What You Can Do to Save Your Freelance Career from AB5
Does California hate freelancers? With the introduction of AB5, it sure seems that way. You may have strong opinions about the new law (I certainly do). The ideas presented in this law are also being adopted by other states and Federally with the PRO Act. Since it’s possible that you’ve been living in a cave or you’re coming off a twitter sabbatical and you haven’t heard about it, we should start with some history and facts.
What is AB5 and why should I care?
AB5 is a California law that went into effect on January 1st, 2020. It comes out of a landmark Supreme Court of California case, Dynamex Operations West, Inc. v. Superior Court. In that case, the court held that most workers are employees, ought to be classified as such, and the burden of proof for classifying individuals as independent contractors belongs to the hiring entity.*
The intention of the original bill, according to California Assemblywoman Lorena Gonzalez (who drafted the bill) was to prevent the misclassification of workers by employers who sought to avoid paying livable wages, healthcare and other benefits that they would normally pay to part or full time employees.
This applies to any independent contractor working in the state of California. Exemptions are given to “doctors, dentists, psychologists, insurance agents, stockbrokers, lawyers, accountants, engineers, and real estate agents, as they are seen to generally directly work with and set their prices to customers.”*
The exemption is also given to graphic designers for the same reasons.
Maybe you’re not a California resident and you’re thinking this doesn’t affect you. Those Left Coast weirdos, right? Think again. There are changes happening around the U.S. that will likely affect all independent contractors, so wherever you live, you should have a good understanding of what’s going on.
Oy vey, the controversy! So what’s the problem?
If you’re guessing that there would be a ton of angst over this law, you’d be right. People who had been happily working as independent contractors for their entire careers are suddenly being told they must become W-2 employees for every client they work with.
Freelance journalists are getting particularly shafted by the law, as media organizations that hired them previously dropped their contracts in favor of hiring part and full-time writers.
There are more stories being told every day about people whose income depended on being an independent contractor and have had to suddenly change the way they work to conform to the law. Some claim to have even lost their entire source of income due to AB5. California Assemblyman Kevin Kiley has been tweeting these stories and you can read them here: https://twitter.com/KevinKileyCA
Since the responsibility of adhering to AB5 lies with the hiring entity, many companies have chosen to either only offer W-2 employment or simply not work with California freelancers.
Truck drivers who previously enjoyed being independent contractors and even own their own rigs have also been affected, as they are now supposed to be classified as employees.
Musicians are also scratching their heads and wondering if they suddenly need to become employees of every bar or venue they play.
Why is this a big deal? What can you do?
First, let me offer the disclaimer that I’m not a labor attorney and my take on this is purely from observation and my own understanding of the law. Take my advice at your own risk.
So what’s the big deal? Can’t we all just work as W-2 employees and get on with our lives? For some, that might be an acceptable answer. For others who seek to retain their independent status, or who have invested heavily in tools and equipment, this can be a huge financial setback.
If you want to stay indie, and you’re not already a dentist, there are still things you can do that don’t require you to go W-2 with your clients.
The law exempts those independent contractors who can pass a 3-part test:
- the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact
- the worker performs work that is outside the usual course of the hiring entity’s business
- the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity
If this sounds confusing, you’re not alone. Let’s break them down and apply them to real world situations:
A essentially means that you need to clearly be in charge of the work you do for your client. This doesn’t mean that as a graphic designer you can’t take direction in terms of what size they would like their flyer. It means that in the actual performance of the work they are not spelling out what days and hours you need to be working, where you need to be working, how you use your mouse, or what applications you use.
B is the one that’s problematic for journalists. If you’re writing a news article for a news organization that publishes news articles, you’re in the same business. If you make cakes for corporate retreats, you’re in a different business. If you create animation for a marketing firm’s presentation, you’re fine. If you create animation for an animation studio, you are supposed to be classified as an employee.
C is pretty cut and dry. If you’ve been doing virtual assistant work for years for multiple people and/or companies, then you can keep on keepin’ on as an indie contractor.
If you can pass that test, then you’re fine. But that’s just you. It’s crucially important that you’re able able to convey this to prospective clients who have concerns about whether or not they can hire you.
It’s crucially important that you’re able to convey this to prospective clients who have concerns about whether or not they can hire you.
When I grow up, I’ll become a real business!
One solution that Assemblywoman Gonzalez has been throwing out there is to simply become an LLC. I get what she’s saying. You need to treat your freelancing as a real business, and I agree.
However, in California creating an LLC can be complicated and expensive to do correctly. You also open yourself up to a lot of tax issues, as well as an $800 minimum tax every year, whether you make any money or not. I’ve gone down this road myself and it’s not fun.
Some freelancers have had success meeting requirements of both the law and clients by simply filing a DBA and using a Federal Tax ID number rather than their Social Security number. In some situations, it can be that easy.
A Few Simple Things
I would advise this for any freelancer regardless of the law, but you can do some really simple things to make it easier to hire you.
- Get business cards printed. I mean, come on. You should have these anyway.
- Create a website. It doesn’t have to be fancy. A basic free WordPress or Wix site will do if you don’t want to go whole hog or actually conduct business online. But I have to ask, what century did you arrive from? And hey, was it really more polluted back then?
- Get a separate checking account for your business. Employers aren’t going to care about this, but it’s one more way to show that you’re serious about running your business.
Opinions. I have them!
Of course I have strong opinions about this law, I’m a freelancer and I run multiple businesses in California. I believe that the burgeoning gig economy is going to take a huge step back.
I wasn’t happy to see this signed so quickly by Governor Newsom. It really should have been put to a vote by the people. I believe that any time we have government leaders deciding what’s best for us without input from their constituents, it means that there’s an agenda that has nothing to do with what the people actually want. And I believe that’s the case here. No one was asking for this bill, with the exception of the unions. While I believe that workers have the right to organize without interference from their employer, I also believe we have the right to remain independent.
Currently, the PRO Act bill is making its way through Congress, which is essentially the same as AB5, but on a national level. While on the surface the intent appears to protect workers, it’s actually doing harm to those who wish to remain independent.
Stepping off the soapbox…
The best thing that California freelancers can do to offset the effects of AB5 is to do everything in our power to conduct ourselves like a business.
Also, make your voice count. Contact your representative and get on social media and tell your story. Follow me on twitter, I want to hear from you!
If you need help or have questions, I’m here for you! Comment below or email me at firstname.lastname@example.org.