Special Report: Jonathan Handel, Esq., on the Impact of AB5

January 21, 2020 Film & TV, Law, Technology 01:04:51 0 Comments

OWC Radio Host, Cirina Catania tackles AB5 issues head on in an in-depth interview with entertainment and tech lawyer Jonathan Handel. of counsel with the law firm of TroyGould and a contributing editor at The Hollywood Reporter. Jonathan covers labor, workplace and legal matters and is a reliable and informed source when we need to know the latest on what is happening in the legal side of the entertainment and tech industries.

Do you qualify as an employee or are you a contractor? The answer isn’t so simple, and it may be even more complicated as it applies to those in the music, film, and TV industries. In California, new legislation called AB5 changed the rules effective January 1, 2020.

So how do this impact you? Listen in as we answer those questions.

Transcript

This is Cirina Catania with OWC Radio. I have Jonathan Handel on the line. He’s an entertainment technology attorney at TroyGould, and also a frequent contributing editor at The Hollywood Reporter. Jonathan and I have spoken over the years about many issues involving unions and trade and things. Jonathan, you’re always the go-to smart guy when I need to know the legal implications of anything that’s current, that’s happening in the industry. And recently, there’s a lot of hullabaloo about this new AB5. So can you explain to our listeners what that is?

Sure, it’s a pleasure to be back with you. AB5 changes the legal analysis, the legal criteria in California, for whether someone is considered an independent contractor or an employee when they’re doing work for someone else. It’s called AB5 because it was Assembly Bill 5, the state assembly, the state representatives. And it passed and was signed by the governor last month or several months ago, and it will take effect January 1st of this year and is now part of the laws of the state of California, the Labor Code. Perhaps the first thing to explain is, why do we care? What’s the difference between for a worker and for an employer, the difference between someone being an employee versus being an independent contractor?

That would be awesome. Let’s explain that.

Great. Okay. And it turns out that there are some pros and some cons on either side, on the one hand, employees are entitled to a variety of protections, protections regarding minimum wage, so-called Wage and Hour laws. The number of hours they can work, if they’re not highly paid the number of hours, they can work before being given a rest break and a break for lunch and things of that sort. When people talk about being paid overtime, that’s protection from in wage and hour laws, workers compensation and unemployment insurance when they lose their job, discrimination laws in many cases only apply if someone’s an employee, not if they’re an independent contractor. Social Security payments, when you’re an employee, they deduct money for Social Security from your paycheck, but the employer also has to pay a share and additional share towards social security.

So those are advantages of being an employee. Now, the advantages of being an independent contractor are, first of all, that you’re not tied to a single employer, whereas often an employee only has one job well, that’s not necessarily the case. And the key thing is that if you make use of your home office, make use of your car, and certain other expenses, these things are deductible, for independent contractors are not deductible for employees. In fact, because of the Trump tax reforms, even something like a large expense like a commission to an agent, 10% of your wages going to an agent are not deductible for employees but are deductible if someone is an independent contractor. So I guess I think maybe the next thing to think about is, who falls into what kind of a bucket and can you simply say, “I’m an independent contractor,” or “I’m an employee.” Even before AB5 assumed that if you were treated as an employee if you were paid wages, that you got a W-2 form at the end of the year for your tax return, that you were an employee, again, that comes with these various advantages. And I should mention, the other thing about independent contractors is the independent contractor has to pay both halves for Social Security, they paid twice what an employee does toward social security because they’re paying the employer side as well. 

Under the law, if someone is receiving a 1099 Form at the end of the year, not being treated as an employee, that’s not necessarily definitive. Now, under the law prior to AB5, there were multifactor tests, and the one used in California is called the Borello Test, named after a court case that looked at things, like how much control does the employer or the company have over the worker. The more control they have, the more it looks like an employment relationship that provides the tools, whether it’s a hammer and saw or whether it’s a PC, who decides what your working hours are. So, an employee in a sort of most obvious typical case, someone who has to show up at nine o’clock in the morning and sits at a desk or a workstation or workplace and does work and then leaves at five or six, and does work for the company. That’s what an employee looks like.

And specifically under the direction of the people monitoring the work, right? So if they say, go here, go there.

