Everything You Need To Know About The New California Law Affecting The Freelance Economy
There has been a lot of buzz around the new law of the land in California known as AB5. We’ve had so many companies and freelancers contact us about this that we figured we’d ask an actual lawyer to break it all down for us. For our friends in the digital media and video production industries, have no fear. You can still hire freelancers for video projects in California and freelancers can still work in California doing what you love to do. But you do need to know what the law entails to remain compliant.
As a starting point, here’s some background on the new California labor law that went into effect on 1/1/2020. The main new point affecting companies and freelancers in the media and video digital video industry is this:
If a California-based freelancer does more than 35 jobs, or projects, for the SAME client per calendar year, then that freelancer should be a W2 and should not be considered an independent contractor anymore.
It’s important to note that last week, CNN Business’s Kerry Flynn reported that it’s possible for change to come to the regulation sometime this year, after the American Society of Journalists and Authors and the National Press Photographers Association both sued California on behalf of freelancers. The two organizations argued that freelancers require modified regulations based on the nature of their work. So it’s possible that some modifications may be coming to AB5, but there’s no knowing when or what the changes will be.
We asked Scott Smedresman of McCarter and English Law Firm to provide some insight on the new law.
Scott, thanks for breaking this down for us. Why the new law?
I can’t really comment on why the new law exists, but I can tell you it was created primarily to address the rise of gig economy workers and their classification by platforms as independent contractors.
Who does it affect?
The language and impact of the law reach far beyond full-time gig economy platform participants, down to traditional industries where the use of non-routine independent contractors is widespread. Even though these less routine uses of ICs may not have been the impetus for the law, they are still impacted by the law.
What’s with the number 35?
I know it seems kind of arbitrary, but it is what it is.
Can you provide a practical example of how the law would work in practice in our industry?
If for argument’s sake, a Laguna Beach-based freelancer does 15 jobs for NBC and 25 jobs for Airbnb in 2020, they’re still an independent contractor (IC) which means they would fill out a 1099.
If they do 35 jobs for Airbnb in 2020, they’re still an IC.
Upon completing their 36th job for Airbnb in 2020, then Airbnb must move them to payroll for the duration of the year.
Got it, what about subsidiaries of companies?
While there is no explicit language or precedent regarding subsidiaries, we believe the law may apply to any wholly-owned subsidiary of a company as well.
What if a freelancer is based in CA but is hired by a company based outside the US?
As of now, there is no geographic limitation on the 35 submission limit or the location of the freelancer or putative employer. If both hired person and hiring entity are legally located outside of CA, the law is irrelevant, even if a project is performed in CA. But if either the employer or freelancer are located in CA, then the rule of 35 will apply. This means that AB5 even applies to companies located outside the United States, who are commissioning a freelancer based in California.
Gotcha, makes sense. Do you think AB5 could impact other states?
AB5 does not on its own apply to activities in other states not involving one party in California. However, other states like New Jersey have already recently tightened their independent contractor standards, and others may do the same in the near future to continue this trend.
What happens to a freelancer or a company who isn’t AB5 compliant?
Companies or agencies that misclassify employees under AB5 as contractors can be subject to a civil penalty of up to $25,000. For freelancers, they could face liability for inducing the firm to categorize them that way, so even if the regulations don’t provide a direct penalty, there could be a legal indirect penalty.
Thanks so much, Scott.
Interested in ensuring compliance for hiring freelancers in CA? Reach out to us at firstname.lastname@example.org.
Written By Jake Watkins, Head of Stories