AB 5 — What does it mean for newspapers that use independent contractors?
Now that legislation supported by CNPA creating exemptions for freelancers and carriers (expiring Jan. 1, 2021) has been signed into law by Gov. Gavin Newsom, there are many questions about how the new law and the exemptions will impact newspapers’ use of independent contractors in their operations.
This discussion is intended to provide readers with a general understanding of how the law will operate beginning on Jan. 1, 2020. Before making any decisions about how to apply the new law to your particular operation, you should consult with an attorney who specializes in labor law.
AB 5 by Assemblywoman Lorena Gonzalez (D-San Diego) is the legislation that codifies the decision in Dynamex Operations West, Inc. v. Super. Ct., (2018) 4 Cal. 5th 903, in which the court adopted the “ABC test” to determine whether a worker is properly classified as an employee or independent contractor. AB 170, also by Gonzalez, is the companion bill to AB 5 that establishes a one-year exemption from the ABC test for carriers and distributors.
Prior to the passage of AB 5, the Dynamex decision applied only to classification determinations based on wage and hour claims. By codifying the decision in AB 5, the legislature and the Governor have extended the use of the ABC test to other areas of the law affecting workplaces including minimum wage, overtime, meal and rest breaks, reimbursement of expenses, paid sick leave, paid family leave, various notice, poster and wage statement requirements, timekeeping record requirements, unemployment coverage, workers’ compensation coverage, paycheck timing requirements, on-call, call-back and standby pay requirements, travel time payment requirements, final paycheck requirements, and commission payment rules.
The ABC test presumes that a worker is an employee unless the contracting business can show its relationship with a worker meets all of the following conditions:
- The worker is free from the control and direction of the business in connection with the performance of the work, both under the contract for the performance of the work and in fact.
- The worker performs work that is outside the usual course of the company’s business.
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
AB 5 has established a handful of exemptions to the ABC test. “Professional service” exemptions pertaining to the newspaper industry include those for writers, editors, newspaper cartoonists, still photographers and photojournalists.
Newspaper Carriers and Distributors
In addition to the professional service exemptions, there is also a general exemption for newspaper carriers and distributors. The carrier exemption expires on Jan. 1, 2021. Rather than the ABC test, the standard that will apply to determine whether carriers and distributors are properly classified will be the Borello standard as discussed below.
Many publishers are now thinking about and discussing potential models to use for their carriers and distributors once the exemption expires. While no clear model has yet emerged from these discussions, some of the issues they are considering include:
- Identifying the number of carrier and distributor contractors who potentially would be reclassified under the law
- Analyzing carefully the facts and circumstances of work the carriers and distributors perform with the ABC test in mind
- Determining whether there might be a distribution model that would fall within one of the other exemptions in AB 5
- For those carriers and distributors who may be reclassified as employees, assess the costs of doing so:
- Direct costs (wages, salary, benefits)
- Overhead costs (HR support, taxes, UI, worker’s comp, recruitment, training)
- Cost savings (increased control, potential lower rate of pay, decreased turnover, increased customer satisfaction)
- Decreasing the size of circulation areas
- Decreasing the frequency of publication
- Analyzing the logistical issues of reclassification
- Customer satisfaction
- Operational challenges
- Workflow challenges
- Distribution partnership challenges
The test for publishers and their circulation teams in the coming months will be to weigh these and other factors to create a distribution model that will continue to allow for home delivery while complying with the new law.
Professional services exemptions — Freelancers
Workers that fall within one of the specific exemptions in AB 5 are exempt from the strict ABC test. The Borello standard is used instead of the ABC test to determine if a worker is properly classified and is similar to the common law factor test used in federal law. Getting its name from a 1998 California Supreme Court case known as S. G. Borello & Sons, Inc. v. Department of Industrial Relations, the Borello standard is generally viewed as an easier standard for businesses to meet when using independent contractors.
Preconditions must be met before professional service exemptions apply
Before a worker can be considered exempt under one of the professional service exemptions the person must first show:
- The individual maintains a business location, which may include the individual’s residence that is separate from the hiring entity;
- The individual has a business license, in addition to any required professional licenses or permits for the individual to practice in his or her profession;
- The individual has the ability to set or negotiate his or her own rates for the services performed;
- Outside of project completion dates and reasonable business hours, the individual has the ability to set his or her own hours;
- The individual is customarily engaged in the same type of work performed under contract with another hiring entity or holds himself or herself out to other potential customers as available to perform the same type of work; and
- The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.
If an individual satisfies all of the preconditions above, then he or she must also satisfy criteria set forth in one of the applicable professional service exemptions. AB 5 provides two distinct categories of professional service exemptions for newspapers.
Freelancers seeking to qualify as a still photographer or photojournalist must show:
- They do not provide content to the same “putative employer” more than 35 times per year.
- A “submission” is defined as one or more items or forms of content produced by a still photographer or photojournalist that:
- Pertains to a specific event or specific subject;
- Is provided for in a contract that defines the scope of the work; and
- Is accepted by and licensed to the publication or stock photography company and published or posted. Nothing in the law prevents a photographer or artist from displaying their work product for sale.
Writers, editors and newspaper cartoonists
Freelancers seeking to qualify as a writer, editor, or newspaper cartoonist must show:
- They do not provide content to the same “putative employer” 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 the 35 times per year;
- A “submission” is defined as one or more items or forms of content by a freelance journalist that:
- Pertains to a specific event or topic;
- Is provided for in a contract that defines the scope of the work; and
- Is accepted by the publication or company and published or posted for sale.
Important considerations for publishers and editors
In light of the submission cap in the new law, all newspapers will need to review their existing freelance agreements to ensure they are up-to-date. Publishers and editors should seek counsel from a labor law attorney to help structure freelancer agreements in a way that maximize the ability to use submissions from a freelancer while minimizing liability exposure.
Publishers and editors will also need to set up a tracking system to monitor the number of contributions made by each freelancer to ensure that no freelance contributor exceeds 35 submissions in a year.
Alternative to freelancer exemption
After reading through the discussion above, you may have reached a point where you are looking longingly at that bottle of pinot vowing never to use freelancers again.
Not so fast.
AB 5 provides another exemption from the ABC test for businesses that directly contract with other businesses called the business-to-business exemption. This exemption may be useful under the right circumstances to avoid the 35 submission cap altogether.
Business to business exemption
To the extent a business entity is formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation (“business service provider”) which contracts to provide services to another business (“contracting business”), the determination of employee or independent contractor status of the business services provider will be governed by the Borello standard described above. To qualify, the contracting business must demonstrate that all of the following criteria are satisfied:
- The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The business service provider is providing services directly to the contracting business rather than to customers of the contracting business;
- The contract with the business service provider is in writing;
- If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration;
- The business service provider maintains a business location that is separate from the business or work location of the contracting business;
- The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed;
- The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity;
- The business service provider advertises and holds itself out to the public as available to provide the same or similar services;
- The business service provider provides its own tools, vehicles, and equipment to perform the services;
- The business service provider can negotiate its own rates
- Consistent with the nature of the work, the business service provider can set its own hours and location of work;
- The business service provider is not performing the type of work for which a license from the Contractor’s State License Board is required.
Using a freelancer who formally organizes as one of the business entities listed in this exemption and who meets all of the criteria would help newspapers avoid potential liability for exceeding the 35 submission cap per year. This is an important consideration since AB 5 places the burden on the business contracting with the freelancer to demonstrate that the relationship complies with the law.
Some of your questions may remain unanswered after reading this discussion. Please contact CNPA General Counsel Jim Ewert at 916-288-6013 to discuss them with him.