What is AB-5?
California Assembly Bill 5 was signed into law in September of 2019, but its effects will begin January 01, 2020. AB-5 codifies a previous court decision from 2018 (Dynamex), which implemented the ABC test for determining whether or not a worker can be properly classified as an independent contractor or must be classified as an employee.
The Dynamex decision was narrowly defined to apply only to wage-order claims, but AB-5 will expand the application of the ABC test to include all labor and unemployment codes, which means employers will be held to the stricter ABC test standard for classification issues across the board.
There are some limited exemptions to using the ABC test under AB-5, including several “professional services” providers (note that even exempted workers still have to pass the Borello classification test). Notably, production cast and crew members are not exempted under the current AB-5 professional services exemption.
What is the ABC test?
The ABC test includes the following three requirements:
- the worker is free from control and direction in the performance of services; and
- the worker is performing work outside the usual course of the business of the hiring company; and
- the worker is customarily engaged in an independently established trade, occupation, or business
California labor law presumes that a worker is an employee, which means the burden of proof will be on the employer to demonstrate that the worker passes the test before they can be treated as an independent contractor.
Previously, CA employers often relied on more lenient tests, such as the Borello case test or the IRS 20-factor test, to classify workers as contractors. These tests weigh many factors of the working relationship, none of which are determinative on their own. By contrast, the ABC test requires that you meet all three requirements of the test to properly classify workers as independent contractors—failing any of the components means you fail the test.
Why does AB-5 matter?
Worker classification is important because employers are required to provide employee benefits, including overtime pay, meal breaks, disability insurance, workers compensation insurance, FICA contributions, and state + federal unemployment. These benefits are not required when paying independent contactors, which means there is a huge difference in costs when paying employees versus independent contractors.
Production companies often pay crew members (and sometimes cast) as “1099” contractors to avoid these expenses; however, to misclassify employees violates the law and carries the risks of labor claims, workers comp disputes, and even employee lawsuits. California also has stiff penalties for intentionally misclassifying workers, starting at $5,000.00 per employee, per occurrence (SB 459). If an employer demonstrates a history of intentional misclassification, those minimum penalties double.
What if my cast / crew choose to be paid as an independent contractor?
1099’ing workers is a common practice on independent productions, and many non-union workers even prefer to be paid this way, but it is important to note that the worker’s preference is not considered by California or federal agencies when determining a worker’s classification, and it is the employer who faces liability with misclassification, not the worker. Consider the following state / federal FAQ’s on the topic:
Federal FAQ sheet on misclassification
CA DIR FAQ highlights on misclassification
The bottom line: citing industry practice, signing a contractor agreement, or giving workers the 1099 “option” do not protect the production company. The proper classification depends on the actual working relationship, and the employer is the one penalized when misclassification is determined. While a worker may want you to pay them as a contractor, they’re not the one taking the risk by avoiding the costs of unemployment and FICA benefits, workers comp, and following labor code.
How can ABS help?
Many employers are watching closely to see how California will be monitoring and enforcing AB-5, but ABS does not recommend paying cast / crew members as independent contractors, and we urge production companies to reference the ABC Test and to seek proper legal advice when determining worker classification.
Are you ready to classify workers as employees, but don’t want the headache of monthly & quarterly tax filings, workers compensation, and year-end W2 processing? Sign up your in-house staff payroll with ABS Payroll (Weekly or Bi-weekly basis) and receive free payroll processing. Set up a call or apply online with our company to learn more about this offer! Must sign up by Jan 31, 2020.