Go here, go there, do this, do that. Now that varies by profession. For example, is a lawyer or a doctor, a skilled professional, or even a computer programmer someone who’s with some seniority, those people even though they can be employees do make a lot of decisions themselves. A junior computer programmer may get a lot of direction from a manager saying, “Okay, here’s how I want you to implement this algorithm. Here’s what we need to do, go off and do it,” whereas a more senior computer programmer would be expected to make some of those decisions themselves. And likewise, with the lawyer or a doctor, those are the people exercising independent sort of judgment, but if they’re showing up at the office, or the workplace at nine o’clock and being told an outline, at least what to do, and stay till the end of the day. And that’s the only person that they’re providing services to because that’s another factor. And the independent contractor is someone who’s in business for themselves and is providing services to other clients; they have clients, not employers. So that’s the basic feel of what’s the difference. Now, why isn’t that enough? Why does the law get more specific than that? And why has it changed? A lot of this has been driven by Lyft and Uber and the challenges that these kinds of business models present to this really binary or bipolar system; you’re either in one bucket or the other. A Lyft driver and Uber driver, the companies contend that those workers are independent contractors, but they feel a lot like they’re providing basic services to a company, they’re showing up, now granted, they can choose when to turn on the app or not. But are they the one or the other? And is it fair as a society that people who are very dependent on the platform, nonetheless don’t have some of the benefits and protections of overtime law and things of that sort. There actually are some countries, Canada, for example, has a category called Dependent Contractor, that kind of splits the difference.

Hmm. I didn’t know that. How is that different?

Well, I don’t know in detail, but basically, it is somebody who is an independent contractor type, who is very dependent on a single employer or single client or two, they have some of the protections that employees too. Another example I should mention is that under Federal Labor Law, employees can unionize, independent contractors cannot. Now we play some sort of fast and loose type games with that in the entertainment industry and then some of the people that we do recognize as unionized workers, they are paid as employees, but though they sure look like independent contractors. For example, a screenwriter, I’m talking specifically a movie writer, not a TV writer, your agent pitches you to Universal or to Warner’s, let’s say, and you get to write the next Superman movie. Well, do you show up at Warner Brothers every day at nine o’clock and take detailed directions? No, and in fact, they don’t even provide the PC, you work at home, you agree that the story is going to be one about Lex Luthor coming to some prominence or being this or the other thing and the broad outlines, it feels a lot like an independent contractor. In fact, somebody writing on spec is not even an independent contractor. 

If they write us a spec script, where there’s no buyer known at that point, and then the agent goes out and tries to sell it, they’re just a vendor peddling goods. It’s like somebody pushing a cart down the road, trying to sell pretzels in the street, you don’t even have a buyer until someone walks up to you and says, “Yeah, I’ll take that,” and nonetheless, those folks, someone writing a spec script or someone writing a script on assignment, the Superman example, they’ll get a W-2 at the end of the year. They’re treated as employees, and their work is recognized by the studios as union work, and it’s under the jurisdiction of the writer’s skill. Compare that writer with a writer on television, specifically, let’s say, comedy, a half-hour, those folks go into work every day. They go to the writer’s room, and they sit with other writers, and they act about stories, and then they go. They might write at home, or they might write in an office, more likely, I think they write in an office at the studio. I’ve been assigned to write episode five, you’ve been assigned to write episode six, whatever it is, but after we’ve had our conversation, and they sit there, television writers actually do look a lot more like a traditional employee, film writers, not so much, but both of them are paid as employees and are treated as union workers.

This is all kind of new. Have you thought about loan-outs and how they’re going to work under this new ruling? 

Yes, I have.

A lot of people in our industry use loan-outs, and so the companies hire the loan-out, which then turns around and hires what would normally be an employee.

Right. Well, it turns out that it’s under the AB5 framework. There’s some question as to whether loan-outs will continue to be recognized. The industry is continuing to recognize loan-outs at present, but the tax authorities may decide to challenge that. And so this is probably a good point to get a little more specific on what AB5 actually does, and what the Borello Test was, and to the extent that it still applies under certain circumstances. The new test, which is called the ABC Test, and was promulgated by the state Supreme Court in a case called Dynamex in 2018. So AB5 enshrines the Dynamex Test, the ABC Test into state law.

Can you tell us what the difference is between the two?

The difference is that the ABC test has three criteria, and they all have to be met in order for somebody to be considered an independent contractor. So it’s a very strict test, it narrows the circumstances under which someone is an independent contractor. Whereas the Borello Test had 11 or so factors 10 or 11 factors, in fact, under some criteria or some listings are actually 14 factors. And none of them are actually definitive, they all are weighed one against the other, and potentially a court would have to decide well, which of these factors in this given case is considered heavier. So one of the things that businesses are concerned about when it comes to the law in general when it comes to regulations is, on the one hand, they want laws that are favorable to themselves, but on the other hand, they want laws that have more certitude and precision in them, and where they can predict the outcome without having to potentially face a court case. Those two principles can sometimes be at odds and attention with each other. 

So with that said, let’s look at the ABC test, and then the Borello Test, and then talk about the circumstances under which each one applies because it turns out that AB5 does not always apply to ABC Test. There are a lot of exceptions, a lot of carve-outs, as we call them to the ABC Test under the new law. And that makes things even more complicated, I’m afraid. So the ABC Test a worker is considered an employee and not an independent contractor unless all three of the following conditions apply, A.) The worker has to be free from control and direction of the hiring entity, the company in connection with the performance of the work, and that freedom has to be true, both under the contract for the performance of the work. And it actually has to be true, in fact, in the way the real world is happening. So just because you say in the contract, that the worker exercises independent control, if in fact, the reality is that people don’t follow that contract and the company is instructing the worker, then you haven’t met prong A, and if you fail to meet any of these prongs, then the worker is an employee. 

