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At Wrapbook, we pride ourselves on providing outstanding free resources to producers and their crews, but this post is for informational purposes only as of the date above. The content on our website is not intended to provide and should not be relied on for legal, accounting, or tax advice. You should consult with your own legal, accounting, or tax advisors to determine how this general information may apply to your specific circumstances.
Many people still have questions about how Assembly Bill 5, originally designed to classify Uber drivers as employees, is affecting the entertainment industry.
Assembly Bill 5 (often shortened to AB-5) was signed into law by California Governor Gavin Newsom on September 18, 2019, and makes it harder for employers to classify their workers as independent contractors.
Although the ride share business and gig economy at large were the intended targets, there have been ripples produced by the law’s introduction to the California economy.
In this post, we recap what AB-5 has changed, what the entertainment industry is saying, and how it might affect your productions in California.
AB-5 changed the method by which workers are classified in California. Previously, California used the Borello Test for worker classification. Now, it uses the ABC Test.
AB-5 creates an assumption for employers to consider all workers as employees unless the employer can prove the worker’s role is a contractor according to the state’s new labor classification test.
At the time, it was thought that AB-5 may have reclassified some 2,500,000 workers who had previously been misclassified as independent contractors as employees. Though it was originally intended to reclassify Uber and Lyft drivers as employees, that is no longer the case thanks to Proposition 22, a ballot initiative that specifically exempted app-based transportation and delivery companies from AB-5.
This does not mean that every employer immediately complied with updating the classification of their workers. In every state, misclassification can occur because an employer simply doesn’t understand how labor classification works. It can also occur because an employer doesn’t want to pay employer payroll taxes or provide any employee benefits. Whether intentional or not, worker misclassification can result in hefty fines for employers.
Being a misclassified worker is bad for the worker. Misclassified workers pay higher taxes and don’t get other employee protections, like overtime pay, workers compensation insurance, sick days, paid leave, and other benefits.
Employers who misclassify their employees as contractors will need to withstand the scrutiny of the California authorities and can expect fines for doing so.
If you want to read Assembly Bill 5 for yourself, make sure to check out the clauses and exceptions to the bill here.
In late 2020, Assembly Bill 2257 (AB-2257, for short) was enacted in an effort to create certain exemptions from the rigors of AB-5. While the original bill already included exemptions for some professions, the list was limited. AB-2257 expands it dramatically, establishing exemptions for many musicians, artists, and other freelancers who work under unique circumstances.
Note that AB-2257 does not exempt workers from labor tests altogether. Rather, it specifically exempts them from the ABC test. Workers exempted under AB-2257 must still pass the Borello test to be considered an independent contractor.
For more information, you can read the full text of AB-2257 here or get the big picture with our deep dive into worker classification in California.
AB-5 is placing a larger burden on employers to prove that their short term workers are not, in fact, employees.
But just because the bill made it harder for independent contractors to be misclassified doesn’t mean project-based work has ceased. AB-5 merely changed the labor test used by the state of California.
Prior to the bill, California utilized the Borello test to determine whether workers were employees or contractors. However, as of January 1, 2020, the new bar to cross is the ABC Test.
Already used by the U.S. Department of Labor, the ABC Test assumes a worker is an employee unless the employer can prove that:
A) There is an absence of control.
B) The worker’s business is unusual compared to the employer’s.
C) The worker is customarily engaged in a similar trade with other business entities.
Critically, employers must satisfy all three conditions. If even one condition remains unmet, the employer must classify the worker in question as an employee.
What this gets down to in specifics obviously varies from business to business. Our post, "Employee or Contractor? The Complete List of Worker Classification Tests by State," outlines what the different prongs of the ABC Test mean in practice.
Because the ABC Test assumes that a worker is an employee by default, it is much harder to “pass” a worker as a contractor under the ABC Test compared to labor tests used in other states. The California government had hoped it would un-gig the gig economy.
Unionized productions already pay 95% of their workers as employees and not as contractors. For this reason the unions said that they don’t see the legislation affecting 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 affects the industry:
“Over the past four months, 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 AB-5 would not undermine the rights secured by our collective bargaining agreements, including the right to form and utilize loan-out companies.”
To put it another way, because most filmmaking unions negotiate their own contracts regarding member employment, AB-5 has had little direct influence on union employment conditions. AB-5 has essentially been a non-factor for union productions.
The unions went on to state that many of their members are often paid through loan out companies.
While the status of loan out companies has been top of mind for entertainment professionals with AB-5, the large consensus from guilds is that the bill did not affect the use of loan outs as a payment vehicle. Producers can continue their usual process for paying loan-outs.
The broad nature of AB-5 sounded an alarm for non-union projects.
Under the California ABC Test, the majority of the cast and crew on a production are now viewed as employees because they work under the production company’s control.
For example, simply having a call time could constitute “control.” Working as an actor could be construed as usual to the business of a production company. Collaborating with the same people on a regular, frequent, or ongoing basis could demonstrate that you are dependent on that one job and are, therefore, an employee.
In a scenario where freelancers are reclassified, production companies should consider using a film payroll company that can efficiently onboard workers as short term employees and serve as their employer of record.
In any case, the breadth of AB-5 should motivate many employers to review and, if necessary, update the classification of their workers.
At the end of the day, AB-5 offers relatively simple parameters for worker classification. The ABC Test clearly states that workers are employees unless the employer can prove there is an absence of control, that the worker’s trade is outside the employer’s business, and that the worker is engaged in the same trade with other hiring entities.
Failure to meet any of these prongs means you’re hiring an employee.
If you’re not careful worker misclassification can be an expensive payroll mistake. Consider using Wrapbook to help you quickly and accurately classify cast and crew for your next production.You can reach out to us for more information or check out our demo to see how Wrapbook can help you avoid production headaches for yourself.
