A new freelance law passed in California could impact workers everywhere. And while many worry that it will strip them of either income or flexibility, there’s no need to panic. A close read of the new law indicates that most workers can play the fledgling rules to their advantage. But it might require some extra work.
What is this new freelance law? Why are so many afraid of its impact? And how might it affect workers in other states? Here are some answers.
What is this new freelance law all about?
AB-5, California’s new freelance law, has a simple purpose. It aims to stop companies from “misclassifying” their employees as independent contractors rather than employees. In large part, the law was aimed at so-called “gig economy” companies, such as Uber and Postmates. These companies enlist millions of drivers and couriers, but classify them as self-employed independent contractors rather than employees.
This allows the companies to avoid paying workers compensation, Social Security and Medicare taxes on worker wages. It also excludes their drivers and couriers from collecting other workplace benefits, such as minimum wage, vacation pay and health insurance.
How does AB-5 fix that?
The law codifies and clarifies a California Supreme Court decision called Dynamex. Dynamex created a new three-part test to differentiate between workers and independent contractors. The test says you’re an independent contractor only if:
*You are free from the control and direction of the hiring entity
*The work performed is outside the usual course of the hiring entity’s business.
*You are customarily engaged in an independently established trade, occupation or business that’s regularly involved in performing the same type of work.
The second-clause is the new law’s litmus test. It essentially says that if you are a writer, working for a publisher, you are an employee. If you are a driver, working for a transportation company, you are also an employee — not a freelance contractor.
Why would freelancers be concerned about that?
If the law simply applied to workers in the gig economy — drivers for Uber, Lyft, Postmates, etc. — it would probably be less controversial. But the law’s new definition of who is and isn’t a freelancer is likely to sweep a lot of legitimate independent contractors into the employee bucket when they don’t want to be.
This would include freelance writers, photographers, software developers, web designers, court reporters and truck drivers, to name a few.
These unwilling “employees” worry that the new freelance law will cause them to lose work, flexibility, or rights to their work.
Some companies have stepped away from hiring freelancers from California and from several other states, such as New Jersey, Massachusetts and Vermont, that are using California’s law as a model for their own rules. When pressed, employers say the law simply increases the risk of hiring freelancers in these states. Thus, all other things being equal, they’d rather hire someone who lives elsewhere. Vox Media, for example, eliminated hundreds of freelance positions in California last week. That trend is likely to accelerate as the law goes into full effect.
Why would you lose flexibility?
One of the draws of gigs, like driving for Uber, is that you can work whenever you want. If you find yourself with an hour of free time, you flip on the app and you’re working. No one determines your schedule.
But if you are an employee, your employer has the right to tell you when and how to do your job. You can’t just work when it’s convenient. After all, if the employer is compelled to pay at least minimum wage for every hour you work, they need to be able to manage the corporate budget by scheduling employees.
“You may get benefits as an employee, but you sacrifice flexibility,” says Jim Ewert, general counsel for the California Newspaper Publishers Association.
How could freelancers lose rights to their work?
The short version: Any intellectual property that you develop as an employee generally belongs to the company that pays you. If you work for yourself, your intellectual property belongs to you.
When you work part-time for one or several companies and also work for yourself, the ownership of intellectual property becomes murky. Was the new software or best-selling book created during your own time or was it created or inspired during your “employee” hours? If the employer can establish that you got the inspiration, or designed the code, on their time, you may end up scuffling over ownership of the invention/book/software/or other intellectual property.
What if I don’t want to be an employee?
Good news. The law has a bunch of exceptions for specific industries, and a general exception for “professional service providers” as well as “bona fide business-to-business contracting relationships.” Most independent contractors should be able to fit into one of these exempt categories
Let’s first deal with the exemptions that are specifically spelled out.
The law does not apply to you if you are an insurance agent, physician, surgeon, dentist, podiatrist, psychologist, or veterinarian. It also does not apply to lawyers, architects, engineers, private investigators, accountants, securities brokers/dealers and investment advisors. Commercial fishermen, construction subcontractors and direct sales people are also not covered by the law.
What about service providers?
If you can show that you have your own business location (which can be your home); are able to negotiate your own rates; determine your own hours; that you work for more than one entity; and that you have any professional licenses that are required, you can also be exempt from AB-5.
The law notes that this applies to people in marketing, human resources, travel, graphic design, fine art, and sales. It also applies to barbers, cosmetologists and manicurists, who set their own rates and collect payment directly from clients. This exemption also applies to journalists and photographers who sell no more than 35 pieces annually to one entity.
Are there any other exceptions?
Yes. Potentially the biggest loophole in the law is for business-to-business services. If you set yourself up as a business entity and do your work via written contract outside of the control of the client, it appears you also are exempt. You do need to have your own office (which, again, could be your home), set your own rates, determine your own hours and work for multiple clients.
To set yourself up as a bona-fide business you’ll need an Employer Identification Number from the IRS, and possibly, a business DBA with the state. Getting an EIN can be done online for free; State business license fees range from a few dollars to $150. You would also need to secure any licenses required by your profession.
This provision would arguably cover writers and photographers, who would otherwise be limited to submitting no more than 35 pieces per year to a single publication.
Who is covered by the law?
Those who take direction from the companies they work for; are penalized for not taking jobs when asked; and delivery drivers, who provide their services for a business directly to consumers. But even here, there are questions. Uber and Postmates filed suit Dec. 30th, alleging that the law violates both the U.S. and California constitutions because of the seemingly arbitrary way it exempts some industries and not others. The suit asks that the law be put on hold, until these issues can be adjudicated.
What if I think I’m an employee want to be classified as one?
Call your local city attorney. The law gives these offices the ability to enforce AB-5. If you can show that you meet the definition of an employee under the new law, your employer may have to put you on the payroll.