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California’s AB5 Bill and the Unintended Consequences for Freelancers

A law passed in California had a noble goal: to prevent “gig” workers such as drivers for companies such as Lyft and Uber from being economically exploited. However, Assembly Bill 5 (AB5) has had some unintended consequences as some employers are letting go of their California-based freelancers, rather than deal with determining if they’re independent contractors or not. While graphic artists are, for the most part, exempt from the most stringent provisions of the law, there are broader implications of AB5.

The issue is that employers assume certain responsibilities for employees, such as abiding by state and federal regulations and withholding payroll taxes. Employers, in general, do not assume those responsibilities for freelance workers. Determining whether an individual is an employee or an independent contractor is not as simple as it sounds, and tests have been created by courts and agencies. (See our Tools & Resources article,  Are You an Employee or Independent Contractor?.)

Classifying Workers: The Borello and ABC Tests

In California, two such tests have bearing in AB5. The Borello test resulted from the 1989 case, S. G. Borello & Sons v. Dept. of Indust. Relations (1989). In that case, the California Supreme Court considered whether a group of farm laborers were independent contractors or employees. The Borello test was devised as a list of 11 qualifications and became a standard for determining the classification of workers in California. A 2018 case, Dynamex Operations W. v. Superior Court, further narrowed employers’ ability to classify workers as independent workers by the application of the ABC test. Under the ABC test, a worker is considered an employee and not an independent worker unless they meet all three qualifications:

  • 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;
  • The worker performs work that is outside the usual course of the hiring entity’s business; and
  • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Under the Dynamex court decision, the ABC test only applied California state wage and hour laws.  AB5 was drafted to apply the ABC test to the classification of workers under the full scope of California unemployment and labor regulations. This means that unless an employer can prove all three criteria of the ABC test, a worker is considered to be an employee even if the worker and the employer have a written agreement stating that the worker is an independent contractor.

This creates a huge burden on employers and jeopardizes the livelihoods of broad swathes of freelance professionals. In recognition of this, the bill exempted about 50 different professions and businesses from needing to have the ABC test applied. The exempted professions and businesses must still meet the looser requirements of the Borello test.

Implications for Graphic Artists

Graphic designers and fine artists are specifically exempted from the ABC test as professional service providers. While illustrators are not listed, the US Department of Labor folds illustrators into the occupation category for fine artists, indicating that illustrators would also be exempt. These graphic artists must still meet six professional service provider requirements:

  • Have a business location
  • Negotiate their rates
  • Set their work hours

  • Have or be available to other clients
  • Exercise their own judgement in performing their services
  • Beginning in June 2020, have a business license

Graphic designers and web designers who find work through a referral agency also benefit from exemptions created for those agencies. The referral agency must meet 10 requirements stipulated in AB5. For example, the service provider (or graphic artist) must be free from control of the referral agency, etc. (See Talentwave’s article on Understanding AB5’s Carveouts.)

It’s less clear how AB5 will affect web designers. While the carveout for referral agencies specifically lists web designers as service providers, web designers are not listed under the exemptions for professional service providers as are graphic designers and fine artists. Attorney Ivan Hoffman worries that web designers may fail the ABC test, since the work of a web designer – creating or editing a business entity’s website – is so integral to the operations of a business. The difficultly lies in the wording of the second prong of the ABC test: the worker performs work that is outside the usual course of the hiring entity’s business. “Business” is not defined in this context, leaving interpretation of the law up to the hiring companies.

For newspaper cartoonists, the professional services carveout includes a restrictive condition. Photographers, photojournalists, writers, and newspaper cartoonists are limited to only 35 submissions per year. Any number higher than that, and the individual must be considered an employee. This is a huge problem for professional freelancers with weekly or ongoing contracts with publisher. (Confusingly, marketing photographers are exempt from this limitation.)

Chilling Effect on Creative Industries

Predictably, AB5 has been opposed by gig-economy fueled businesses like ridesharing and food delivery services, whose labor practices the bill attempts to address. However, the bill is also facing legal challenges from the creative industries, in particular writers and photographers. The National Press Photographers (NPPA) and American Society of Journalists and Authors (ASJA) have filed a joint lawsuit challenging AB5 on its constitutionality. The lawsuit points out that the law, in imposing limits on some freelancers and not other visual artists, is violating the free speech of freelance writers, editors, and newspaper cartoonists.

There are also concerns that the law will have a chilling effect on the hiring of California-based creative professionals overall.  In an interview on KUSI News station, California cartoonist Lisa Rothstein stated that she’s worried that companies will terminate contracts with California freelancers, rather than go through the process of determining if the freelancer would be exempt under AB5. She also points out that AB5 fails to take into consideration the vast numbers of creative professionals who either prefer or, because of family obligations and the like, require the flexibility and independence of freelancing.

Rothstein’s worries have already been borne out. On December 16, Vox Media announced that they would be moving their California team blog in-house, ending contracts with hundreds of California freelance workers. Rebecca Lawson, editor-in-chief of Vox Media’s SB Nation who got her notice of termination, wrote: “So, SB Nation has chosen to do the easiest thing they can to comply with California law – not work with California-based independent contractors, or any contractors elsewhere writing for California-based teams. I don’t blame them at all.”

Going Forward: New York and New Jersey

California lawmakers are being pressed to either repeal AB5, or make significant revisions to the law. In an article published by the San Diego Union-Tribune, “Three ways to fix the AB5 independent contractor law,” lawyer Dan Eaton states Assembly Member Lorena Gonzalez, the legislator who introduced AB5,  emailed him that they intend to continue working on the legislation.

While public outcry against AB5 is gaining ground in California, similar laws are being considered in New York and New Jersey, and the Protecting Workers Right to Organize Act of 2019 (PRO Act) has been introduced into the House and Senate. The New York and New Jersey bills are similar to AB5, and all three employ the ABC test to narrow the definition of contract workers, raising the concerns of freelance workers. The hope is that California will be able to execute meaningful reform of the law that recognizes the complexity of the freelance worker labor force, and New York and New Jersey legislators will take note.

In the meantime, it’s advisable that graphic artists take steps to support their status as independent contractors by setting up an LLC. The process and requirements vary state by state. The process in California takes 10-steps and requires a $70 processing fee and California state tax obligations ($800 for an annual net income under $250,000).

Photo © Andrei Stanescu, iStock