California’s AB 5 Has Been Repealed, Sort Of.

Rain rain go away, come again another day.

When Zeus sends his thunderbolts into Cleveland, Zippy gets scared. The snow, wind, and rain don’t bother her, but the thunder and lightning cause her to shake. Usually she hides in the shower.

Seeking shelter from the storm (apologies to Robert Zimmerman) is what California businesses are doing too. Assembly Bill 5 (AB 5), codifying the ABC Test for determining who is an employee, has been in effect since January 1, 2020.

On Friday, a new law repealed and replaced it. This new law, AB 2257, passed both chambers in the California legislature unanimously and was signed into law September 4 by Gov. Newsom. It contains an urgency clause, which means it takes immediate effect. So AB 5 is gone.

Great news for businesses, right? Not exactly.

AB 2257 moves the ABC test to a different part of the California Labor Code– new Sections 2775 through 2787–and cleans up some of the confusing and poorly considered language in AB 5. It does not, however, provide relief from the ABC Test for most large businesses.

The revisions make it easier for entertainers, freelance writers and photographers, and digital content aggregators to maintain independent contractor status. It scraps the arbitrary 35-article limit for freelance writers to maintain independent contractor status. It allows entertainers to perform single event gigs without becoming employees. It cleans up some other language too, but it does not make substantial changes that would excuse large businesses from the ABC test.

For example, subsection 2750.3(f) of AB 5 addressed whether an exception applies for work requiring a license from the Contractors State License Board (CSLB). The exception, with its multi-part test, is unchanged. It just moves to a new section of the Labor Code, new Section 2781.

One small glimmer of hope comes from some clarifying language for the business-to-business exception. That exception still does not apply for work that requires a CSLB license. To fall within that exception (meaning that the ABC Test would not apply), one of the requirements is that the work must be performed for the benefit of the contracting business, not its customers. Under the revised law, that requirement goes away if “the business service provider’s employees are solely performing the services under the contract under the name of the business service provider and the business service provider regularly contracts with other businesses.” For grammarians who despise double negatives, this is an exception to the exception. You’re welcome. What it means is if your subcontractor has its own employees, operates as its own business, and performs work not requiring a CSLB license, it may be easier to meet the business-to-business exception, thereby avoiding the ABC test.

So where does that leave us? On one hand, the fact that the bill passed both chambers unanimously shows a recognition that AB 5 had some serious flaws. But on the other hand, the fixes that both chambers thought were appropriate are of minimal help to large businesses. It’s like unleashing a horrible lab-created supermonster, then deciding that its eyelashes should be less curly. The largely-superficial changes in AB 2257 are mainly designed to help maintain independent contractor status for individuals who truly run their own businesses, particularly in the entertainment, journalism, and digital content fields.

This new law obliterates AB 5 in name, but not in function.

Like the blanket I gave Zippy, this move by the California legislature is not likely to provide any shelter from the storm. The ABC Test in California remains alive and well. Whether you grab a blanket or hide in the shower, the ABC Test is here to stay.

© 2020 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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If I Told You Once, I Told You 55,000 Times! These NYC Employment Laws Now Apply to Contractors

NYCHRL independent contractors 8-107(23)A Twinsburg, Ohio man received a statement in the mail for his daughter’s student loan. And then another. And another. And another. The lender sent him 55,000 identical letters filling 79 bins at the post office.

Even better, all of the statements were wrong. They provided an incorrect payment amount.

A recent change to New York City’s Human Rights Law (NYCHRL) doesn’t need to be explained 55,000 times. But it does need to be explained once. Correctly.

Effective January 11, 2020, the protections under the NYCHRL now apply to independent contractors, including freelancers. That means, under NYC law:

  • It is now unlawful to discriminate, harass, or retaliate against an independent contractor, based on any protected class;
  • Businesses must provide reasonable accommodations, including for needs related to pregnancy, lactation, religious observances, sexual offenses, or stalking;
  • Businesses must engage in a “cooperative dialogue” with any contractor seeking an accommodation and must provide a written determination of any accommodation that was granted or denied;
  • Businesses must follow the Fair Chance Act requirements before taking any adverse action based on the results of a criminal background check, including providing a written Artcile 23-A analysis;
  • Businesses cannot inquire about salary history;
  • Businesses cannot perform a credit check (maybe; this is unclear); and
  • Businesses may need to provide sexual harassment training to contractors, depending on the number of hours worked.

