AB 5’s Impact on Musicians, Part 2 – Frequently Asked Questions
Meanwhile, since the last post…
Since the start of 2020, and even in the months before, we’ve been receiving questions daily about AB 5 (which, to be more precise, is now California Labor Code sections 2750.3 and 3351 and Unemployment Insurance Code sections 606.5 and 621 – but we’ll use AB 5 as a shorthand) from musicians of all walks of life.
The unfortunate truth is that because the law is vague and too new for the courts to have provided any clarity, there is very little certainty with respect to AB 5. In addition, the answers to the questions we’ve received are specific to the particular circumstances of the musician asking, so those same questions can only be discussed in general terms here – which means none of the below can or should be construed as actual legal advice. Subject to these caveats, below are our thoughts on the frequently asked questions we’ve encountered so far.
1. “I can’t do anything about AB 5 so I’m just going to put my head down and not do anything differently, is that crazy?”
It’s not ideal but it’s also not necessarily crazy. This has technically been the law since the Dynamex decision in April of 2018, and chances are you didn’t change how you did business after Dynamex and have been fine thus far. However, it may be breaking the law and is thus legally risky. How risky depends on many factors, some of which are in your control (e.g., are you playing two private shows a year or two hundred public shows a year) and many of which are not (e.g., whether the EDD is making it a priority to take a look at musicians with respect to AB 5 compliance).
The simplest analogy is speeding on the freeway. Is it breaking the law to exceed the speed limit? Yes. But practically speaking, if you’re driving 66 MPH in a 65 MPH zone surrounded by other cars going the same speed, you’re probably not going to be pulled over (emphasis on probably); however, if you’re driving 120 MPH in a 65 MPH zone, all on your own, in the middle of the day, and in a bright red sports car, your chances of being pulled over aremuch greater.
So although it’s not necessarily crazy, it may still be breaking the law. Keep in mind that the failure to properly classify a worker as an employee can range from monetary penalties for failure to pay overtime (noting that musicians frequently arrive long before the gig actually starts for set-up and sound check and can stay long after it ends for tear down) to actual jail time for failure to provide workers’ compensation insurance and everything in between. And liability for the negligence of an employee, particularly without the protection of insurance, can be financially devastating. So pretending AB 5 doesn’t exist is not necessarily crazy, but it is certainly risky because you may be breaking the law.
2. “I’ve heard AB 5 is just going to go away, is that true?”
The answer, as of today, is probably not. It is very likely to be heavily amended throughout this year and going forward, but it appears that the solution to AB 5’s problems is to grant exemptions rather than to reverse the underlying ABC rule. For musicians, the proposed exemption would make them subject to the prior Borello test, as opposed to the AB 5 test (see the follow-up post to this); however, although the exemption has been proposed, it still has yet to be passed into law and is unlikely to be a high priority given the current state of world events. So it is unclear how much longer AB 5 will be the guiding law for musicians in California.
3. “What are the consequences for violating AB 5?”
The consequences for violating AB 5 are the same as for any employer that has misclassified its employees as independent contractors. As described above in the discussion on the first question, these can range from financial penalties to jail time.
4. “I heard that I have to form a LLC and can’t use a sole proprietorship under AB 5.”
AB 5 contains what has been referred to as a “business-to-business” exemption and the conversations about using a business to address AB 5 usually center on this exemption. The answer is no, you probably don’t have to form a LLC to use this exemption. A sole proprietorship should work, as should a partnership or corporation. However…
The major caveat with using a sole proprietorship is that most people do not treat their sole proprietorships as an actual business. For example, if Joe Smith claims he has a sole proprietorship simply because he says Joe Smith is a sole proprietorship, that is probably not going to cut it. A sole proprietorship being operated as an actual business needs to be operated as an actual business. This could include items such as (i) registering a fictitious business name, i.e. a DBA, for the business, (ii) selecting a DBA name that is separate and distinct from the owner’s legal name, (iii) obtaining a business license, (iv) obtaining an Employer Identification Number separate from the owner’s individual Social Security Number, (v) setting up its own separate bank account, and (vi) holding itself out as an actual business, such as by having a business website, a business e-mail address, and/or a business mailing address. And of course, the owner of the sole proprietorship must then operate as his or her business – if Joe Smith sets up a DBA as Smith Drumming Services but then continues to interact with clients as Joe Smith, his DBA will likely be of little value.
As discussed later below, it must be noted that there are other requirements that have to be met in order to use the business-to-business exemption beyond simply having a business.
