Whether you believe it is a step toward reducing inequality in the workplace or a burdensome new business-unfriendly hassle, California Assembly Bill 5 (AB-5), which went into effect last month, could potentially affect everyone who works with independent contractors in the state. The bill was designed to address what its proponents see as inequities built into the burgeoning gig economy, where companies like Uber and Lyft save on Social Security and Medicare taxes, workers’ compensation, unemployment and disability insurance, sick leave, and other labor costs by misclassifying workers as independent contractors when they should be classified as employees.

The basic gist of the bill, which builds on an April 2018 California Supreme Court decision, is that companies have to prove California-based workers meet a strict test to be considered independent contractors, such as being free to control and direct the performance of the work they’re contracted to do, being able to show that the work they perform is outside the usual course of the hirer’s business, and operating their own business and setting their own hours. Some professions are excluded entirely from having to comply with AB 5, including lawyers, architects, financial advisors and fine artists. The law gives other professions strict guidelines for maintaining an independent contractor status; for example, freelance writers who submit more than 35 articles per year to any one entity are considered employees of that entity under AB 5.

While the law does not specifically exempt or provide guidance for meeting planners or the third parties they contract with, those who are or work with independent contractors in California could feel some effects.

For example, according to an interview on KUSA TV, some clients already are notifying California-based independent meeting planners that they are choosing to hire colleagues in neighboring states rather than having to deal with the risk that AB 5 will force them to hire their California contractors as employees.

It also can cause headaches for third parties that planners hire to work at their events. For example, according to an article in the Los Angeles Times, an entertainer who hires backup musicians and singers is concerned that she may be required to classify those workers as employees — and be responsible for up to a 30% increase in labor costs that would entail.

Play It Safe
To ensure you don’t run afoul of this or any other state labor law when working with independent contractors, Joshua Grimes (pictured), an industry attorney with Grimes Law Offices in Philadelphia, suggests the following:

• Both hirers and workers should familiarize themselves with local and state labor laws, as well as Internal Revenue Service rules around employment classification.

• The contract between the worker and the hirer should document the specifics of the work to be done, including where the work will be done, what the worker will and will not be reimbursed for, and the hours he or she needs to be available. “If you say someone has to be available to a particular company every workday between 9 a.m. and 5 p.m., that makes it more likely they would be considered an employee,” Grimes pointed out.

• Be wary of restrictive covenants such as noncompetes. “If it’s the contractor’s business, restricting them from working for others would be an indication they are more of an employee than a contractor.”

• Have a lawyer ensure that any contract you have with a California-based contractor doesn’t run afoul of AB 5. It also would be prudent to hire an employment lawyer to ensure that your current worker relationships are properly classified as “employee” or “independent contractor.”

Grimes added, “Just because you create a two-page contract saying they’re an independent contractor doesn’t mean you’re home free, particularly in California with this new law — and AB 5 has some teeth behind it, with penalties for noncompliance.”

Is California setting a new trend in labor law with AB 5? “I do think this could spread to other states, but there also are other states that are going in the opposite direction, that would set the default to independent contractor rather than employee,” Grimes said. Whether this is the beginning of a trend or just a blip, it still makes good business sense to review and document your working relationships so you can prove no one has been misclassified.