As previously reported, Governor Gavin Newsom recently signed into law AB 5. The controversial law narrowing the classification of independent contractors was aimed at companies like Uber and Lyft. But what does it mean for the entertainment industry?

AB 5

Assembly Bill (AB) 5 creates a three-pronged test to determine if a person providing services is an independent contractor or an employee.

The first prong (the “A” prong) looks to whether “control” exists in the business relationship. This prong is very similar to the practice prior to AB 5, which was governed by the Borello test. Simply put, if the employer cannot exert control over a service provider, then that provider is not an employee.

The second prong (the “B” prong) is the most controversial. It requires an examination of whether the worker performs work that is outside the regular course of the hiring entity’s business, but the test does not define “business.” Ordinary meanings of the term “business” are also quite varied, making the application of this provision problematic. If the work is within the regular course of the employer’s business, the worker will likely be deemed to be an employee.

The third prong (the “C” prong) requires that the worker is already in business for themselves and works in a customarily independent fashion to be considered an independent contractor.

Ultimately, AB 5 dramatically shifts what services will be considered the work of independent contractors and is anticipated to shift the classification of approximately 2 million independent contractors to employees. This has major implications for employers across the state and would significantly increase the cost of doing business for many companies.

Entertainment Hiring Practices

The entertainment industry frequently hires professionals in independent contractor capacities rather than taking them on as employees – and the workers prefer it this way.

The nature of entertainment work lends itself to individuals working for a variety of employers throughout the year, sometimes even at the same time. Luckily, freelance writers are a noted exception to AB 5, but nearly every other position could be negatively impacted.

For instance, most Schedule F SAG-AFTRA performers are not interested in being considered employees for the studio that hires them. Taking on an independent contractor role offers them more freedom to do work on other projects, as well as being beneficial for tax purposes. In fact, most performers form loanout companies so that they may be considered an employee of the loanout, rather than the studio.

Crew members feel similarly. In fact, many crew members would not accept employment as anything other than an independent contractor.

Employers benefit immensely from this as well, as they do not owe independent contractors overtime or meal penalties and employers do not have to pay traditional payroll taxes on top of the paychecks.

The entertainment guilds do not have language in their collective bargaining agreements requiring any members to be engaged as independent contractors, but considering the interests of their members, they may seek to resist AB 5. All of the Guild agreements contain provisions regarding loanout corporations. They generally state that the collective bargaining agreement applies regardless of the loanout corporation.

Effective Date and Jurisdiction of the Law

The law is currently set to go into effect January 1, 2020.

Under the guidance of the unpublished Sullivan v. Oracle Corporation opinion, AB 5 would likely 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.

However, California companies could employ residents of other states to perform services outside of California and not be restricted by AB 5. For instance, a company producing a film in Georgia would not be limited by AB 5 in hiring Georgia residents as independent contractors. Instead, Georgia law would apply.

What To Do About AB 5

It would be in one’s best interest to adjust all independent contractor agreements that are 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.

It is important to also be aware of the tax ramifications of misclassification. Both parties are likely to incur a greater tax liability under these laws and it’s important for them to understand how that might change when agreeing to provide services.

Everyone should also be aware that noncompliance is likely to result in lawsuits for misclassification. The attorney general, city attorneys and local prosecutors all have the authority to bring claims regarding worker misclassification. The prevalence and ramifications of these claims will have to wait to be seen, but large amounts of costly litigation seem imminent.

*Leah Katz is a intern in Sheppard Mullin’s Century City office.