Who is An Independent Contractor in California?

It seems almost month-to-month the definition of an independent contractor is changing in California.

While AB-5 imposed strict restrictions on who can be classified as a contractor, new laws such as AB-2257 have added exemptions as to who is 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 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.

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Who is an independent contractor?

Independent contractors have a different pay structure than employees, and often receive one sum for everything once the work is completed. Independent contractors see 0 tax withholdings, and their hiring process is also a bit different. Because of the nature of their work and the strict stipulations in states like California, they usuallu have to sign contracts that detail the the specifics of services requested.

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 up to the state you’re hiring the worker in.

In fact, every state has its own classification test to determine whether a worker is an employee or a contractor.

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 scenarios that must exist in order for your worker to be classified as an independent contract:

1. The hiring entity must not exert significant control over the worker.
2. The services are “outside the usual course of business” for the hiring entity.
3. The worker engages as an independent business completing work of the same nature as the project you intend to hire them for.

If it 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 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 was AB-5?

AB-5 was a California state law that went into effect in 2020. The bill switched the default standard for determining if a worker in California needs to be classified as an independent contractor or employee from the common law test to ABC.

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 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 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 set a laundry list of industries and occupations that are now exempt from the ABC test’s stringent requirements. Let’s break it down.

MUSIC BUSINESS EXEMPTIONS

The biggest impacts to the entertainment industry from AB-2257 are in music. AB-2257 exempts a vast majority of music professionals from the ABC test:

• 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 any 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 these situations:

• Perform as a symphony orchestra, or in a musical theater production, theme park, or amusement park
• Headline an event in a venue with more than 1,500 attendees
• Perform 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. Comedians, improvisers, magicians and illusionists, mimes, spoken word performers, storytellers, and puppeteers that perform original work are also exempt.

Just as long as they are:

• Free from control by the hirer
• Keep their intellectual property rights around their performance
• Can set their terms of work and negotiate rates

Single engagement B2B exemptions

AB-2257 adds new exemptions for companies who contract with 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, do not interpret this in any way as legal advice. If you have questions or any doubts, talk to an attorney.

With this exemption, we’ll see how it affects the entertainment industry once the pandemic is over.

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 to use one of these types of contractors.

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

• marketing professional
• human resources professional
• travel agent
• graphic designer
• graphic artist
• fine artist
• freelance writer
• barber or cosmetologist
• esthetician
• electrologist
• manicurist
• payment processing agent
• IRS licensed tax professional

All independent professional service providers must:

• Have an established business location (can be home)
• Have any required business license or occupational license
• 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 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 industries including medical, legal, and real estate.

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 others.

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 referrals.

To be exempt, referral agencies also have to be able to show they can meet these 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 advice provided by a trusted lawyer.

Treat it more so as a starting point, so that you can then ask a lawyer more specific questions. For more resources focused on the CA entertainment industry, we recommend you check out The Essential Guide to California Tax Credits and our Los Angeles Film Permits Ebook.

If you have questions about hiring and onboarding California workers within the entertainment industry, reach out to us.