For those keeping score at home, the change is to Section 8-107(23) of the NYCHRL. This one little sentence does all the work: “The protections of this chapter relating to employees apply to interns, freelancers and independent contractors.” Boom!

The law applies to businesses in New York City that had four or more workers, including independent contractors, at any time in the previous 12 months.

The law does not apply to wage and hour issues like minimum wage and overtime payments, and the law does not change the test for determining whether someone is an independent contractor or an employee.

The Commission has published some additional guidance on how this will work, especially the sexual harassment training part. You can read it online. Thankfully, the Commission didn’t send it 55,000 times to every business in the mail.

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© 2020 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Bring Forth the Tiger-Dogs! Here’s a Quick Status Check on the Challenges to California’s New Independent Contractor Law

Tiger independent contractor dynamex california

Not an actual tiger. Or a dog.

When outside forces pose a threat to people’s livelihood, people will go to great lengths to fight back.

For example, when monkeys began ravaging the crops of a farmer in Karnataka, India, the imaginitive farmer painted his dog to look like a tiger, to scare away the pesky invaders. [Photo here.]

Business owners in California are taking more conventional measures to fight back againt the tyranny of Assembly Bill 5, the new California law that seeks to reclassify many of the state’s independent contractors as employee. Here’s a quick summary of the resistance:

  • Owner-operator truckers claim the new California law cannot be applied to them because of a federal law (FAAAA) that prohibits states from enacting their own laws that affect the “price, route, or service of any motor carrier with respect to the transportation of property.” They won a preliminary injunction last month, temporarily preventing the law from applying to them.
  • Freelance writers and photographers are challenging the law too. The law has an exception for freelancers, but the exemption goes away if freelancers submit 35 or more pieces to a single publication. In other words, they’re independent contractors for submissions #1 through #34, but they instantly become employees with submission #35. They argue that the exemption is arbitrary and violates their First Amendment and equal protection Rights.
  • Rideshare and food delivery apps filed their own lawsuit, alleging that the exemptions are arbitrary and violate their equal protection and due process rights.
  • Five gig economy app companies have contributed $110 million to a ballot measure that will be voted upon in the November 2020 election if the measure collects 625,000 signatures. The law would exempt app-based gig economy drivers from the new test if the companies provide workers with specific levels of pay, benefits, and rights, which are defined in the proposal.
  • Republican lawmakers have proposed a constitutional amendment (A.C.A. 19) called the “Right to Earn a Living Act,” which would overturn Assembly Bill 5 and enshrine in California law “the right to pursue a chosen business or profession free from arbitrary or excessive government interference.” The amendment would reinstate California’s S.G. Borello balancing test for determining whether a worker is an independent contractor or an employee.

Meanwhile, the California Supreme Court is considering whether the 2018 Dynamex decision, which first imposed the ABC Test for wage and hour claims, applies retroactively. If it does, then businesses can be liable for failing to comply with a test that did not yet exist. Really.

That’s a lot of action, and we’ll continue to watch for new developments. Meanwhile, California businesses that use independent contractors should tread carefully, follow the status of legal challenges, and paint their dogs to look like tigers — just in case that turns out to be effective.

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© 2020 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

Need training on avoiding independent contractor misclassification claims? Hey, I do that!  

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When The Rules Do Not Apply: Freelancers’ Lawsuit Challenges California’s New ABC Test

piano IMG_2111

I was headed to an appointment last week when I came upon this sign. Sometimes the people who make the rules just assume the rules don’t apply to them. Or sometimes people don’t even think about the rules and whether they make sense.

I was tempted to take the sign off the piano, in the interests of following the directive on the sign. But I just took a picture instead.

