Everyone has been wondering how the new bill enacted to classify Uber and Lyft drivers as employees would affect California’s gig economy. It turns out ripples produced by the law will be felt throughout the entertainment industry as well. Effective as of January 1, 2020, AB-5 (Assembly Bill 5), will restrict the hiring of employees on 1099. Rather than making a law targeting specific companies, legislators in Sacramento basically outlawed all independent contractors with few exceptions.
AB-5 will have jurisdiction over California residents as well as any employees required to perform significant services in California, regardless of their home state. Additionally, even companies that conduct the majority of their business outside of California would still be subject to AB-5 for any worker performing services in California.
The new law will likely have some effect on every film and television production. While major studios should be able to move forward unscathed, smaller production companies and indie filmmakers will feel the brunt of the law. By forcing these individuals to designate everyone they hire as an employee, it will increase costs by up to 30 percent. That’s quite hit for profit margins!
Who’s a Contractor Under AB-5?
AB-5 places a bigger burden on employers to prove that their short term workers are not employees. But just because the law will make it harder for independent contractors to be classified doesn’t mean project based work will cease. AB-5 is merely changing the labor test used by the state of California.
Prior to the law, California adopted the Borello test to determine whether workers were employees or contractors. The new bar to cross will be The ABC Test. Already used by U.S. Department of Labor, the ABC Test assumes a worker is an employee unless the employer can prove there is an absence of control, the worker’s business is unusual compared to the employer’s, and the worker is customarily engaged in a similar trade with many other business entities. Employers who mis-classify their employees as contractors can expect fines for doing so.
How Does it Affect Union Productions?
Most work for major studios and production companies is covered under collective bargaining agreements, with workers being classified as payroll employees. For this reason, entertainment industry unions don’t see the legislation effecting their members.
In a joint statement by SAG-AFTRA, WGA West, IATSE, Hollywood Teamsters 399, and Studio Utility Employees Local 724, the unions made it clear that they do not think AB-5 will affect the industry:
“We have carefully monitored this legislation as it was drafted and moved through the California Legislature… During that time, we conducted due diligence within our own guilds and unions, with outside tax attorneys, CPAs, and entertainment lawyers knowledgeable about our business and loan-out companies, and with legislative staff in Sacramento. These conversations were all undertaken to ensure that AB5 would not undermine the rights secured by our collective bargaining agreements, including the right to form and utilize loan-out companies.”
How Does it Affect Non-Union Productions?
The broad scope of AB-5 should be a warning for all non-union projects in California. Under the ABC Test, the majority of the cast and crew of a production will be viewed as employees considered to be under the company’s control.
Having a call time could be constitute “control.” Working as an actor could be construed as usual to the business of a production company. Collaborating with the same people often could demonstrate that you are dependent on that one job, and therefore, an employee.
The broadness of AB-5 is problematic and should signal to employers that they consider updating the classification of their workers to employees.
Does it Affect Me if I’m not in California?
You might think this isn’t relevant to you because you don’t produce films or videos in California. While that is true for the present, you should still pay close attention because historically, wherever California goes, other states often follow. Here are a couple of examples:
In 2004, California was the first state to mandate paid family leave at work. Many other states were quick to follow including Rhode Island, Washington, New Jersey, and New York.
In 2016, California was the first state to pass a $15 minimum wage bill. More than a dozen states have since done so too.
So, while other states have not yet passed an official law similar to AB-5, it is predicted that many states will follow.
Although there are many way to address AB-5, from fighting it in court to making all your contractors become LLCs, I believe taking these three simple steps is the best approach.
Modify your agreements. Adjust all independent contractor agreements currently being negotiated to include a clause regarding what may occur when AB-5 goes into effect. This clause would include language stating that all payment obligations still apply, that the employer still has a right to all content and services agreed to, and that terms shall only change as necessary to comply with AB-5.
Add a production fee. Add an additional 15-20% per new employee into your new quotes so your production doesn’t take a hit. If asked, “why?” explain that the government doesn’t see film teams as independent contractors any more so we have to pay them more. It’s not ideal, but it is simple.
Hire a payroll company. Although you could hire extra crew members to manage your payroll, entertainment payroll companies are better equipped to deal with AB-5. They can onboard workers as short term employees easily and serve as their employer of record, saving you the hassle of dealing with the changes.
As with any legislation, the effects can never be truly known until after a law is applied. But even if changes to the law come quickly, AB-5 will be law for at least a full year before any new exemptions are carved out. Companies must be ready to comply on January 1.