On January 1st, 2020, California’s AB5 Labor Bill will go into effect and will prevent many companies from treating their workers as independent contractors.
What does this mean?
The short version is that AB5 presents an ABC test. If A) workers perform tasks under a company’s control, B) their work is vital the company’s business and C) they don’t have independent enterprises in that trade, then they are considered an employee, not a contractor.
Let’s hear the longer version
So “a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:
- (A) The person is 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 and in fact.
- (B) The person performs work that is outside the usual course of the hiring entity’s business.
- (C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”
But there are a number of exemptions. A few example exemptions that might be particularly relevant to the video game industry (and other creative companies): marketing professionals, graphic designers, fine artists, freelance writers with fewer than 35 submissions per year to the business.
In those cases, the test is more comparable to what we have always known:
- (A) The individual maintains a business location, which may include the individual’s residence, that is separate from the hiring entity. Nothing in this subdivision prohibits an individual from choosing to perform services at the location of the hiring entity.
- (B) If work is performed more than six months after the effective date of this section, the individual has a business license, in addition to any required professional licenses or permits for the individual to practice in their profession.
- (C) The individual has the ability to set or negotiate their own rates for the services performed.
- (D) Outside of project completion dates and reasonable business hours, the individual has the ability to set the individual’s own hours.
- (E) The individual is customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other potential customers as available to perform the same type of work.
- (F) The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.”
If a business has folks who do not fit one of the exemptions or don’t fit the exemption test, that business needs to figure out how to handle them going forward. Initially, this law will only apply to California but it is expected that more states will follow suit. The “gig economy” is not popular with many legislators.
One option for companies who want to continue with an independent contractor is to work to convert their relationship to a “bona fide business” deal. The contractor would need their own business and the hiring business would need to check the deal against the specific business to business criteria in the act. The contractor’s business would need to be more than an alter-ego or loan out corporation, too.
Why does this matter to me?
While most media outlets are covering how this will affect Uber, Lyft and other companies in the gig economy, the impact will be pretty far reaching. Per the Los Angeles Times, “Janitors cleaning downtown office buildings, truckers loading goods at the ports of Los Angeles and Long Beach, construction workers building new homes, manicurists, medical technicians, nightclub strippers and even software coders would be among scores of occupations offered protection against long-documented workplace abuses.” (Emphasis supplied).
A ton of video game companies are based out of California and will be greatly affected by this change. Many others, even if based elsewhere, have contractors in California. As we’ve discussed before, classifying a company’s workers correctly is important not only for the business’ finances (and taxes) but also for legal liability.