With Passage of “AB5”, California Content Creators Must Evaluate Employee Classifications or Face Serious Fines

by Mitchol Dunham and Will Hanisch

California content creators and entrepreneurs have relied on independent contractors to edit, write, design, and help support their businesses in numerous ways. These contractors are key to a creator’s workflow. Assembly Bill 5 (“AB5”) has been heralded as one of the largest employment reclassifications in American history, potentially creating tens of millions of dollars in additional tax revenue for the state of California. It will also result in the mass reclassification of tens of thousands of independent contractors to employees. Some individuals might see benefits from this legislation, but small to mid-size businesses will be forced to reassess how and by whom their work is done.

The Change in Standard

Starting January 1, 2020, AB5 reclassifies individuals as “an employee rather than an independent contractor unless (1) the hiring entity demonstrates that the person is free from the control and direction of the hiring entity in connection with the performance of the work, (2) the person performs work that is outside the usual course of the hiring entity’s business, and (3) the person is customarily engaged in an independently established trade, occupation, or business”. All three elements must be met for an individual to retain or be hired with the classification of independent contractor instead of employee.

Each company hiring independent contractors in California has the burden of either proving these elements or face potential prosecution and significant fines. If a company fails to satisfy even one of the elements, it must “make contributions with respect to unemployment insurance and disability insurance from the wages paid to their employees”.

The Professional Service Exemption

Despite AB5’s sweeping impact, the language of the bill carves out certain exceptions for “Professional Services”. The individuals falling under the Professional Services exemption are still regulated but are evaluated by the existing “Borello” standard. A full list of factors relating to the Borello standard can be found here under 1.A. Companies must make sure that this evaluation is done carefully as the consequences for misclassification are very severe and include significant fines. Professional Service providers are a varied class of exempt individuals, ranging from graphic design to lawyers and doctors. Critics of AB5 cite the spotty selection and variance of the exempted professional services and to the complexity of the analysis. See the language at Section 2750.3.(c)(2)(B) here. Of these professional service providers, the most pertinent to content creators include their lawyers, accountants, travel agents, fine artists, graphic designers, and payment processing providers.

The Freelancer Exemption

Under a separate exemption that we will coin the “Freelancer Exemption”, content creators will be able to contract with marketing professionals, photographers, freelance writers, freelance editors, and freelance cartoonists as contractors subject to additional conditions. The two most vital positions under this Exemption for content creators are editors and writers. These individuals are crucial to the production schedule of content creators but are not traditionally classified as employees. Content creators will be forced to re-evaluate these relationships and either ensure that they follow the process below or hire the editors and writers as employees.

To hire an editor or writer as a freelance contractor, the relationship must fall under the Freelancer Exemption. The Freelancer Exemption states that “services [are] provided by a freelance writer [or] editor . . . [where the freelancer] does not provide content submissions to the putative employer more than 35 times per year. Items of content produced on a recurring basis related to a general topic shall be considered separate submissions for purposes of calculating the 35 times per year. For purposes of this clause, a ‘submission’ is one or more items or forms of content by a freelance[er] that: (I) pertains to a specific event or topic; (II) is provided for in a contract that defines the scope of the work; (III) is accepted by the publication or company and published or posted for sale.”

The Freelancer Exception limits contractors to only 35 projects annually. Considering that many content creators put out videos daily, AB5 has a strong potential to change the way that content creators do business with freelancers. Many small content creators cannot afford the costs associated with transitioning an editor or a writer into an employee, indicating that this change in particular could end up hurting content creators, editors, and writers alike.

The Business-to-Business Exemption

The final relevant exemption for content creators is the Business-to-Business (B2B) Exemption. Under the B2B Exemption, bona fide B2B contracting relationships are governed by the Borello standard, referenced above. This Exemption is perhaps the broadest exemption described in AB5. To fall under this Exemption, the two contracting parties must both be businesses. Most content creators organize their operations under a corporate structure, whether as a corporation or an LLC; however, to fall under this Exemption, the other contracting party must also be organized under a corporate structure. Assuming this baseline requirement is met, the hired business will be considered a contractor if all of the following criteria, copied directly from Section 2750.3.(e)(1), are met:

(A) The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.

(C) The contract with the business service provider is in writing.

(D) If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.

(E) The business service provider maintains a business location that is separate from the business or work location of the contracting business.

(F) The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.

(G) The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.

(H) The business service provider advertises and holds itself out to the public as available to provide the same or similar services.

(I) The business service provider provides its own tools, vehicles, and equipment to perform the services.

(J) The business service provider can negotiate its own rates.

(K) Consistent with the nature of the work, the business service provider can set its own hours and location of work.

(L) The business service provider is not performing the type of work for which a license from the Contractor’s State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.

Considering an ordinary, written, contractual relationship between a remote editor, providing services as a business as opposed to as an individual, and a creator, several of these criteria will be easily met. The remote editor business can perform the contracted work at its own place of business, using its own computers and technology, at any hours that the business wishes, implementing the methods and editing programs that the business feels most comfortable using, creating an end product that will be incorporated into the creator’s channel, for rates agreed upon by the business and the creator. This type of relationship would, on its face, meet criterion (A), (B), (C), (E), (F), (I), (J), and (K). The remaining criterion, (D), (G), (H), and (L) require a closer fact and circumstances analysis. Most importantly, the remote editor’s business needs to advertise and hold itself out to provide its services to others. The remote editor’s business must, in fact, contract with other content creators to provide editing services. This means that the remote editor cannot be exclusively tied to one content creator. While the B2B Exemption has strict requirements, this Exemption might arise as the best option for some content creators to maintain their existing business operations.

AB5 will force all companies in California to re-evaluate how they do business, but the impact on content creators could be quite severe. Content creators cannot ignore this significant change. Content creators must change how they hire and utilize independent contractors or risk prosecution.

This article is meant for information purposes only. This article does not create an attorney-client relationship and does not constitute legal advice. If you have questions about how AB5 might impact you, please reach out to the GreenRoom legal team.