AB5: Catastrophe or Opportunity? The right lawyer can make all the difference.
If you hire independent contractors in CA, or you are an independent contractor in CA, AB5 impacts you.
AB5 is a California law passed at the end of 2019, which says that most workers are employees, they ought to be classified as such, and the burden of proof for classifying individuals as independent contractors belongs to the hiring entity. This law codifies a decision of the CA Supreme Court in the “Dynamex” case, and is an attempt to clarify the decision in that case that most workers are employees.
In plain language, this means that if you are an Independent Contractor, and you live in California, you will almost certainly need to change the way you operate, and you may lose your job(s), as is happening to many California Independent Contractors.
And, if you hire Independent Contractors in California, you are at risk of significant penalties if you misclassify team members as Independent Contractors instead of employees.
It’s always been the case that one of the biggest risks of running a company is the risk of misclassifying employees as independent contractors. And, now, that risk has gotten bigger in California.
Other than Uber, Lyft, and Postmates, which have stated that they will not reclassify drivers as employees, and that instead they will fight the law, and have already filed lawsuits in federal court, many employers are terminating their relationship with independent contractors in California because it seems cheaper and easier than converting freelancers to employees or risking the consequences of misclassification.
So, if you are are an independent contractor living in California, or someone who hires independent contractors in California, what should you do?
Well, this is the million dollar question, isn’t it? And there are, unfortunately, no clear answers, yet. AB5 is going to spend years in court, and in the political arena, with repeal being considered, and litigation to interpret what it means.
Unfortunately, some employers are getting advice from lawyers to just get out of California, or terminate all their ICs in California.
In my book, these lawyers are simply not creative enough to help their business owner clients figure out a better plan.
If you are getting advice from a lawyer, and if you are a business owner in CA, I hope you are, my hope is that your lawyer is helping you evaluate the risks of each course of action, and then creatively determine your best option.
That’s exactly what I am helping our Creative Business Lawyer members to help their clients to do. And, to me, this is and should be the primary job of a lawyer — not to tell you what you can and cannot do, but to help you understand the risks of your choices, and then make the best decision possible for your life and business.
If you are an employer, and can easily make your independent contractors from California employees, and you’ve been considering whether to switch your independent contractors over to employees anyway, now is the time to do that. That’s what we are doing in my company, wherever someone is in the grey zone.
For example, our CFO has been operating with us on a fractional basis for years, and we’ve been considering whether he should be an employee or an independent contractor. So, we decided now is the time for him to become an employee, even though he MAY meet the criteria to be an IC under the Professional Services or Business to Business exception. There are enough factors that have him on the employee side of grey for us to make the shift.
In contrast, our long-time financial management/bookkeeping team, is clearly a business, with a business entity, their own advertising, plenty of other clients, and they set their own pricing, and meet all of the criteria under the business to business exception.
In some cases, your considerations may not be as clear cut. For example, a friend of mine runs a production company, and has approximately 20 producers that he pays between $100 and $1,500 to each year as Independent Contractors. Do these producers need to become employees because they do not qualify for one of the exemptions?
Given that he does not know for sure how they would be treated under AB5, and that it does not make sense from a business perspective for him to treat these folks as employees, we are considering other, innovative possibilities. For example, we are looking at the possibility that maybe he should form a partnership with each of the producers, which would have them even more invested in the success of each project they work on.
I share this potential innovation so we can together begin to consider whether AB5 can be an opportunity rather than a catastrophe.
I don’t have answers, yet. But, I can help you ask the right questions. And I hope to prompt you to see that there are possibilities here that you may not have considered.
One of the mindsets that has supported me to build what I have in life and business is that I’ve come to see that everything happens for us, and not to us. And, if you see that too, and can apply it to AB5, and get the right counsel to support you, we can start to consider what opportunities may be here that we would not have otherwise taken on our own.
Before you throw up your hands, or throw in the towel, please consider whether there could be an opportunity here for you that you cannot yet see. And, let’s discuss the possibilities!
Come on over to the Eyes Wide Open Tribe group on Facebook, and bring your questions, your possibilities and opportunities, in the face of AB5, or frankly, any other challenge that you are ready to face with eyes wide open. See you there!