AB 5 (An Overview)
Ivan Hoffman, B.A., J.D.
Editorial Note: In an effort to remedy the defects in AB 5, the California legislature recently passed and the Governor signed a new bill, AB 2257. (read that article) The new statute replaces Labor Code section 2750.3, and amends or adds other statutes.
However, the reader should read all the AB 5 articles on my site before reading the article about AB 2257 since my article refers to those prior provisions contained in AB5. Keep in mind though, that AB 2257 controls.
If you are an artist, writer, editor, web designer, recording artist, songwriter or other intellectual property creator, or if you are a publisher, record company, web site owner or other party seeking to engage these parties, you MUST read this article.
I have previously written an article called “Work Made For Hire Agreements Under California Law” It deals with California Labor Code section 3351.5(c), which makes any party who signs a work made for hire agreement an employee for both workers compensation and unemployment insurance purposes. You should absolutely read the article before reading this one so you can see the larger picture. For the reasons set forth in that article, I believe that publishers, authors and others who might need the services of these parties should NEVER engage any California artists, writers, editors etc. Since those provisions are directed solely to intellectual property creators, there are unlimited number of other possibilities to find talented parties elsewhere in the country or indeed in other countries where this type law may not apply. (As discussed below, these issues may apply to parties not located in California as well).
One of the ways out of the above conundrum is for the engaging party to sacrifice the value of having a work made for hire agreement, which may not be a choice in a given instance. (Read the numerous articles on my site under “Terminations of Transfers”). But now California’s new law, AB 5, has made even that “solution” apparently unavailable because it appears to apply to any working relationship with any intellectual property creator (clearly it applies to many other occupations but my comments in this article are directed solely to intellectual property creators).
AB 5, which will be effective January 1, 2020 although some sections will be retroactive, codifies the concept of who is an employee. Note however, that AB 5 also amends Labor Code section 3351 and states that, for purposes of the workers compensation laws, as to those parties who are employees under Labor Code 2750.3 (the rest of AB 5), the law only applies starting July 1, 2020. Related provisions apply to changes to the Unemployment Insurance Code but without the July 1, 2020 date. The law applies to virtually all workers except those that are exempt under statutes but since I represent intellectual property creators and those who engage their services, this article will be limited to those creators and parties.
In reality, California law in this regard had been previously broadened by court decisions, 2 of which are now codified in this new statute. Thus, most California intellectual property creators have been subject to these issues for the last 30 years. One of those decisions, the so-called Dynamex case, [Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903] ruled that all parties doing work are PRESUMED to be employees unless the hiring party can demonstrate, via a 3 way test, that those parties are not. That 3 way test is as follows and the hiring party must demonstrate that all 3 elements 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.
The statute added the above provisions to Labor Code section 2750.3
You can see the difficulty here, especially as to B. If, for example, the hiring party is a web site owner and seeks to engage the “professional services” (see below) of an outside web designer, it would appear that letter B. is not able to be satisfied by the hiring party in that those services may be deemed an integral part of the “hiring entity’s business.” The Court in Dynamex defined this at page 959 as:
Workers whose roles are most clearly comparable to those of employees include individuals whose services are provided within the usual course of the business of the entity for which the work is performed and thus who would ordinarily be viewed by others as working in the hiring entity’s business and not as working, instead, in the worker’s own independent business.
Even though I mention the above issues under B., all of the 3 elements are essential for any determination. However, since a hiring party has to prove all 3 elements, item B. seems most concerning.
However, AB 5 appears to make certain intellectual property creators (“professional services”) not subject to Dynamex. However, even if that is so, the law then makes those same parties subject to another case, the Borello case, [S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341]. Although the Borello factors are more open, this does not appear to be of much assistance to these intellectual property creators since Borello, and the statute, also place of burden of proof on the hiring party to show that the intellectual property creator is not an employee and thus has much the same chilling effect as Dynamex. The hiring party must demonstrate that all of the enumerated factors are satisfied. The Court in Borello stated at page 349:
One seeking to avoid liability has the burden of proving that persons whose services he has retained are independent contractors rather than employees.
In regard to these intellectual property creators providing “professional services,” the statute limits these categories to only those specified. For example, there is no express specification for web designers or parties in the recording industry. Presumptively, those occupations would be subject to Dynamex and those parties would thus be deemed to be employees.
Even if a creator falls into the designated classes of “professional services,” the statute then provides a defined list of factors to be considered in determining status. The statute states in part:
(c) (1) Subdivision (a) and the holding in Dynamex do not apply to a contract for “professional services” as defined below, and instead the determination of whether the individual is an employee or independent contractor shall be governed by Borello if the hiring entity demonstrates that all of the following factors are satisfied:
(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.
So that is the first hurdle that must be overcome. But even assuming the hiring party can prove that all of the above factors are satisfied, then the standards established in Borello must also be determined. Among the Borello factors which are to be balanced and weighed are:
The key factor (the so-called “economic realities test”) is whether the engaging party has the right to control the working party both as to the work done and the manner and means in which the work is done. In an independent contractor relationship, the engaging party does not have this control but may only control the results of that work. The Borello Court stated, at page 350 in part:
Following common law tradition, California decisions applying such statutes uniformly declare that “[t]he principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired. ...”
