In August, we wrote about California’s increasingly notorious and contentious Assembly Bill 5 (AB 5), which seeks to reclassify independent contractors in the state as full-time employees. Since the publication of that article, AB 5 has been signed into law and will go into effect this coming January. Naturally, the law’s supporters see its passage as a significant victory for the instability and income inequality they associate with the gig economy. But the longer-term ramifications of AB 5, along with too many ambiguities to count, have raised a lot of red flags. Legislators clearly had companies like Uber, Lyft, and DoorDash in mind when they rallied to restore a sense of security to an employment landscape they felt had become overly precarious. What they didn’t fully consider, however, were the wider implications to freelancers across the spectrum—jobs that have historically remained autonomous—not just side-hustling drivers and errand runners.
Reclassifying Independent Contractors or Redefining Freelancing?
“The intent seemed reasonable on the surface,” Erik Sherman wrote of the bill for Inc. “Companies like Uber and Lyft and all the other on-demand workforce platforms have overstepped boundaries. These often-big companies call their workers independent contractors even as the platform businesses control pricing and customer relations. How can you really be in business for yourself if someone else sets all the rules?”
He made an astute point, one that lawmakers must have weighed predominantly in their decision to move forward. But they may have overreached.
“In their zeal,” Sherman continued, “lawmakers went too far and decided that many formerly independent workers should be traditional employees. For freelance journalists, as an example, that easily appeared to clear the top of outrageous when the law set a limit on the number of times a person could work for a publisher in a year without having to be an employee. Although, according to Veena Dubal, an associate professor of law at the University of California Hastings, there’s a lot of misinformation and many freelancers who assume that they’re covered under the restrictions of 35 pieces per year for a client aren’t if their work is considered sufficiently ‘creative.’ (That doesn’t apply to straight reporting on facts.)”
AB 5, which codifies and expands upon the 2018 California Supreme Court decision in a class-action lawsuit for misclassification against Dynamex Operations West, could have sweeping effects for legitimate independent contractors and business owners alike.
As Andy Kessler noted in his editorial opinion for The Wall Street Journal, “Many disabled people or parents with young children would rather work freelance from home than trudge to an office. Retaining more workers directly will send employers’ costs up, up, up.”
Consider the trucking industry in California. Of the roughly 13,000 drivers who regularly serve the ports of Los Angeles and Long Beach, only a few hundred are classified as employees. The remaining truckers are independent owner-operators with their own vehicles. Of course, many others lease rigs from trucking companies and suffer abuses of potential misclassification. Then there are people like Marvin Estrada, a San Pedro-based trucker profiled by the Los Angeles Times:
Marvin Estrada, a San Pedro trucker, counts himself as a ”100% real independent contractor” and businessman. “A lot of owner-operators are misclassified,” he said. “They use the company’s permits and the company tells them how much they’re going to pay them, and they can’t go move a load for any other company.”
With his own permits and insurance, Estrada, 40, nets about $6,000 a month, enough to pay his $3,500 a month home mortgage. Employee trucking jobs pay about $29 an hour, he said. “How could I live on that?”
Next, we arrive at the entertainment industry, one of California’s largest and most thriving business sectors. Independent contractors and bonafide freelancers have been fixtures here forever.
AB 5 does not include carve-outs for entertainment industry laborers including musicians and film crew workers.
While little was heard, at least publicly, from the independent movie industry, cable television or documentary film companies — all of which rely heavily on independent contractors — music industry advocates actively lobbied for an exemption. The Recording Industry Assn. of America and groups that represent artists and indie labels said AB 5 would treat independent musicians as employers when they hire sound mixing engineers or pay a trombonist to play a hook on a new track, for example.
The impact of AB 5 on film and television production, LA Times explained, is even less clear. Stranger still, the bill provided no exemptions for professional translators, thousands of whom demanded to retain their independent contractor status: “As legislators finalized AB 5, more than 5,000 translators and interpreters signed an open letter calling on lawmakers to allow them to remain independent contractors. ‘We are not the gig economy workers AB 5 is designed to protect, but rather highly trained and skilled professionals,’ they wrote.”
AB 5 Transcends California’s Borders
There’s an old saying that the “road to hell is paved with good intentions.” AB 5, to some extent, lives up to the adage. In attempting to protect a certain group of violated workers, the bill hinders the efforts of others. Legitimate freelancers and independents could be forced into traditional employment arrangements that rob them of important tax deductions and multiple income streams. Their “putative employers” could also reduce their working hours to skirt mandated health care coverage requirements. But that’s not all.
Referring back to Erik Sherman’s Inc. article:
California has taken to assessing taxes on people outside the state. As in people who do business with California clients but who don't work or live in the state.
The matter is Blair S. Bindley, OTA Case No. 18032402 (May 30, 2019). Bindley is a screenwriter who received, according to the California Office of Tax Appeals (OTA) record, $40,000 for writing two screenplays for two different companies. The Franchise Tax Board (FTB)--the state's tax revenue collector--was able to match the income to the Arizona-based Blair and demand he file a California return for that year or explain why he needn't.
Blair replied that he undertook all the work in Arizona, so didn't have income from California. The FTB disagreed and said that being paid by California companies constituted income from the state. As the OTA noted, "California imposes a tax on the entire taxable income of a nonresident, such as appellant, to the extent it is derived from sources within this state." Also, "'Taxable income of a nonresident' is broadly defined as 'gross income and deductions derived from sources within this state.'"
AB 5 and the Staffing Industry
It’s difficult to determine just how AB 5 might directly influence or impede the staffing industry. Indirectly, however, there are a few mechanics in play. And if agencies are smart, they can capitalize on the momentum.
- ICs and companies that leverage them should begin enlisting the services of staffing companies that specialize in independent contractor validation and compliance. Clients will have legal recommendations, risk mitigation solutions, assurance of compliance, and defense files in case of regulatory audits.
- Candidates who fail the rigid qualification tests, or seem likely to incur too much risk, can be referred to staffing agencies as W2 employees. Payrolling providers and employers of record have an opportunity to help stave off the penalties associated with AB 5, while containing costs for clients who would otherwise have to onboard the workers into their organizations as employees.
- Businesses with frequent or high-volume IC usage can turn directly to Professional Employer Organizations (PEOs), payrolling providers, and staffing firms that act as Employers of Record to handle the incoming contractors. The staffing entities increase their revenues, while the client companies save more money than they would hiring the talent themselves. Uber is currently undertaking a similar process with offerings such as JUMP and Uber Works.
Nothing appears to be set in polished stone with AB 5. For as many problems as it attempts to solve, it seems to create several others in the fallout. But if the staffing industry had a moment to rise up and take charge of a perilous workforce situation, this could be it.