California’s new “gig economy” law: What does it mean for independent creatives?

California’s “gig economy” law, Assembly Bill (“AB”) 5, makes it harder to classify many workers as independent contractors. The new law is expected to have broad effects both within and outside California. But how much will it change the business of independent creative professionals and studios?

Effects will likely vary. Graphic designers, for example, are among the numerous exceptions included in the final bill along with workers from barbers to veterinarians. Independent music professionals, however, are subject to AB 5’s provisions after music industry trade groups and the American Federation of Musicians reportedly failed to agree on an exception. For now, at least, some musicians, songwriters, and producers could be swept up in the expansive new legal framework for independent contractors. Will predictions that the new law will “gut the music industry” in California prove accurate? And what will its effects be on independent creative talent other than graphic designers?

One thing is certain: AB 5 becomes effective January 1, 2020. Others are currently unknown—but potentially troubling: Independent creators who work collaboratively with other members of the freelance creative industry could face reclassification. They could also find reduced work opportunities as clients bring work in-house, rely increasingly on temp agencies for creative output, or even relocate from California to states currently not applying the same independent contractor test.

Legal Background
AB 5 writes into state law a recent California Supreme Court decision, Dynamex Operations West, Inc. v. Super. Ct.., 4 Cal. 5th 903 (2018). There, the court adopted a major new test to distinguish employees and independent contractors for purposes of certain wage orders affecting delivery drivers. The court discarded the test of independent contractor status it had first applied 30 years earlier in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989), which asks generally “whether the person to whom services is rendered has the right to control the manner and means of accomplishing the result desired” as shown by numerous factors.

Instead, the court in Dynamex imposed a more stringent three-part “ABC” test. A worker qualifies as an independent contractor only if the employer proves:

(A) that the worker 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; and (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

AB 5 adopts the Dynamex formula and extends it outside the wage order context–potentially even into places like garages, basements, and “song camps” where independent artists frequently create music. For example, as a recent Variety guest column observed, under the ABC test, “producers in a garage who hire musicians to play on a track . . . are an employer.” Touring musicians in California might be similarly classified, perhaps leading them to employ measures like performing to pre-recorded tracks rather than hiring other musicians.

The “B” prong of the three-part test is the element most likely to bring independent creators under the employer classification. The “usual course” of producing and promoting recordings, videos, and live shows, for example, generally requires engaging other musicians, producers, and engineers. As such, even if producers in a garage could show that they take a hands-off approach with those they engage, and that those they engage take the same kinds of gigs with others, they could fail to avoid being deemed employers. If so classified, they would be subject to the wage, tax, and insurance requirements of the large employers that AB 5 seeks primarily to affect.

How will AB 5 affect other freelance creatives?
It’s also possible that freelancers outside the music industry could be affected. The bill’s author was quoted as stating that legislative intent was not to “deny somebody the opportunity to, say, submit a story to The New York Times.” But exemptions for specific creatives included only graphic designers and fine artists. “Services provided by a freelance writer, editor, or newspaper cartoonist” can continue to be provided without change. AB 5, however, now exempts freelance creatives in these positions only if they limit content submissions to a putative employer to no than 35 times per year. The same is true for still photographers and photojournalists. Beyond that, they will be classified as employees.

Importantly, indie film industry professionals fall outside even the 35 submission limit and will be subject to AB 5’s classification rules: “an individual who works on motion pictures” is not a “photographer” for purposes of the new law even if he or she is a DP. Neither does the application of the law to those only working on motion pictures offer comfort to those working in the digital media space. The term “includes, but is not limited to, projects produced for theatrical, television, internet streaming for any device, commercial productions, broadcast news, music videos, and live shows, whether distributed live or recorded for later broadcast, regardless of the distribution platform.” While this does not appear to affect larger productions, which are generally guild signatories and already employers (including of talent and crew who work through personal loanout companies), smaller independent filmmakers hiring for nonunion productions could be found to have misclassified newly-covered AB 5 employees as contractors.

Importance of bona fide business-to-business relationships
If your film or other creative production may be affected, then one option is to ensure that anyone believed to be an independent contractor under the former tests is clearly under AB 5’s business exception. AB 5’s expressly provides that the Dynamex “ABC” test will not apply if “a business entity formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation contracts to provide services to another such business . . . .” Rather, the Borello “control” factors will be used to determine independent contractor status.

A dozen factors must be met under that analysis. But each looks at another aspect of the same basic issue: whether the purported freelance contractor truly operates his or her own creative business. Here, freelancers who work creative gigs are readily distinguishable from “gig economy” workers like drivers who regularly carry passengers for car-sharing apps or tech company temps who put in regular 40-hour weeks for the same corporate enterprise.

Key for those on the creative hiring side as well as the freelancers’ side is properly organizing and documenting the business-to-business relationship on which the AB 5 exception is based. Written contracts for the creative service provided, for example, are one of the twelve criteria. And contracts must be a regular practice—the creative must “actually contract with other businesses to provide the same or similar services.” He or she must “maintain a clientele” of such business and be an “independently established business” working out of a business location separate from that of the contracting client.

AB 5 does not define these terms further, and it is too soon to tell how California courts may interpret them. It may also be premature to predict whether a startup business will be considered sufficiently “established” to qualify at its inception. Based on the enacted text of AB 5, however, there appear to be steps that indie creators should take now if they wish to continue operating safely as independent contractors.

Fortunately, the steps include many that a creative business built for long-term success should already have taken or should plan to take soon. Establishing your business in a form that provides for liability protection and allows for efficient management. Protecting your creative rights through well-drafted contracts and communications. Implementing proper billing and collection procedures. If your art, film, or music school didn’t teach these skills, you have a fine incentive to learn them now.

That’s because 2020 is certain to highlight the importance of such prudent business actions. So get prepared now and stay tuned. You may well see the business models of companies like Uber, Lyft, and DoorDash significantly change. But if you keep focused on the business of succeeding as an independent creative professional, you likely won’t see a significant impact from AB 5.

Dane Johnson
djohnson@iss.law