You may have heard of California’s recently enacted Assembly Bill 5, or AB5, which took effect on January 1, 2020.
This new law has major implications for many publishers who work with VAs (virtual assistants), developers, or contributors on a contract basis.
To help you navigate how AB5 may apply to your business, we asked our lawyer Kevin Kuzas to share his insights!
What is California’s Assembly Bill 5?
AB5 codified a court decision that held that, under California law, many contract workers that were viewed as independent contractors must be treated as employees — and therefore are entitled to all the protections of employees under California law, such as benefits, insurance, and the withholding of taxes.
The employer would be responsible for, among other things:
- Complying with California’s wage and hour laws (such as paying a minimum wage, providing overtime pay, and meal and rest breaks)
- Providing California unemployment insurance (a state-run program for which the employer must register and pay premiums)
- Providing worker’s compensation insurance
- Providing paid family leave
These benefits are not ordinarily associated with independent contractors and would make hiring these workers in California much more expensive.
The stated purpose of the law was to protect “gig economy” workers, like Uber and Lyft drivers, from perceived discrimination in benefits and wages, as well as to protect sources of tax revenue for the state.
What does this mean for publishers who work with contract workers in California?
AB5 essentially mandates that most contract workers be reclassified as employees.
The law provides a series of exemptions for professions where the workers have been traditionally thought of as independent contractors – such as barbers, doctors, insurance agents, and tax preparers.
Many businesses like yours use a “virtual assistant” for routine tasks like answering correspondence, maintaining a calendar, managing your social media accounts, or proofing or editing content.
Unfortunately, AB5 does not have a specific exemption for workers performing the typical tasks of a virtual assistant.
If you’re using a virtual assistant or a similar contract worker, and he or she is not a California resident, then you don’t have to worry about AB5.
If, however, your contract worker lives in California, the terms of AB5 mean you should restructure your business relationship or perhaps even terminate it.
What is AB5’s business-to-business exemption and can publishers rely on this for contract workers?
AB5 provides an exemption for a “bona fide business to business contracting relationship.”
This could potentially be applicable if your contract worker:
- Does business as a corporation, partnership, or similar entity
- Maintains the appropriate tax and business licenses
- Has a written agreement with your contracting business
However, AB5 places other restrictions on business-to-business relationships that make relying on this exception problematic for publishers hiring Virtual Assistants, most notably:
- The individual hired must be “free from the control and direction” of the contracting business in connection with the work being performed. This doesn’t mean that you cannot manage the overall quality of work or set deadlines. Rather, a court applying this test would likely look at whether you control the worker’s hours or location of the work, and whether you pay hourly or for the project (and perhaps if the worker risks not being paid if the work is poor quality). This factor does suggest, though, that micromanaging workers’ tasks makes them more likely to be classified as employees in California.
- The individual must be able to negotiate rates and fees.
- The individual must provide services directly to the contracting business and not to the customers of the contracting business.
- The worker must hold themselves out as available to other clients and have other customers.
- You can’t place any restrictions on your worker’s other clientele. In other words, you can’t place exclusivity around your business relationship.
There are a few other requirements that will most likely be met by most virtual workers, but you’d need to review AB5 carefully before relying on the business-to-business exception.
If you determine the processes or workflows your VA follows and you pay them hourly, and they’re based in California, there is likely to be a problem. Also, it is the hiring party’s duty under AB5 to verify the freelancer’s eligibility, so you’d need to keep written records showing why you believe each worker to be ok.
Some gig economy employers and workers believe that the business-to-business exception limits the impact of AB5 on their current worker classification practices, and they are actively encouraging those California workers who have not done so already to form corporations. However it’s the overall nature of the relationship, not simply incorporation of the worker, that AB5 looks at, so this may not be sufficient.
There will almost certainly be litigation that will clarify this exemption, or there could be new regulations providing some certainty, but until then, it’s important to understand the complexities of the situation and the risks this law creates for employers.
Does AB5 cover other people I hire on a freelance basis, like developers or designers?
Unfortunately, AB5 doesn’t provide specific guidance for many categories of work, so you’d have to look at the same five-point test to determine if these specific workers qualify as a “bona fide business to business contracts” in the words of the law. The good news is that freelance designers and developers, even if they’re based in California, are much more likely to pass this test.
You should walk through each of the five points (listed above), but as long as the worker is properly organized as a business under state law and regulations, they are most likely okay to hire. The most important thing is to ensure they have multiple clients and work on a project, rather than hourly, basis.
What is AB5’s “Freelance Writer” exemption and can publishers rely on this for content contributors?
AB5 does have an exemption for “freelance writers, editors, and newspaper cartoonists.”
However, it is a very narrow exemption, and many believe that it will lead to companies severing ties with freelancers who are based in California. For example, New York-based Vox Media recently ended its relationship with hundreds of freelance contributors based in the state.
The Freelancer Exemption has a limit of 35 submissions per year. The exemption only applies to freelancers who don’t provide more than 35 “submissions” (pieces of content) per year to any one business, so you have to make sure that any contributor you hire does not exceed this limit. And the law makes it clear that multiple submissions on the same general topic are to be considered separate submissions.
Even if a hiring business contracts for fewer than 35 submissions per year, the freelancer must still be able to offer similar services to other potential customers and meet the law’s other requirements. Most virtual workers will, but you’ll still need to verify that they meet the above five-point test.
What are the potential consequences of miscategorizing a California worker as a contractor?
The consequences of misclassifying workers under California law could be significant. AB5 empowers local prosecutors, as well as the California Attorney General, to bring suit to enforce the law.
The contracting business (which AB5 calls the “putative employer”) would be liable for fines, past taxes to the state, and, potentially, wages and benefits to the affected workers. Thus the mad scramble we are seeing among companies big and small to deal with AB5’s consequences – both intended and unintended.
So what should publishers do for AB5?
- Review all your freelance contracts to see which workers are based in California.
- For each California worker, see if they could qualify as a bona fide business to business contract. If not, using the worker creates serious burdens to you as an employer — you should consider terminating the relationship or consulting with an attorney to better understand your obligations.
- For each freelance writer, editor, or illustrator, start tracking how many pieces of content you ask them for and make it clear that you will only hire them for 35 pieces of content each year.
- Make sure that those California workers you continue to contract with are properly organized as businesses. It’s probably enough if you contract with and pay a corporation rather than an individual.
- Make sure you keep a record showing why you think each worker qualifies as a bona fide business.
And stay tuned, because both New Jersey and New York are debating similar laws.