AB5’s Exemptions

Before Gov. Gavin Newsom signed Assembly Bill 5 – the new law that redefines who is an independent contractor – lobbyists for a variety of industries secured exemptions to the rules. Their efforts resulted in a hodgepodge of exempted professions that range from lawyer to commercial fisherman, according to Sue Bendavid, an attorney at Lewitt Hackman in Encino. “There were some exemptions from the very beginning, but they were limited. Physicians and surgeons were in there from the very beginning. Then they added more,” said Bendavid. “They added the professional services, the marketing, HR, travel agent.” In order to cut through employer confusion about the law and its exemptions, the state on Dec. 16 launched an “Employment Status Portal” through the website: www.labor.ca.gov/employmentstatus/. Employers and workers can view information on the law’s ABC test and exemptions. Hiring organizations can determine how to classify certain workers, short of hiring a lawyer themselves. “Misclassification, or labeling a worker as an independent contractor when they should be an employee, undermines businesses who play by the rules,” Julie Su, secretary of the California Labor and Workforce Development Agency, said in a statement. “This website is meant to be a resource for California’s workers and employers to ensure a smooth implementation of the law.” For Jonathan Handel, Century City entertainment lawyer, the law further emphasizes an existing dichotomous system of employee and independent contractor, with exemptions muddying the waters only slightly, and for specific occupations. “If there are amendments to this law in response to the concerns people have expressed, for instance freelance journalists, that may result in something less binary,” said Handel. “Canada has the concept of dependent contractor, essentially somewhere between employee and independent contractor. It’s an independent contractor-type person who does most of their work just for a single company. They are a contractor but they’re dependent on the company,” added Handel, by way of example. Three-pronged test The new law establishes a three-part test, also called the ABC test, that was first devised by courts to determine whether a worker is an employee or an independent contractor. The test examines three factors: A: Is the person free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work? B: Does the person perform work that is outside the usual course of the hiring entity’s business? C: Is the person customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed? Only “yes” to all three questions qualify a person as an independent contractor; otherwise, he or she should be an employee under the law. However, the state’s website under FAQ No. 7 has a bullet-point list of occupations that automatically go to the Borello test, which was in place prior to AB5. Under Borello, an employer considers 13 factors surrounding the question of employment; no single factor controls the determination, like Prong B in the ABC test, instead relying more on weighing factors like whether the service provided requires a special skill and if the method of payment is determined by time or project. Occupations that go right to Borello include licensed insurance agents and brokers, physicians, surgeons, dentists, attorneys, engineers, direct non-retail salespersons and accountants, according to the website. A separate paragraph under FAQ No. 7 outlines other occupations that would need to jump through an additional hoop to be exempted. They include professional service contracts, subcontracts in the construction industry, service providers referred to customers through referral agencies or business-to-business contracting relationships. Taking professional services as an example, AB5 has six requirements to qualify as an independent in this sector: maintaining a business location separate from the hiring entity; having a business license, if work is performed for more than six months; the ability to set or negotiate rates; the ability to set one’s own hours, aside from project completion dates and reasonable business hours; regularly performing the same type of work for other hiring entities with the abiilty to solicit themselves while working on a particular project; and freedom to exercise discretion and independent judgment in performing services. “Some of them I think can be proven in a contract,” said Bendavid. “The business license, you can get a copy. The negotiations of the rates, I think you can establish that, especially if certain people have certain rates.” Entertainment exemptions Unions in the entertainment industry such as SAG-AFTRA, WGA West, IATSE, and Hollywood Teamsters Local 399, wrote a joint letter to members assuring them that they will not be affected by the law. “Members of our guilds and unions are not independent contractors; they are employees,” the unions said in the letter. “AB5 is not directed at our industry, and we do not believe it will trigger a change to industry practices.” For a non-union individual in the entertainment industry however, let’s say a script writer on a low-budget production, it would be rather hard to prove content created wouldn’t also be created by the studio, a requirement of Test B. In this case, the contractor would need to prove that he or she can be considered a provider of professional services, before providing documentation that satisfies the Borello test. “This is more of a weighing, a weighing of a whole bunch of different factors. It does depend on the issues,” Bendavid said. “In applying the economic realities test (Borello), the most significant factor is whether the person to whom services rendered has control or the right to control the worker both as to the work done and the manner and means of which it was performed.” For example, a cartoonist using independent judgment could say he is going to make a person’s nose a little bigger or ears a little larger. The hiring entity would say it needs a cartoon of Barack Obama or President Donald Trump – it would not dictate how to draw the two men. Other workers in the entertainment industry may not be able to fall under a similar exemption though, according to Bendavid. Crew members on set are sometimes independent contractors, and individuals working on a low-budget film may be let go rather than have a small hiring entity shoulder employee costs. “There are production companies that outsource people to do crew for setting up staging and some of the physical stuff. A lot of those have been classified in the past as independent contractors,” explained Bendavid. “Those are the people where it’s going to be a question mark. Are they, in fact, independent under these standards?” she added. “There are no exemptions for them. It’s going to be the ABC standard.” Handel told the Business Journal that loan-out corporations may also be affected by AB5, with no exemptions mentioning the corporate structure by name. A loan-out, typically set up for an actor, serves as a separate legal entity and provides corporate legal protection to the individual. “The relationship between an actor and a studio, when the actor is directly employed, is an employee relationship. They’re being told where to show up, what time, when and all of that,” explained Handel. “If you have a loan-out, the relationship between the loan-out and the individual is also an employment relationship. There is an employment agreement between them. The relationship between the loan-out and the studio is an independent contractor relationship.” The debate taking place in the industry, Handel said, is whether the relationship between the loan-out corporation and studio will survive AB5. Studios have already said they will respect the loan-out structure, but if the state government or IRS performs an audit, there could be a case of misclassification that neither party wanted, according to Handel. The relationship could very well be considered a business-to-business contracting relationship too, which is covered in exemptions – if 12 conditions outlined in the bill text are met. Many of the conditions echo professional service requirements, like maintaining a separate business location and the ability to negotiate rates.