This post is about when the rules should apply.

Since California’s new ABC Test law (Assembly Bill 5) went into effect January 1st, the legal challenges have been rolling in. (See this post, for example.) The latest groups to challenge the new law are freelance writers and photographers.

Wanna know something absurd? Of course you. We all do. That’s why we read the internet on our phones during meetings. Under the new law, freelancers are exempt from the ABC Test — and can likely remain independent contractors — if they make 35 or fewer submissions to a publication in a year. But with the 36th submission, the ABC Test suddenly applies, meaning that same freelancer would more likely become an employee, retroactive to the first submission.

What is so special about the 36th submission that would convert a freelancer from an independent contractor to an employee? All together now: “Nothing!” This law is ridiculous. A newly filed lawsuit asks a court to invalidate that limit on the basis that it is arbitrary, which it absolutely is. The lawsuit alleges that the arbitrariness violates the freelancers’ Equal Protection and First Amendment Rights.

Freelancers don’t want to be employees for two reasons.

First, works created by contractors are owned by the contractors, who can license the works and earn a fee. That’s how they make money — and is the reason why freelance journalists are all so rich. (That’s for my daughter, who’s in journalism school and doesn’t eat ramen noodles. Yet.) In contrast, under the U.S. Copyright Act, works created by an employee are owned by the employer. That means the freelancer who created the work loses the rights to it. So, if we apply the new rule, that would mean Submission #36, which likely converts the freelancer to a retroactive employee, also converts ownership of Submissions #1-35 to the employer. No way that’s fair.

Second, for every action there’s a reaction. Publishers are not stupid. They don’t want freelancers to become their employees either. So what will they do once a freelancer hits the 35-submission limit? They won’t accept any more submissions. That hurts the publication and the freelancer. Or maybe they will want some freelancers to become their employees so they can commandeer ownership of Submissions #1-35. Either way, this is absurd.

If you’d like to read more, here’s a copy of the complaint. The lawsuit is pending in federal court in the Central District of California.

And please don’t place anything on top of the piano.

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© 2020 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

Need training on avoiding independent contractor misclassification claims? Hey, I do that!  

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Trump’s Tax Plan Is Great News for Independent Contractors! Here’s Why.

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[Important Note to Readers, 1/15/18: This post is dated May 2017, before the final tax plan was passed, and the final version is slightly different than described in this post. For a revised 2018 analysis based on the final tax bill, click here.]

President Trump’s tax plan, released last week, is great news for independent contractors. Contractors may be able to cut their tax rates by half (or more) by creating an entity, instead of contracting as an individual. Indirectly, this would help companies who use contractors as well. Here’s why:

Benefit to Individuals:

For individuals, the proposal would reduce personal tax rates modestly. An individual being paid as an independent contractor will likely see a reduction in marginal tax rates, but the range is likely to remain somewhere between 25% and 35%, depending on income level.

For individuals being paid through their homemade entities, however, the proposal could result in substantial savings. Currently, pass-through entities like LLCs pay taxes at the rate of the individual. The sole owner of an LLC would pay taxes on the LLC’s profits at the individual’s personal income tax rate, likely between 25% and 35%.

Under the proposal, however, pass-through entities such as LLCs and partnerships would instead be taxed on pass-through business income at 15%. That’s a sizable savings compared to 25-35%. [Note 9/29/17: Latest proposal would tax entities at 20%, not 15%, but there’s still a long way to go before any of this becomes law.  And it may never become law.  For now, it’s just a proposal.]

If this proposal passes, individual independent contractors will have a strong financial incentive to incorporate. Creating an LLC is relatively inexpensive. If it leads to Continue reading

How Can There Be Misclassification When The Worker Prefers to Be an Independent Contractor?

Alan Hudock

Photo of Singer Dave Mason (We Just Disagree), by Alan Hurtock

Let’s start with this: Everyone is happy being an independent contractor until they’re not.

What do I mean by that? Right now, the relationship works. The contractor performs, and you pay for the work.

But what happens when things go south? As soon as you decide you no longer need those services, the contractor might stop being your BFF.