B.) The worker performs work that is outside the usual course of the hiring entity’s business. Now, what does that mean? It means, for example, let’s take a small software development company, their usual business is developing software by definition. If they engage somebody as an independent contractor to write software, well, that’s not outside the usual course of their business. That is their business. So that person, even though the contract is saying that person is an independent contractor, the law is not going to respect that, the law says, “No, that’s an employee, just like your other employees, that’s business.” But does that mean that everybody that performs services for the software company is an employee and has to be treated as an employee? No, that’s a software company presumably has a restroom and a kitchen or a break room where people can have food when the kitchen sink stops working, or when the restroom stops working, and they bring in a plumber to fix those. Well, plumbing is not the normal business of a software company that plumber is providing services for the company. He or she is fixing the plumbing, but he or she is an independent contractor. Now, on the other hand, if you have a plumbing services company and your plumbers go out and work for clients, the plumbers in play. So that’s B and then the third prong of the ABC test, C.) The worker is customarily engaged in an independently established trade occupation or business of the same nature as the work that they’re performing for the company that’s doing the hiring. So someone who is customarily a plumber and comes in does plumbing for your software company assuming that they are customarily a plumber they’ve got other clients, they hold themselves out as a plumber, for a plumber for hire, probably a good name for a series, Plumber For Hire. 

That would be interesting—the Plumber For Hire.

I feel a pilot coming on. That person meets that prong. Is the plumber free from the controller direction of the hiring entity? Yeah, the software company says, please come fix our sink. Now, you get into definitional things here, even with the plumber, let’s suppose the sink is working fine, but they want to add one of those hot water taps to it or something one of those extra instant hot water things. They might say, I want one that makes water that’s hot enough for coffee as well as tea. And I want it to have a safety valve so that on Bring your kid to work day no one gets burned, and I want it on the left side of the sink, not the right side.

And I want to be able to turn it on and off with my cell phone.

With my cell phone, right, or a foot pedal. Are they free from the control and direction? I think that the law would still consider that when a software company brings in a plumber to do some installation like that it is the Borello Test and we’ll have to also look and see if plumbers are specifically listed as being an exception to the ABC Test that might make the example more complex, but you can see that the degree of control and direction that the hiring entity provides often depends on the kind of worker and work that’s being performed. The more skilled the work. And the more that it’s a sort of a black box to the hiring entity, the less control and direction you would expect, but there are nonetheless if you want somebody to paint your house, you don’t just call up a house painter and say, paint my house. I mean, you’re gonna get a pretty random result If you do, I will specify the color, I want to have a conversation about how weatherproof the paint is going to be. 

Of course, it’s like going to the store, and you want certain things, right? If you hire a vendor, you want to be able to tell them what you want. I don’t know if this is the correct term for the way this is working now, but doesn’t the burden of proof now lies on the employer. So the employer now has to make sure that they have all the documentation in place proving that the person they’re hiring is an independent contractor, which we were doing to a certain extent before anyway, there’s that, and there’s also that in the film and television business, there’s a lot of what I perceive as abuse in terms of people like interns, part-time employees that are not really being paid as employees or just being paid a flat hourly wage, and they’re not independent contractors. So did some of that also weigh into the Supreme Court’s decision with Dynamex? Well, no.

You’re exactly right. This issue of misclassification, I don’t know that misclassifications specifically in the entertainment industry weigh directly in a decision, but this issue of misclassification of workers, as independent contractors are very much what’s driving. All this drove the Dynamex decision and the legislature’s interest in enacting Dynamex into established statutory law, locking it in places that were in answer to your question. Yes, in fact, it is the employer’s burden of proof. Now, one thing that Dynamex’s decision was quite clear on is that the hiring entity, meaning the company must establish that the worker is free of control, and the worker performs work outside the usual course of business. And even the hiring entity must establish that the workers customarily and currently engaged in an independent business or trade or occupation. And it just simply labeling them as an independent contractor is not sufficient. And it’s not even sufficient to say that the worker could, at some time in the future, go into independent business life. The hiring entity has to establish that the worker actually has an independent business operation at the current time.

Or the pendulum can swing in either direction too, because if you hire an independent contractor, and after a while, you take up so much of their time that they then become exclusive only to you. At that point, it would seem to me that the state would want to take a look at that and say, “Well, Is this person now an employee if they don’t have other clients?”

