Friday, January 3, 2020

California's AB5 - wreaking havoc for independent contractors

The CA legislature goes back into session next week, and the new AB5 law is now in effect, with significant consequences ahead for California's economy. It's the law of unintended consequences -- or is it?

Some topics below:
* So I called the EDD for information about compliance...
* What does compliance look like?
* Why was AB5 needed when SB459 is already on the books?
* This isn't jaywalking...

Those who work as independent contractors/freelancers (unless you were in a professional classification that lobbied and won an exemption) now face the prospect of being fired, or less-hireable instantly. Why? Because those who hired you for your services now have to hire you as an employee. And they have to fulfill all labor laws -- that also means payroll withholding taxes. Ostensibly this is to protect service professionals that are routinely denied these rights by large companies exploiting and misclassifying them as independent contractors.

Good reads...

But AB5 harms hundreds of thousands of independent contractors that rely on freedom to determine their rates of pay, when and how they work. The massive problems are exemplified by the enormous number of exemptions -- the law is too broad, a sledgehammer. Since the legislature reconvenes on Jan 6, expect amendment proposals on the table. 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. Or, more broadly, adopt amendment language that includes many more groups similarly affected.

Apparently enforcement by the Employer Development Department will not occur until July, but what are contractors and those who hire them supposed to do in the meantime?! Payroll has to be set up and withholdings will begin, and payments will flow to the state coffers.

I called the EDD...
I personally called the Employer Development Department last week. If you want any education about how to comply, or who is are pretty much SOL. I was told to go to the EDD and FTB web sites. The option to talk to a human is limited - I was connected to the "Auditor of the Day" and got voicemail, left a detailed message, and was never called back.

They believe that putting a comprehensive web site and directing people there is sufficient when many independent contractors and those who hire them have never been an employer, have no experience doing payroll/withholding and submitting paperwork to the state for this. So there goes another expense -- hiring a payroll company to do that, or learn to do it yourself (with the high risk of making errors - 1/3 of companies do -- and receiving fines). Madness.

What logistically will happen if AB5 is rolled back with exemptions retroactive back to January? I cannot tell you. More confusion:
"Enforcement will be slow and uncertain: AB5 does not tell businesses that they must reclassify their workers as of January 1, 2020. Instead, the new law allows cities and the state to challenge a company’s worker classifications through legal action. California government agencies will have to spend time and legal fees to sue companies and determine through the courts whether the workers are employees or independent contractors."
So, what does compliance look like for these new "employers" and "employees"?  There you'll need to consult with an an employment attorney or accountant - and many of them aren't up on AB5. The Franchise Tax Board and Employment Development Department note AB5 on their sites -- they will enforce the law. I'm sure if you are employing a freelancer, you don't want to be caught with multiple violations. The uncertainty is why many businesses, including magazines, fired their entire freelance staff in 2019 in anticipation of compliance with AB5 (see Vox layoffs).

Question...why was AB5 needed when SB459 was already on the books? Perhaps someone out there can shed light on this...I came across this article that begs the question why CA passed AB5 at all when there is a law already on the booksSenate Bill No. 459, regarding misclassification (
"California already has a worker misclassification law it’s not enforcing: California Senate Bill 459 is an existing law that makes it unlawful for companies to misclassify workers. This law puts its money where its mouth is. It gives the state Labor and Workforce Development Agency the power to fine companies $5,000 to $25,000 per violation for willfully misclassifying workers and allows the state Labor Commissioner to assess additional civil and liquidated damages. 
The law has been in effect since January 1, 2012 but so far has not been used to challenge worker misclassification at Uber, Lyft, or other Gig Economy platform companies. 
From the SB459 itself:
SB 459, Corbett. Employment: independent contractors. Existing law prescribes comprehensive requirements relating to minimum wages, overtime compensation, and standards for working conditions for the protection of employees applicable to an employment relationship. 
This bill would prohibit willful misclassification, as defined, of individuals as independent contractors. The bill also would prohibit charging individuals who have been mischaracterized as independent contractors a fee or making deductions from compensation, as specified, where those acts would have violated the law if the individuals had not been mischaracterized. The bill would authorize the Labor and Workforce Development Agency to assess specified civil penalties from, and would require the agency to take other specified disciplinary actions against, persons or employers violating these prohibitions. It would also require the agency to notify the Contractors’ State License Board of a violator that is a licensed contractor, and require the board to initiate an action against the licensee. The bill would authorize an individual to file a complaint, as specified, to request the Labor Commissioner to issue a determination that a person or employer has violated these prohibitions with regard to the individual filing the complaint. The bill would authorize the Labor Commissioner to assess civil and liquidated damages against a person or employer based on a determination that the person or employer has violated these prohibitions. 
This bill would provide that a person who, for money or other valuable consideration, knowingly advises an employer to treat an individual as an independent contractor to avoid employee status for the individual shall be jointly and severally liable with the employer if the individual is not found to be an independent contractor. This bill would exempt from the provisions regarding joint and several liability a person who provides advice to his or her employer or an attorney who provides legal advice in the course of practicing law.
So what gives?
AB5 Bill sponsor Assemblymember Gonzalez (on Twitter) -- perhaps she can give specific insight/rationale. Ostensibly the state could have charged Uber or Lyft with misclassifications violations under this statute (they were not). SO...a possible reason I can think of why they passed AB5 was to try to explicitly define what an independent contractor is (SB-459 does not). But the definition as outlined in AB5 makes it nearly impossible for any IC to pass muster. What it does do is place onus on newly minted "employers" to do withholding of taxes that go to the coffers for state unemployment, disability, etc., enforced by the Franchise Tax Board and Employment Development Department.

Call and write your representative...
If you don't know who they are, you can find them by your address and zip code: .. Better yet, go make an appointment to see them in the local office or in the legislature in Sacramento. They need to see the faces of hard-working, self-employed constituents whose careers are being harmed by AB5. Find out why and how they intend to help AB5 be retooled to serve Californian independent contractors that want to remain independent.

This isn't jaywalking...
NOTE: I've also heard that some hiring freelancers/contractors will simply break the law and hope they don't get caught and do business as usual. To try to fly under the radar until AB5 is addressed. Do you trust that you won't get reported? You can't frame that as "a protest" to simply ignore the law. If you think that is a truly a protest, then feel free to call up the EDD and FTB and let them know you're openly in noncompliance with AB 5 in this manner and see how that goes...

It's the WE, not the ME time. My suggestion - redirect your anger and frustration and DO something that helps roll AB5 back, please. There are millions in the same boat as you are. And many who are not, but will stand by you and work to make this equitable and just for everyone.

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