November 11, 2020
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Who Is an Independent Contractor in California?

The Wrapbook Team
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For a while there, it seemed like the definition of“independent contractor” was changing all the time in California.

While AB-5 imposed strict restrictions on who could be classified as an independent contractor, newer laws like AB-2257 have added exemptions for who qualifies as a gig worker in the Golden State.

Having a thorough understanding of who can be hired as an independent contractor is crucial for employers. In addition to penalties for wage violations associated with a worker being misclassified, there are civil penalties for willful misclassification between $5,000 and $25,000 per violation.

In this post, we’ll cover the ins and outs of worker classification in California to help you better understand if you are hiring an employee or an independent contractor.

Who is an independent contractor?

Independent contractors have a different pay structure than employees, and often receive one lump sum payment for all work once it’s completed. 

Independent contractors require zero tax withholdings, no payroll taxes, and their hiring process requires different startwork documents. Because of the nature of their work and the strict stipulations in states like California, they usually have to sign contracts that detail the specifics of services requested.

Employee vs Contractor Classification - Wrapbook - Independent Contractors

So how does this all work in California?

The employee vs independent contractor test in California

Whenever you have an open position, you may think that it’s up to you whether or not you have to hire the worker as an employee or contractor. However, it’s actually up to the state you’re hiring the worker in.

Employee vs Contractor Classification - Wrapbook - ABC Test

In fact, each state has its own classification test to determine whether a worker is an employee or a contractor. In California, that test is outlined by Assembly Bill 5 (AB-5, for short).

Per the rules of AB-5, you determine a workers’ classification in California using the ABC test. In a nutshell, the ABC test outlines three conditions that must exist in order for your worker to be classified as an independent contractor:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  2. The worker performs work that is outside the usual course of the hiring entity’s business.
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Note that the hiring entity must satisfy all three conditions to classify a worker as an independent contractor. One or two is not enough.

If it still seems a little confusing, don’t fret. We did a deep dive into the ABC Test, providing examples of what each prong can look like. And, of course, nothing can replace a conversation with a lawyer to see if your hiring decision passes muster.

However, just because a worker fails to meet these criteria doesn’t mean they’re not an independent contractor in California. In both AB-5 and AB-2257, exemptions are laid out.

What is AB-5?

AB-5 is a California state law that went into effect in 2020. The bill switched the default standard for worker classification from the common law test to the ABC test.

Many workers saw the switch over to the ABC standard with the passing of the AB-5 bill as a win. However, from an employer’s perspective, it became increasingly more cost prohibitive to onboard workers in California for certain projects.

For some individuals, particularly often underpaid musicians, the cost of incorporating or establishing an LLC and related expenses were prohibitively expensive. This led to a petition where over 189,000 signatures were collected to add exemptions for independent California music professionals. This ultimately led to AB-2257, an addendum to the original law.

Enter: AB-2257

Think of AB-2257 as the sequel to AB-5.

With AB-2257, the ABC test stays the default standard for employee classification. The passed bill simply adds more exemptions that expand who can legally work as an independent contractor in California.

Want to read AB 2257 for yourself? Review the clauses and exceptions within the bill here.

Occupations exemptions to AB-5 in California

AB-5 and AB-2257 established a laundry list of industries and occupations that are now exempt from the ABC test’s stringent requirements. Let’s break them down.

Music business exemptions

AB-2257 made its biggest impacts felt in the music industry. AB-2257 exempts a vast majority of music professionals from the ABC test, including:

  • Recording artists
  • Songwriters
  • Lyricists
  • Composers
  • Proofers
  • Managers of recording artists
  • Record producers and directors
  • Musical engineers and mixers
  • Musicians
  • Vocalists
  • Photographers
  • Independent radio promoters

Plus, any other individual engaged to render creative, production, marketing, or independent music publicist services related primarily to the creation, marketing, promotion, or distribution of sound recordings or musical compositions.

Musicians who do not receive royalties from a sound recording or musical composition must receive the applicable minimum and overtime wages.

Musicians and groups hired for a single-engagement live performance event (i.e., a concert) are exempt from the ABC test, except if they meet any of the following situations:

  • The musical group is performing as a symphony orchestra.
  • The musical group is performing at a theme park or amusement park.
  • The musician is performing in a musical theater production.
  • The musical group is an event headliner for an event in a venue with more than 1,500 attendees.
  • The musical group is performing at a festival that sells more than 18,000 tickets per day.

Other performer exemptions

The state of California still wants to be an entertainment mecca. That’s why comedians, improvisers, magicians and illusionists, mimes, spoken word performers, storytellers, and puppeteers that perform original work are also exempt.