Well, that’s right. If you engage in an independent contractor, they have other clients, but also they have to be performing work that’s outside the usual course of the hiring entity’s business for that to be respected. But if you do take up enough of their time, the pendulum could swing. Now, let’s look next at the Borello Test and then go through sort of a flowchart as to which test applies and under what circumstances. So the Borello Test, which dates in 1989, another California Supreme Court case, relies on multiple factors and a key factor is whether the company has all the necessary control over the manner in means of accomplishing the desired result, doing the work, the control need not be direct, or actually exercised or completely detailed. So that’s very fuzzy, to begin with, but then there are, believe it or not, 13 other factors, let’s go through them.

Could we make it a little more complicated?

Well, exactly. A court has to consider all of these multifactor tests, and no single factor controls the determination. So in different cases, courts have emphasized a different factor in the test, depending on the circumstances. So what are those factors 1.) Whether the worker performing services holds themselves out as being engaged in occupation or business distinct from that employer. 2.) Whether the work is a regular or integral part of the employer’s business. So those two will sound a little familiar from the ABC Test. 3.) Whether the company, or the worker that supplies the tools, the instrumentalities, and the place for the worker doing the work. 4.) Has the worker invested in the business, such as buying equipment or materials required for the task. 5.) Whether the service requires a special skill. Not even clear how that would cut one way or the other, but there you have it. 6.) The kind of occupation and whether the work is usually done under the direction of an employer or by a specialist without supervision. 7.) The workers’ opportunity for profit or loss depends upon their managerial skill, so an independent contractor is someone who is, under this test, is potentially subject to losing money or making money depending on if they set a too low price for the job, for example, an employee just makes money, they go to work. 8.) The length of time for which the services are to be performed. So that sort of gets to your example there. If you were performing services for a long time for a single employer. 9.) The degree of permanence of the working relationship, sort of fits with number eight, not even clear how distinct those two are, but there you have it.

Jonathan, there are so many gray areas here. I’m getting red flags all over the place with this but go ahead. This is fascinating. 

We’re almost there. 10.) The method of payment, is it by time or by the job? 11.) Does the worker hire their own employees? So if a plumber comes in and they hire an assistant, that doesn’t look like an employee. That plumber doesn’t look like an employee if they’re hiring their own employees. 12.) Whether the company has the right to fire, it will, or whether a termination gives rise to an action for breach of contract. But independent contractors often have contracts that allow you to terminate the contract at will. So there’s the gray area there. And flipside, some employees particularly, top executives can’t be fired at will, they have employment contracts that give them a three-year term, for example. Typical in the movie industry and in the film industry. And finally, 13.) Whether or not the worker and the company believe they’re creating an employer-employee relationship, this may be relevant. It’s the guidance that we get from the state, but it’s not dispositive, it’s not determinative. In practice, it’s sort of a one-way ratchet if a worker and a company do believe that it’s an employment relationship, then the courts will often treat it as such. But if they believe that it’s an independent contractor relationship, the courts may or may not respect that judgment. So there’s a bias in the law even under the Borello Test; there was a bias towards employee’s status. Well, how does this work in a flowchart, because the issue here is that we’ve got these two tests, which one applies? And it turns out that the answer is, it depends.

Oh, my goodness, isn’t that typical?

It really is, it really is.

I don’t know why I find that just hilarious. 

I know. 

Everybody is so afraid of this ruling, AB5, everyone is really nervous about it. And I work in the film and television industry, obviously. And I host a radio show, and I also do consulting for tech companies and tech evangelism. So professional consultants get paid there. I have some clients who pay me by the hour to consult for them because I have knowledge in certain areas that can help them further the profits of their company. So, where does that put me on this sort of grayscale? I’m not an employee because I do have other clients. So that protects me; it also protects them.

Well, that’s only one of the factors.

Yep, that’s the only one exactly. 

You have to be free from control and direction. You’re free performing work outside the usual course of their business. And you are as you said, engaged in independently established trade. But here’s how it works like a flowchart, you have to first ask is this worker part of an exempted profession? Because there are a bunch of occupations and professions that are exempt from the ABC Test, instead, you apply the Borello Test. Now, it turns out that some of these occupations, it’s pretty much enough to be part of that occupation. And others have additional criteria that you have to meet. So let’s go through some of those.

Okay, that’s really helpful. I appreciate you doing this because it’s very confusing.

It is. The first exception is someone who’s licensed by the Department of Insurance under one of several different sections that I honestly have not looked up. I don’t know if these are insurance brokers or what exactly but something in the insurance business, and you’re a licensed person in the insurance business. Second, physicians, surgeons, dentists, podiatrists, psychologists, and veterinarians, let’s not forget the animals, licensed by the state of California, performing professional or medical services provided to or by a healthcare entity, including an entity organized as a sole proprietorship, partnership or professional corporation. But this doesn’t apply to the employment settings currently or potentially governed by collective bargaining agreements.

Potentially, that’s a scary word.

Well, that is. If you have a bunch of doctors who work at a hospital seemingly as employees, they are providing medical services for a healthcare entity, but they could become unionized even if they’re not. Now, one hand give it the other hand, take it, let’s move on. We probably don’t have a lot of doctors listening to our podcast.

