The AB5 Law and How Freelancers Are Affected

At the beginning of 2020, a new law in California went into effect that complicates the relationship between freelancers and their clients.

The AB5 Law, also known as the gig worker bill, more narrowly defines how companies classify workers as employees or freelancers. The intention of the bill was to give gig workers more rights by requiring companies to reclassify independent contractors as employees if certain conditions were met. The idea was to give the workforce of companies like Lyft and Instacart, for example, more access to minimum wage protections and other workers’ rights. 

However, the bill has had some unintended consequences for creative freelancers in California. For example, New York-based Vox Media cut ties with hundreds of freelance journalists in California because it wasn’t sure it could comply with the terms of the new law. While are certain exemptions for freelance writers and graphic designers, some out-of-state clients are choosing to play it safe and avoid working with contractors in California altogether.

Understanding the California Gig Worker Law

The bill establishes a three-part test that companies must use to determine whether they can classify a worker as an independent contractor. The worker must meet all three of the following conditions to be considered an independent contractor, otherwise, the employer must treat the worker as an employee:

• The worker is free to perform services without the control or direction of the company.
• The worker is performing work tasks that are outside the usual course of the company’s business activities.
• The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

On the face of it, most freelance editors, writers and designers would meet the conditions to remain independent contractors for many companies. The second criteria, however, poses a problem for media companies. For example, a writer creating content for a vacuum supply store would most likely be exempt, since writing blog posts is outside the usual course of activities for a retail establishment. But if that writer is hired to write stories for Vacuum Supply Magazine, then the client likely would have to classify them as an employee since writing articles would be a usual work task for a magazine.

Exemptions for Creative Freelancers

The bill does exempt freelance creatives from employee classification if they complete no more than 35 submissions in a calendar year. 

That means a writer can only submit 35 articles to a single client before they are considered an employee. And out of state clients must comply when it comes to freelancers who live in California. The submission limit has drawn anger and legal protest from writers and other freelance creatives, who say the limit threatens their livelihood. 

Business-to-Business Exemption

While there is follow up legislation that would remove the 35 article cap, in the meantime many freelancers still need to make a living. The good news? There is one potential workaround for a freelancer looking to get around the 35 article cap.

The AB5 makes an exemption for business to business contracts. This means a freelancer could form a company, whether it be an LLC or sole proprietorship, and not have to worry about the assignment cap. However, because this bill is so new it hasn’t been clearly interpreted by the courts. While some lawyers contend that business formation is a potential AB5 workaround, it hasn’t been thoroughly vetted.

But many freelancers are opting to form businesses in order to get around the AB5 caps, and that gives clients the cover they need to have an independent contractor relationship with writers. However, freelancers that form businesses to bypass AB5 must meet a list of additional requirements in order for their relationship to be legitimate:

• Work is performed independently from the direction of the client
• freelancer provides service directly to the client and not the client’s customers
• a written contract is in place
• the freelancer maintains the requisite business licenses and tax permits
• operates a work location separate from the client’s location
• the nature of the freelancer’s work for the client and their business’ primary business activity is the same
• contracts with other businesses performing the same kind of work
• is open to the public
• the freelancer provides their own equipment
• the freelancer sets its own rates
• the freelancer sets their own hours and work location
• nature of work does not require a license from the Contractor’s State License Board.

As a business entity, you can continue to send invoices in the same manner. However, remember that when it comes time to do your taxes that reporting your income will be quite different. It might be a good idea to talk to an accountant about what to expect.

Uncharted Territory

However you choose to adapt to the AB5 law, remember that your fellow freelancers and clients together are all navigating this uncharted legal territory together. 

The California legislature is likely to continue to tweak the law and make changes in the future. Until then, California freelancers should discuss with their clients which arrangements work best for both parties. Forming an LLC or other entity is a big step, so it is a good idea to make sure that your clients are on board with your plan before proceeding.