Earlier today, I had a call from the HR director at one of the colleges where I teach one night a week. She called to tell me that I can no longer be classified as an independent contractor, and that under California's new law, AB5, I must be treated as an employee.
OK. No big deal for me. I don't really mind. And the college doesn't either, because they're a big operation and run a significant payroll. Although it does cost them a little bit more to treat me this way, it's not much in the overall scheme of things.
But for smaller businesses and freelancers, this classification question can be a big deal. Some have estimated that having an employee costs as much as 30% more than using the same worker as an independent contractor. They can't really pass all of that cost along to the employee, by lowering the base rate of pay, so it hits them in the wallet.
And it's also hitting workers in the wallet. A lot of folks in entertainment have for decades made all or part of their income doing “gigs” as independent contractors. Now, under the new law, they're having trouble getting hired for gigs, because of the new rules and added expense.
For example, a solo musician can't be hired to play as the 4th member of a combo for a simple compensation rate of, say, $100 per performance. The combo has to do the whole payroll thing… so maybe they just skip it and remain a 3-piece combo. Now our soloist has just lost a $100 paycheck. And the combo might have to forego an opportunity for a 4-piece.
Or, a comedienne who works a few minutes a night at a club? The club now has to treat her as a W-2 employee, at 30% more expense? (What do you think they'll do?)
Now, I'm getting asked lots of questions about this by artists and the businesses that use them alike… and we still don't have lots of answers.
Should the affected workers look into forming loan-out companies? Probably.
Under a loan-out company, if it's properly structured, the artist/owner is an employee of the company (which handles payroll internally, pays taxes, etc.,) and the company contracts with the third party that wants to use that artist, essentially “lending” its employee to the other party. But there are pitfalls here. First, in California, there's a minimum state tax on such business that starts at $800 per year. And, if the company isn't operated just right, the government could determine that it's a sham, and hold the third party employers liable for all the consequences of misclassification. So, some third parties may shy away from hiring through loan-outs.
So here's my question to you… Have you experienced any change in the way you work, hire, or operate as a result of AB5? Comment below, or email me using the form on our Contact-Us Page, and let me know.