You never know. 

But you never know. Next, a licensed lawyer, architect, engineer, private investigator, or accountant, no further conditions there. So a licensed lawyer, among others, can be an independent contractor or well, I should say, what this means is that you use the Borello Test, rather than the ABC Test for those professions. So again, this isn’t saying that these professions are automatically independent contractors. It’s saying that they are judged under the looser and vaguer Borello Test rather than the ABC test. Next, securities, broker, dealer or investment advisor or their agents or representatives that are registered with the SEC or FINRA, or licensed by the state of California. Next, a direct salesperson, as defined under the unemployment insurance code, a commercial fisherman working on an American vessel. An American vessel is defined, commercial fishermen are defined; you have to have a valid unrevoked commercial fishing license. Don’t lose your license, or you’re in a different situation. There’s some more la dee da about fisherman here some more detail. Now we move on to a bunch of contract situations where there’s a contract for professional services, but here we have to talk not only about specific professions, but also there are some conditions. 

The conditions are six separate conditions. The individual maintains a business location, which could be a residence that’s separate from the hiring entity, but nothing in the subdivision prohibits the individual from choosing to perform services at the location of the hiring entity. The individual needs a business license, although there’s a six month grace period for that, so that doesn’t take effect until July 1st, I guess. The individual needs a business license in addition to any required professional licenses or permits. They have the ability to set their own rates for the services provided, or to negotiate them at least outside of project completion dates and reasonable business hours the individual can set their own hours. That’s okay. So you have to work during reasonable business hours. What does it mean that you can set your own hours if you’re subject to reasonable business hours, I mean, I don’t know. The individual is customarily engaged in the same type of work with another hiring entity or holds themselves out to potential customers is available. And finally, they customarily and regularly exercise discretion and independent judgment in the performance of the services. Now, an individual includes an individual providing services through a sole proprietorship or other business entity, which appears to mean that incorporation is possible. Now, what kinds of professions are we talking about here? Professional Services means the following, and now we have like 11 different carve-outs for this.

Do you know what’s scary about this? I’m not a lawyer, but what scares me about this is the more you try to be specific, the more you’re going to create situations where people are going to argue for an exemption. 

It’s a Full Employment Act for lawyers and also for lobbyists. This would be a logical place to point out that the trucking industry filed suit, challenging the constitutionality of this law. And so two associations of independent journalists have filed suit because there we’re about to get to them. And Uber and Lyft, and I believe Doordash. So Uber and Lyft, and at least one of the companies providing restaurant delivery, are going to spend reportedly as much as 100 million dollars trying to get a ballot initiative on the ballot this year to overturn AB5 or some portions of it to try to overturn or amend it. There’s not a lot of simplicity to this to what sounds like a simple ABC test. 

So one of the professional services that we’re talking about here that had to meet these six conditions, marketing, provided that the contracted work is original and creative in character. And the result of which depends primarily on the invention, imagination, or talent of the employee, they really mean the worker or work that is an essential part or incident to any of the contracted work. Secondly, administration of human resources, provided that the contracted work is predominantly intellectual and varied in character, and is of such character that the output produced or result accomplished cannot be standardized in relation to a given period of time. So this, I guess, HR people who are intellectual and varied in character.

This whole thing is just ridiculous. Anyway, sorry, I shouldn’t have an opinion. This is fair reporting. Anyway, keep going.

Travel agent services. I didn’t know there were travel agents anymore, but there are a few actually still in existence, and I guess there were enough in existence to lobby for an exemption.

Particularly in the cruise business.

Travel agent services provided by either of the following, a person regulated by the Attorney General, under articles such and such of state law, or an individual who is a seller of travel within the meaning of another section of state law, and it was exempt from registration under the third section of state law. Seventh, graphic design, grant writer, fine artist, services provided by an enrolled agent licensed by the US Department of the Treasury, to practice for the IRS. What is an enrolled agent? That’s someone who’s not necessarily a lawyer, but who can represent you and deal with the IRS. Eight, a payment processing agent through an independent sales organization. All right now, we get to a couple more additional creative services, services provided by a still photographer or photojournalist who does not license content submissions to the particular hiring entity more than 35 times per year. Now, this clause is not applicable to an individual who works on motion pictures, which includes but not limited to, projects provided for theatrical television internet streaming for any device. Commercial productions, broadcast news, music, video, and live shows, whether distributed live or recorded for later broadcasts, regardless of the distribution platform, and the submission is defined, whether the photos relate to a specific event or specific subject. 