5. “I heard that if all the musicians each make their own companies we don’t have to worry about AB 5.”
The short answer is maybe. Previously, relationships between two legitimate businesses almost always meant that there was no employment relationship. However, that is not the case after AB 5, which instead implemented the business-to-business exemption mentioned above.
The business-to-business exemption shows up in Labor Code section 2750.3(e)(1), which states that AB 5 does not apply to a “bona fide business-to-business contracting relationship.” There are then up to twelve requirements that must be met. Some of these are relatively easy to meet, such as having a written agreement or allowing negotiation of rates, while others may be more difficult or even impossible to comply with, such as requiring that the contractor provide services directly to you rather than your clients. This criteria in particular is likely to disallow use by many, though certainly not all, musicians, as often musicians are hired by other musicians to provide services to the client, not to the hiring musician.
6. “So if I fall under this business-to-business exemption, I’m safe?”
Unfortunately, not necessarily. All that the exemption means is that you’re not governed by AB 5 or Dynamex. You’re still governed by the Borello test and will have to pass that before your business relationship is firmly deemed to be an independent contractor relationship.
Also, keep in mind there is a difference between meeting and continuing to meet the exemption. One of the risks with relying on the exemption is that if your contractor initially meets all of the criteria but then later fails one of those criteria, he can eliminate the exemption for you. So, for example, if a musician decides, without telling you, to stop advertising her services and to not take any other gigs except with you, she’ll likely have eliminated the exemption by doing so. So reliance on the exemption requires continued vigilance and communication.
7. “I am frequently hired by venues to hire other musicians for one-night performance (i.e., I get hired as a band leader who then has to find other musicians for the gig). What steps can I take so that my musicians are not my employees?”
First, stop calling them “my” musicians. This is a good time to point out that precision with language is likely to be extremely important if you are trying to address AB 5. If the musicians you work with are, in fact, independent contractors, then they are not “yours” – they are the “musicians I contract with.” Along these same lines, if your contract says one thing (e.g., the musicians are free from my control and direction) but in actuality you are doing something else (e.g., you still control all the musicians by telling them what and how to play), it is almost guaranteed things will not end well for you if your arrangement is put under scrutiny.
To get back to the question, if the venue (or event or private party) is willing to do so, then having the venue hire you and separately hire the other musicians would be ideal. Alternatively, if another entity you work with, such as a booking agency, is willing to do the hiring, then that would be ideal as well. In short, try to avoid being responsible for hiring if you can.
If not, then you would likely need to turn to the business-to-business exemption. If you work with a fixed set of musicians – e.g., you have a band and always play with the same people – then another option may be to formalize your band by creating a LLC, partnership, or corporation. That entity could then be the one to be hired by the venue instead of you individually and the players, as (respectively) members, partners, or officers/directors in the entity, could provide services for the benefit/on behalf of the entity and be compensated in accordance with the documents used to form the entity (e.g., the operating agreement for a LLC).
8. I own a venue that regularly hires bandleaders and musicians directly. What steps can I take to prevent them from being classified as my employees?
The answer depends on what type of venue you own. If you own a restaurant, for example, which is in the business of serving food, then it’s likely you won’t have to change anything to avoid being considered an employer. This is because the primary issue created by AB 5 is that like can no longer hire like – that is, a musician can hire a plumber but a musician cannot hire another a musician. So a food service provider should be able to hire a music service provider without any problems. If, on the other hand, your venue is arguably in the music business (say, you’re a piano bar or a jazz club), then the business-to-business exemption may be your best option. You could also, theoretically, enter into partnerships with each musical act instead of hiring them, but that would likely prove impractical for many venues.
9. I am putting on my own concert, hiring the musicians, and have rented a venue. How do I avoid these musicians becoming my employees?
As with a venue owner, it depends on what your business is. If, for example, you are in the medical business and you host a New Years’ Eve party with the band as the centerpiece, the band probably won’t be your employees. On the other hand, if you are actually in the business of putting on music concerts, then there is more to be concerned about. As with venue owners, the business-to-business exemption may be an option. Unlike a venue, however, it may actually be more practical to go into business with the musical act as, unlike a venue where you are looking at multiple musical groups, for each specific concert/event there is likely to be a fixed number of musicians involved. While certainly it would be more paperwork than the old way of doing things, it would most likely be less paperwork than hiring them as employees.
10. “Isn’t there an exception for fine artists?”