The Court went on to list additional factors that are to be considered at pages 350 and 351 and stated:
These include (a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee.
The Court stated at 351: “(g) whether or not the work is a part of the regular business of the principal;” and at 355: “and (5) whether the service rendered is an integral part of the alleged employer’s business.”
The Court also added at 350:
Thus, we have noted that "[s]trong evidence in support of an employment relationship is the right to discharge at will, without cause.
The reader should carefully note that factor (g) and the “discharge at will” factor (nor the factor below) are NOT part of the elements that the engaging party is required to prove under the statute as discussed above.
The Department of Industrial Relations at https://www.dir.ca.gov/dlse/FAQ_IndependentContractor.htm offers an additional Borello factor:
The alleged employee’s opportunity for profit or loss depending on his or her managerial skill.
And then adds:
Even where there is an absence of control over work details, an employer-employee relationship will be found if (1) the principal retains pervasive control over the operation as a whole, (2) the worker’s duties are an integral part of the operation, and (3) the nature of the work makes detailed control unnecessary. (Yellow Cab Cooperative v. Workers Compensation Appeals Board (1991) 226 Cal.App.3d 1288)
Key Question: Thus, the reader will recognize the same issues discussed above in the Dynamex context here as well and therefore, when the statute says the determination will be made under Borello, what does it mean? Does the statute only require proof of those items the statute enumerates or does it require proof of all the other Borello issues? Probable answer: It would appear that satisfying both the statutory as well as the Borello factors is required.
As under Dynamex, you can see the difficulty here, especially as to (2) in the above paragraph and number (g) in the Borello factors. If this is so, then if a book publisher seeks to engage an editor or a graphic artist (2 of the categories of “professional services” to be governed by Borello), it seems likely that the services of those parties would be deemed to be “part of the regular business” of the publisher and thus those parties would likely be deemed to be employees.
There are additional provisions in the statute governing the determination, generally under Borello, in the instance where the intellectual property creator operates through a business entity. Read: "AB 5: The Bona Fide Business-To-Business Rule"
Moreover, if you are one of the kind of intellectual property creators mentioned in the statute (“graphic design,” “photography,”“web design”) and you operate through a “referral agency,” this, too, is subject to provisions, restrictions and qualifications. This may be the subject of another article.
In all instances, if it turns out that the intellectual property creator is an employee, the legal and financial consequences to the hiring party (fines, penalties and possible criminal violations including possibly as to officers and directors) are significant. What party seeking to engage an intellectual property creator is going to take this risk? As with the problem created by 3351.5(c), there are plenty of talented writers, editors, artists etc. in other states and nations to choose from without all this legal “baggage.” (see more below)
Intellectual property creators are treated the same as parties who can only provide their services via their physical presence in the state (the Dynamex/Borello distinctions notwithstanding). Thus, if a hiring party needs someone in the state, indeed someone in a given location within the state, they have little choice but to treat those parties as employees with all the attendant issues. Individually those parties are not likely to be at a competitive disadvantage since all other parties are in the same situation. Moreover, these parties who are so hired often work for large businesses which may already have the business infrastructure (insurance, HR departments etc.) to simply include these other parties into the operation as employees, under their insurance and so on.
But intellectual property creators, unlike those other parties, face competition from not only other such creators within the state, but also from those outside the state and outside the country. An artist, writer etc. can be anywhere. A hiring party has the world to choose from and the legal impediments to engaging someone in California, no matter how talented or tanned, are likely to outweigh that talent. And given that many potential hiring parties are small businesses or no businesses at all (individual authors for example), these requirements seem to place all those potential hiring parties out of the running for engaging California intellectual property creators.
The Issues About The Scope of The Law’s Applicability
The law clearly applies to:
1. California based intellectual property creators doing work for California parties such as publishers, record companies and others.
But the law may also apply to:
1. California based intellectual property creators doing work for parties such as publishers, record companies and others located in other states or countries.
2. Any intellectual property creators located outside of California doing work for parties such as publishers, record companies and others located in California.
See comments in “Work Made For Hire Agreements Under California Law” in this regard.
There are many other provisions of the law which are likely to be applicable to your given situation. This is a very complex statute that will likely be the subject of much judicial interpretation over the coming years. Given this complexity and given the enormous legal and financial consequences for “guessing wrong,” this is not something you should try to figure out on your own. These are individual situations and there is no one size fits all answer.
Also read the other articles on my site dealing with AB 5.
Copyright © 2019 Ivan Hoffman. All Rights Reserved.
This article is not legal advice and is not intended as legal advice. This article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. You should not rely on this article in any manner whatsoever and you should not draw any conclusions of any sort from this article. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This article is based on United States laws but the laws of other countries may be different. You should consult with an attorney familiar with the issues and the laws of your country. This article does not create any attorney client relationship and is not a solicitation.
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