In order to secure an exemption, these performers must meet the following conditions:

  • They must be free from control by the hirer
  • They must keep their intellectual property rights around their performance
  • They must be able to set their own terms of work and negotiate rates

Single engagement B2B exemptions

AB-2257 adds new exemptions for companies who contract someone for the purposes of providing services at the location of a single-engagement event. The ABC test does not apply if the individual provides services at a stand-alone non-recurring event in a single location, or a series of events in the same location no more than once a week.

On paper, the exemption may sound clear, but it’s always best not to make any assumptions. If you have any doubts or questions, talk to a qualified attorney.

Professional services exemptions

AB-2257 eliminates restrictions previously in place by AB-5 to independent contractors in California working as photographers, photojournalists, freelance writers, editors, and newspaper cartoonists.

In addition, AB-2257 removes any editorial submission cap that requires contractors to convert to full time after completing a specific amount of work. The bill only requires businesses to refrain from displacing existing full-time employees when hiring one of these types of contractors.

AB-5 also defines the following roles as exempt professional services:

  • marketing professionals
  • human resources professionals
  • travel agents
  • graphic designers
  • graphic artists
  • fine artists
  • freelance writers
  • barbers and cosmetologists
  • estheticians
  • electrologists
  • manicurists
  • payment processing agents
  • IRS licensed tax professionals

To qualify for exemption, all independent professional service providers must:

  • Have an established business location (can be their residence)
  • Have any required business or occupational licenses
  • Have the ability to set or negotiate their own rates
  • Maintain the ability to set their own hours outside of project completion dates
  • Engage in the same type of contract work with other companies, or must be able to hold themselves out to other potential customers available for similar work
  • Exercise discretion and independent judgment as they work

AB-5 also provides specific exemptions to roles in other industries, including the medical, legal, and real estate fields.

Referral agency exemptions

Let’s say you hire a web designer. You thought this person nailed your project. Now you want to refer them out to other employers.

Businesses that refer an individual’s services to new clients may be exempt from the ABC test. AB-2257 references graphic design, web design, photography, and event planning among other specific services covered by referral exemptions.

To be exempt, referral agencies must be able to show they can meet the following eleven conditions:

  1. The service provider is free from the control and direction of the referral agency in connection with the performance of the work for the client, both as a matter of contract and in fact.
  2. If the work for the client is performed in a jurisdiction that requires the service provider to have a business license or business tax registration in order to provide the services under the contract, the service provider shall certify to the referral agency that they have the required business license or business tax registration. The referral agency shall keep the certifications for a period of at least three years.
  3. If the work for the client requires the service provider to hold a state contractor’s license pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code, the service provider has the required contractor’s license.
  4. If there is an applicable professional licensure, permit, certification, or registration administered or recognized by the state available for the type of work being performed for the client, the service provider shall certify to the referral agency that they have the appropriate professional licensure, permit, certification, or registration. The referral agency shall keep the certifications for a period of at least three years.
  5. The service provider delivers services to the client under the service provider’s name, without being required to deliver the services under the name of the referral agency.
  6. The service provider provides its own tools and supplies to perform the services.
  7. The service provider is customarily engaged, or was previously engaged, in an independently established business or trade of the same nature as, or related to, the work performed for the client.
  8. The referral agency does not restrict the service provider from maintaining a clientele and the service provider is free to seek work elsewhere, including through a competing referral agency.
  9. The service provider sets their own hours and terms of work or negotiates their hours and terms of work directly with the client.
  10. Without deduction by the referral agency, the service provider sets their own rates, negotiates their rates with the client through the referral agency, negotiates rates directly with the client, or is free to accept or reject rates set by the client.
  11. The service provider is free to accept or reject clients and contracts, without being penalized in any form by the referral agency. This paragraph does not apply if the service provider accepts a client or contract and then fails to fulfill any of its contractual obligations.

Wrapping up

Keep in mind the above information is not legal advice. Nothing can replace the guidance provided by a properly qualified lawyer.

Instead, treat this post as a starting point, so that you can then ask a lawyer more specific questions. With Wrapbook, you can easily classify workers as employees, contractors, and even loan-outs. Check out our demo to see how Wrapbook can make compliance faster and more efficient on your next production. 

For more resources focused on the CA entertainment industry, we recommend you check out The Essential Guide to California Tax Credits or our Los Angeles Film Permits Ebook.

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Disclaimer

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.

About the author
The Wrapbook Team

The Wrapbook Team consists of individuals who are thrilled about building modern software tools for creators. We’re a team of compassionate and curious people dedicated to solving complex problems with sophisticated solutions. You can find us across the U.S. and Canada.

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