A disgruntled former contractor has some options, all of which involve some variation of this story: “Once upon a time, I was misclassified and should have been an employee.” None of the former contractor’s possible next steps are good for you: Continue reading

What is the IRS Voluntary Classification Settlement Program (VCSP)? How Can It Limit Misclassification Liability?

dollar-independent contractor misclassification-IRS-VCSP-1443244_1920The IRS offers a settlement option for companies that suspect they have been misclassifying their independent contractors and wish to reclassify them as employees.

The Voluntary Classification Settlement Program (VCSP) requires companies to meet certain eligibility criteria to participate but, in exchange, the IRS rewards participating companies with a steep discount off potential back taxes and penalties.

To participate in VCSP, a company:

  1. Must declare its intent to reclassify one or more independent contractors as employees;
  2. Must have consistently treated this class of workers as non-employees;
  3. Must have filed Forms 1099 for payments made to these employees; and
  4. Cannot be under a misclassification audit by the IRS, DOL, or a state government.

Benefits for participating companies include:

  1. Pay only 10 percent of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509(a) of the Internal Revenue Code. See VCSP FAQ 15, for information on how payment under the VCSP is calculated. Also see Instructions to Form 8952;
  2. No liability for any interest and penalties on the amount; and
  3. No IRS employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years.

The settlement process requires companies to sign a closing agreement with the IRS.

Is this a good deal? It can be, but it depends on the overall circumstances. Some factors to consider before applying include: Continue reading

What is an ABC Test? (and why these tests are a problem)

abc

As we know, there are a variety of tests used to determine Independent Contractor vs. Employee, and the proper test varies depending of the law being applied.

Most of these tests are balancing tests. A variety of factors are considered, and no single factor is determinative.

ABC tests, however, are different. ABC tests start with a presumption that a contractor is an employee, then requires a company to prove each of three factors to protect a contractor’s status as a contractor.

ABC tests tend to apply only to state unemployment coverage laws and, less commonly, to
state workers’ compensation laws. Continue reading

Four Ways to Give Up Control and Protect Independent Contractor Status

run

Retaining control over how independent contractors do their work can sink an otherwise legitimate independent contractor relationship.

Fortunately, steps can almost always be taken to give up aspects of control that do not hurt the business case for using a contractor instead of an employee. Companies need to be thoughtful and proactive, though, in evaluating and modifying these relationships — before they are challenged in a misclassification claim.

Here are four aspects of control you may be able to relinquish in your relationships with independent contractors: Continue reading

Independent Contractor vs. Employee, Hit List by Industry, 2016-2017

img_1044Are you on the hit list?

The highest concentration of independent contractor misclassification lawsuits during the past 12 months seem to be in these areas:

  • Agricultural workers
  • Beauty consultants (sales)
  • Cable installers
  • Car services (passengers, ride-hailing services)
  • Computer programmers
  • Construction workers
  • Consultants (various industries)
  • Couriers
  • Delivery drivers (food, goods, freight)
  • Exotic dancers (strippers)
  • Freelance writer/reporters/other journalism
  • Information technology workers
  • Installers (cabinets, appliances, windows, furniture)
  • Insurance sales representatives
  • Janitorial franchise owners (individuals)
  • Maintainance workers
  • Newspaper carriers
  • Performers (actors, cheerleaders, wrestlers)
  • Physicians
  • Property inspection services
  • Repair technicians
  • Sales representatives
  • Travel agents
  • Truck drivers
  • Yoga instructors

This list should not in any way suggest that the categories of workers in this list should be employees. That determination will depend on the facts in any given situation. All of these types of workers, however, have been plaintiffs in recent lawsuits alleging that they were misclassified as independent contractors and should have been deemed employees.

Companies who retain these types of workers as independent contractors should take proactive steps to evaluate the facts in these relationships, particularly under the variety of federal and state law tests that may apply. Companies should also remember that because different tests apply to different laws, workers may be properly classified as independent contractors under some laws and some tests, but may be deemed employees under other laws and other tests.

© 2017 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.