Yes, but unfortunately that does not appear to apply to musicians. The term “fine artists” is likely a technical term that is limited to visual arts such as painting, sculpture, drawing, or glasswork (see, e.g., California Civil Code section 987). Also, the fact that protests from musicians have not simply been responded to by saying “you already have an exemption as a fine artist” indicates that it was not intended to apply to musicians.
11. “What if I want to fully comply with AB 5 and make all the musicians I previously contracted with my employees? What is the easiest way for me to do this?”
Unless you are trained and experienced in human resources and payroll, the easiest way would likely be to contract this out to be handled by a third-party that specializes in providing these services to small businesses. Basically, hiring and managing employees is complicated and you should not try to handle it on your own if you have no experience with it.
It should also be added that, although there is little certainty about AB 5, converting the musicians you work with to employees is one of the two ways to be virtually certain you won’t run afoul of AB 5 (the other being to simply cease hiring musicians). However, much of the uproar about AB 5 stems from the simple fact that neither of these two options is realistic for many independent contractors, not just musicians.
12. My long time client insists that I do “x, y, and z” because he claims that’s what is required by AB 5. I’ve read a lot about AB 5 and I know I’m not required to do this. What can I tell my client?
Unfortunately there are a number of risk averse clients, especially clients from out-of-state, that are not well-informed about AB 5 or don’t fully understand what is required of you and them. To be fair, this is not exactly surprising as it’s unlikely anyone actually fully understands all aspects of AB 5 (including the people who wrote the law). This, however, is not so much a legal issue as a business issue. Just as you presumably convinced the client to contract with you in the past, it will be up to you to arm yourself with enough information and understanding of AB 5 (and muster up every persuasive muscle in your body) to be able to convince them that it is still worth doing business with you and that you have a plan that will allow them to minimize their risk under AB 5.
13. Other than making them employees or not hiring anyone, is there any other guaranteed way to avoid violation of AB 5?
The only other option we are aware of that could potentially provide a guarantee is to, quite literally, report yourself to the EDD (Employment Development Department) (https://edd.ca.gov/pdf_pub_ctr/de231es.pdf ). Through this process, you will fill out paperwork describing your exact hiring arrangement and the EDD will then review the paperwork and determine whether you have employees or independent contractors. Though it is unclear whether the EDD would actually be willing to issue a ruling on AB 5, such a letter is an official document that should effectively certify AB 5 compliance if it deems the worker to be an independent contractor. Of course, the worker could also be deemed an employee, in which case if you continued with the arrangement with them as independent contractors you would be knowingly acting illegaly while on the EDD’s radar – which, as you might imagine, is a very bad thing. So this approach certainly has its risks; however, if you are completely risk averse and absolutely must know, this may be an option to consider.
14. Has California offered any official guidance on AB 5?
Yes, the Department of Industrial Relations has offered guidance at: https://www.dir.ca.gov/dlse/faq_independentcontractor.htm.
And the full text of AB 5, including the business exemption, can be found at: https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB5
We’ll continue to update this as we become aware of more official resources.
15. If I am a California organization but hire contractors from outside of California, will I still have to deal with AB 5?
Most likely, yes. A Court of Appeals decision published on February 18, 2020 reiterated that non-California residents can seek the protection of California laws under certain circumstances.
While in that particular case (Gulf Offshore Logistics v. Norris) it was ultimately held that Louisiana law, not California law, applied, the Court nonetheless confirmed the following standard:
“Sullivan and Tidewater establish that California has strong interests in regulating the working conditions of non-residents who work for California employers within the State’s territorial boundaries (Sullivan), and of residents who work both within and outside those boundaries. (Tidwater.) As the court explained in Tidewater, “If an employee resides in California, receives pay in California, and works exclusively, or principally, in California, then that employee is a ‘wage earner of California’ and presumptively enjoys the protection of [California law].” (Tidewater, supra, 14 Cal.4th at p. 578.)
So, if you are a California-based music venue, for example, that brings non-California musicians to play gigs here in the hopes that you can evade AB 5, be aware that those non-resident musicians may still have a good chance of asserting AB 5 protections nonetheless.
Actively dealing with AB 5 likely requires changing how we operate as musicians. For some it will be a relatively small and painless change while for others it will require completely overhauling how they do business. While the uncertainty of AB 5 means that there may be a degree of risk in continuing to work as, and with, musicians in California, it does not mean that the risk cannot be addressed. It is our hope that the above will be a helpful resource and serve as a starting point for thinking about how to respond to AB 5 in your own specific circumstances.
Last Updated April 30, 2020