Next, services provided by a freelance writer, editor, or newspaper cartoonist, who does not provide content submissions to the particular company more than 35 times per year items of content produced on a recurring basis related to a general topic shall be considered separate submissions for purposes of calculating 35 times a year. And again, we have a definition of submission. Moving on number 11, services provided by a licensed aesthetician, electrologist, manicurist, barber, or cosmetologist, all of whom have to be licensed, provided that they set their own rates, they set their own hours, has their own book of business, schedule their own appointments. And now, we have some more exceptions, a real estate licensee, licensed by the state, they’re subject to Borello for certain circumstances and to other tests for other circumstances, but they’re not subject to the ABC Test or Dynamex. Repossession agency, the repo man, got into the act, independent contractor or employee status is governed by another section of the law that already exists. If they’re free from the control and direction of the hiring entity, a bonafide business to business contracting relationship under an enormously detailed set of conditions. Now, this gets into the loan-out situation many of our listeners will know what a loan-out is, but not all, when somebody essentially self incorporates, in other words, sets up a corporation, where the only services the corporation provides are the services of that person who owns the corporation. And that is often what is called a loan-out corporation. 

Then in particular, when an actor, writer, director sets up a corporation of this sort, and rather than the movie studio or TV studio hiring the actor, writer, director, as a director as an employee, they engage in a business to business contract with the loan-out, which then has an employment relationship with their own owner or the employee. That’s a form of business that used to be only used by people who are relatively highly compensated in the entertainment industry, but now because of the fact that employees can’t deduct employee business expenses anymore, thanks to Trump and this includes, Commission’s to pay agents if you haven’t fired your agent if you’re a writer, subject for another podcast. Commission to agents, managers, and lawyers. Those things are deductible as business expenses by a corporation. So there’s an advantage to having a loan-out even if you’re only making 75 or 100 a year, rather than the previous economic threshold was typically 150 or 200 or more before it made sense to get into the complexity of setting up a separate corporation. 

But here’s the thing, this portion of the law says the Dynamex doesn’t apply to a bonafide business to business contracting relationship as defined below, under the following conditions. And I have to tell you that there are a dozen or more conditions here, It really would be too much to go into, but again they’re very similar to a Borello Test, and they include issues about control and setting your own hours. And if you’re an actor, for example, in a movie, you don’t set your own hours, and so it may not apply. Just to cover the landscape without getting too much additional detail, there’s another exception for contractors and subcontractors in the construction industry. But here again, there is an enormous set of conditions, there is an exception for construction trucking services, then we go on to referral agencies like I guess those are employment agencies, we have a definition of animal services I guess this has to do with pet setting or something. , and tutoring motor clubs like I guess that’s a AAA or something, an automobile club. Now, we finally sort of at the end of it, leaving aside people committed to state hospital facilities which have come up here as well.

Oh my god, my brain is frying, what’s going through my mind right now? What about those wonderful companies that we use when we produce films or television, the payroll service company? I mean, they exist to hire and fire and manage the payroll. For the people who are working on these films that lasts for one month, six months, a year, whatever it is TV series. If I were running a payroll company right now, I’d be really confused.

I’m not sure. Certainly, the relation between a payroll company and the worker is usually an employment relationship,

But the payroll company is paid by the production. 

That’s right. 

So who was ultimately responsible at the moment, it’s the payroll company that is maintaining all the employees and the workers, and they have a contractual relationship with the motion picture company, for example. So, where does the buck stop here?

It’s going to be a different issue. Believe it or not, to add complexity, there are actually two adjacent issues we should mention, and this is one of them. One of the adjacent issues is the question of joint-employer status. In other words, as you were saying, who is the employer? Where does the buck stop? Is the worker an employee of both the payroll company and the film production company? And that’s a whole other kettle of fish caught by a commercial fisherman working on an American vessel.

Well, we know the fishermen are exempt. 

That’s right. Well, under certain circumstances, but of course, once the fish is cooked and somebody brings it to the table, that’s a different type of worker, that’s a waiter. Remember that a lot of these questions also arise under federal law as well as state law. So, for example, federal taxes.

That was my next question. Is this state? Is this federal? Is the IRS now gonna jump in? What forms do you have to fill out? This is very confusing.

I asked a tax attorney about this, and his opinion was that as a matter of practicality, that if someone is treated as an employee under state law here that they would probably need to be treated as an employee under federal law for IRS for federal tax purposes. But it was a brief answer, and I’m not entirely sure why that’s necessarily the case, as a matter of strict legal analysis. This is a California law, AB5, and it does not change the definition of employee under federal law, which by the way, is typically a 20-factor test. We won’t get into that. And it is important not just for tax purposes, but for people in creative industries, and it’s important for copyright law purposes. Because certain aspects of copyright law depend on whether the worker is an independent contractor or an employee, joint-employer status can be determined both under federal and state law and under federal law for both purposes of certain federal occupational safety and health issues and also unionization issues. 

