless proven otherwise. Visit AB 5 – Employment Status to learn how it impacts you.
In addition, it is important for claimants and employers to understand their roles and responsibilities in making sure that information is reported accurately and benefits are paid appropriately. Committing fraud has serious consequences. Learn more on Fraud and Penalties: What You Need to Know or review our Recent Fraud Convictions.
2. It's important to know how your state senator and assembly member voted on AB 5. If you don't know who they are, you can find them by your address and zip code:

This is how they voted this year on AB5:

3. Write them to tell them to amend AB5 during the next session and how its passage has affected you.