The Trump administration is deregulating and has proposed rules changes that are actually at issue right now, that would make it harder to claim that someone is a joint employer, as you can imagine, companies want to not be considered joint employers they want to push off the employment obligations onto other people. This comes up in franchises as well, by the way, is McDonald’s a joint employer of the fast-food worker who works at a franchised McDonald’s location? A lot of lobbying there on that. And the Obama administration had rules that made it easier to claim that there was a joint employment relationship and Trump is, as I say, is losing those. The other adjacent area, sort of not to be confused with this already confusing area that we’ve been talking about, is the question of whether someone has to be a paid worker at all or whether they are a volunteer? And this is another area that the entertainment industry has abused frequently in the context of volunteers or interns. Unpaid internships, in general, unpaid internships are okay if that someone is receiving school credit for them, and if the company is not having them do work that an employee will otherwise do, and it’s not really getting any financial or material benefit from the internship. 

So if you take someone as an unpaid intern and they’re doing actual valuable work that you otherwise would need to hire an employee to do. That is probably without having the details of the rules in front of me; it’s probably not a legitimate unpaid internship. PAs are very abused, if they’re unpaid, it’s your leg up into the business, blah, blah, blah. That’s just outright wage theft. And another example that you were alluding to as well is this Basic Wage and Hour Law, which is you get paid $10 an hour or $15 an hour or whatever, to work a quote, eight hours a day, and you’re working 10 and 12 hour days, but not permitted to put that down on your timesheet. And everyone just winks and nods, a new sign in the timesheet that says you worked eight hours. That’s unlawful.

And it’s prevalent. It’s an abuse that happens all the time. I see it all the time. I don’t agree with it. You weren’t interjecting an opinion, but you were saying that one of the criteria was that you wouldn’t be taking work away from people who would otherwise be paid to do it. And that’s very prevalent. A lot of people hire interns so that they can save money on employment costs. And they abuse the employees, they’re not training them, they’re putting them to work, and they’re not paying them, and they’re not getting any benefits. And they’re displacing other highly qualified employees. So it’s been a prevalent problem for a long time in our industry.

They’re just placing other low wage employees. And they’re also creating a race to the bottom because then it becomes harder for other companies to compete without engaging in the same business practices.

Right. And people are having to reduce their wages in order to compete with it, which is what you were saying, I believe so. Yeah, this is a very gray area. Lorena Gonzalez sponsored it, and Governor Newsom signed it into law, and didn’t they have anything else better to work on? I mean, I’m sorry, I’m interjecting an opinion here. But this is tough.

Well, this was an attempt to deal with what people consider to be true abuses. But you can see the difficulty here in the modern economy that something that always has been, the ABC test. Well, that sounds simple enough, it’s just three prongs, and there’s your test. Well, no, actually, what we end up with is a three-prong test that has about 30 exemptions, some of which have their own tests to decide whether the exemption applies. And if the exemption applies, then you fall into a 14 prong test, the Borello Test. So it’s a frightfully hard situation to regulate. And I guess it’s because of technology and because of changes in the nature of the working relationship, that there’s so much more much less adhesion between companies and workers, than there was 50 years ago. Now, interestingly, in some ways, the entertainment industry was ahead of the curve because from the studio system, which is the way that movies were produced between roughly the mid to late 20s through the late 40s when the so-called studio system essentially collapsed. What did that look like? That looked like traditional factory employment. Studio produced so many movies a year, like 100 movies a year per studio. Remember, there was no television in this time period. And television was one of the things that destroyed the studio system. People would go into work, including screenwriters, they would sit, and there was a writer’s building, and most people, many people were under contract. 

So actors would be under contract to a particular studio and would work on one movie for that studio, then another movie, then another movie. And it was very much a factory model, an industrial model of producing film content and that is the era in which the unions arose. And when I gave the examples earlier, where things feel more freelancing now say with motion picture screenwriters, for example, it wasn’t back then they weren’t freelancers, they weren’t truly employees and the unions arose and in the era of where it fit them the business model very directly. But what happened in the mid to late 40s, in 1945-46, a third of the country went to the movies every week. It’s an astonishing number, because today, an average movie-going is about five or so movies per year per person theatrically, probably slightly fewer than five at this point. So what happened? One thing that drove attendance in addition to the desire for entertainment, during more time, among other things, was that there was a desire for news about the war as well, and people went to see newsreels and animation cartoons. As well as the main feature or even a double feature. So it was the only audiovisual entertainment that people had. But then the war ends, and commercial television is introduced. And suddenly, you have audiovisual entertainment in a box in your living room. 

Meanwhile, the suburbanization of America meant that people were moving out to the suburbs away from the large movie palaces. And this was obviously, later countered by the development of smaller theaters out in malls and stuff. But at that point, the movie theaters were downtown, many of them. There were legal changes as well that undermine the ability of movie studios to control chains of theaters, and to control and to keep workers under hyper long term contracts. And as a result, all this taken together, this system where people will be under contract and would come into work every day, and we’re producing 100 movies a year per studio, all that changed. We’re seeing a big change now with the pivot to streaming. I don’t think we’ve seen such a large change as what we see today, since the end of World War II when the studio system collapsed. So it was a very large and dramatic change, but by the time you look to get to the 50s and 60s, you’re talking about a lot of people who are working in what today we would call the gig economy, you work on a movie, and then you don’t, then the movies over and you don’t have a job and hopefully find another job, another movie. And that’s true, whether you’re an actor, whether you’re a director, whether you’re a writer, the motion picture business. In particular, distinguishing from the television business became a gig business before the word gig economy existed. 

And before, other businesses like taxi drivers became Uber drivers, which is a gig business. And before, restaurant delivery person became independent, Doordash delivery person independent, seamless or caviar or whatever delivery person. Before the hotel business became in part, the independent owner of a spare bedroom in your house that you rent out as a hotel room, Airbnb. One of the key things about this disintegration of business models is the technology is what makes this possible. And the movie business always was a technological business and always produced an intangible product. I mean, yes, a film reel. But the value in what was produced was not the value of this celluloid reel that was sent out to a movie theater display. It was the intangible that you watched on screen and computer technology and the internet, and all the things that we’re all very familiar with today have turned aspects of all sorts of other businesses into intangibles. The business of staying at a hotel, the business of taking a taxi cab, or what the platform companies realize is that part of those businesses are intangible. Part of it is the tangible physical vehicle that takes you from point A to point B, a physical room that you stay in overnight. Part of it is intangible, which is the connection between purchasers. And we now live in an economy where increasingly, as Shakespeare probably once said, all the worlds that app. I think he said that, didn’t he?

Did he say that? I don’t know. Did he invent the internet too?

Well, he must have. He certainly would have said that, if he didn’t, then he should have said that if he didn’t. Whether it’s dating, there’s an app for that.

There’s an app for everything.

There’s an app for everything, and that’s a deeper truth than just the irony of it and the humor of it and the convenience of it. Because when there is an app for something, it means that certain aspects of this something can be disintermediated. The gay bars that I went to, in my 20s, were physical places that had a business model of selling alcohol, but what they were really selling were hookups and meetups and, to some extent, romance, so they were selling sex and romance. Some of that business has been disintermediated, and it’s on Grindr now, it’s on Tinder, there literally is an app for that. Sex? There’s an app for that.

So let’s summarize for people here because it is very confusing, and I think the bottom line is the burden of proof lies with the employers, you have to pass the ABC test at least. Right? 

Well, you do have to […] if the worker is not part of one of the exemption lists.

I want to bring you back in maybe in another month or two to sort of regroup on this, waiting to see what happens because there is some ambiguity in terms of board directors and advisory board members. Even the SEC has fuzzy calculations about whether or not you’re an employee. If you’re a board member, one form makes you not an employee, and the other form that says makes you an employee, and that’s gonna affect AB5.

Right. And the ones that […] gives you don’t do anything at all. 

So we’re gonna just monitor this with you. And we’re going to watch some of these lawsuits that have already been filed by, for example, the trucking industry, the journalists, I think the National Press Photographers Association filed one, and there are some music entities because they use gig musicians all the time. So some of those entities are filing suit now too. So we’re going to be monitoring all of that, and we’ll report back to everybody. And I hope I can bring you back in when this all solidifies and has time to cook, and we figure out exactly what we have. Does that sound good to you? 

I’d be pleased to come back. I’m not entirely optimistic about whether this is going to solidify, but I think that because of the litigation and also the ballot initiative that the Lyft and Uber community are working on, this is going to be in a state of flux for quite some time. And I think we’re going to see courts having to, I mean, already in the trucking industry, there is a pulmonary injunction. I believe, barring the enforcement of the ABC test for the time being, and we’re going to see more court action, I think, and as you alluded to, so I’d be pleased to come back and try to make sense of it.

Thank you. I really appreciate your time. Because this is very important to all of us here, and it’s going to affect almost everyone who either employs workers or who hires contractors. So, Jonathan Handel. Thank you so much. It’s always been a pleasure talking with you. And everybody listening, you know what I always tell you, get up off your chair and go do something wonderful today. This is Cirina Catania, signing off for OWC Radio, and a very special thanks to Other World Computing for sponsoring our show and allowing us to present information like this to people who really need it. Thanks again, Jonathan.

 Thanks, Cirina.

About OWC:

Other World Computing (OWC), owc.com, founded in 1988 by Larry O’Connor when he was only 14 years old, is dedicated to helping tech enthusiasts and industry professionals do more and reach higher. Their trusted storage, connectivity, software, and expansion solutions enable creative professionals, producers, educators, and government entities to get the most out of their technology investments, protect valuable digital assets and expand their hardware’s capabilities to keep up with the demands and evolution of their work. OWC features an award-winning technical support team that is on hand 24/7 as well as an unparalleled library of step-by-step installation and support videos. In everything we do at OWC, we believe in making a better world where technology inspires imagination and everything is possible.

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