California's New Labor Law, AB-5, and What It Means for Publishers
Friday, January 17, 2020
By IBPA General Counsel Jonathan Kirsch
(Manhattan Beach, CA - January 17, 2020) -- California has always been a trendsetter, not only in lifestyle and pop culture but also in law and regulation. And because California represents an important market for publishers across the country, California law has a long reach.
That’s why two new developments in California law have attracted national attention. One is the newly enacted California Consumer Privacy Act (CCPA), which went into effect on January 1, 2020 and may prompt other states to enact similar legislation. The other is an amendment to the California Labor Code (AB-5), which puts new burdens on how publishers (and other businesses) acquire and pay for the services they need. This article focuses on the impact of the changes in California labor law on publishers across the country.
To summarize, California law now presumes that freelancers are employees unless the relationship between the hiring party and the freelancer meets the stringent requirements for establishing an independent contractor relationship. If the new legal requirements are not met, then the hiring party must bear all the burdens of an employer, including the payment of minimum wage and overtime compensation, family and sick leave, payroll taxes, and premiums for workers compensation, unemployment, and disability insurance.
Listen to IBPA podcast host Peter Goodman discuss AB-5 with IBPA legal counsel Jonathan Kirsch on "Inside Independent Publishing with IBPA."
Who Must Comply?
|IBPA general counsel Jonathan Kirsch
Strictly speaking, the law of California applies only in the state of California. But the new provisions of the California Labor Code are the source of concern for publishers across the country. Indeed, some out-of-state publishers have stopped using California-based freelancers in order to avoid the burdens of the new law. While a boycott of California-based freelancers may be an over-reaction, the risk of falling afoul of California law remains.
The new law applies directly to publishers who are headquartered in California or whose headquarters are out-of-state but who maintain a business presence in California. The California law also applies to out-of-state publishers who use the services of freelancers living or working in California. But the California law does not apply to out-of-state publishers who use freelancers in their own states or in states other than California.
Of course, a publisher operating in any given state must comply with the laws and regulations of that state. Massachusetts, for example, is also highly protective of employment status, and some of the issues discussed here may arise in the future in other states, too.
What Changed in California Law?
California has always taken a dim view of independent contractors and generally prefers to characterize service providers as employees. The reason why California law favors employment status is the same reason why hiring parties prefer independent contractor status: An employee is entitled to legal protections and benefits that do not apply to independent contractors (see above).
The policy that favors employment status under various California rules and regulations is nothing new. The law has long provided that employment is a rebuttable presumption when it comes to hiring, and the hiring party that wants to characterize a worker as an independent contractor bears the burden of proof in overcoming the presumption. But the preference for employment is much more muscular nowadays because of two major changes in the law.
First, the California Supreme Court ruled unanimously in the 2018 case of Dynamex Operations West v. Superior Court that all workers are presumed to be employees rather than independent contractors unless the hiring party is able to satisfy a strict three-part test that is known as the “ABC test.”
A. The worker is free from the control and direction of the hiring party in connection with the performance of the work, both under the contract for the performance of the work and in fact.
B. The worker performs work that is outside the usual course of the hiring party’s business.
C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
The next change came in September 2019 when the California Legislature enacted Assembly Bill 5, commonly referred to as AB 5 in the controversy that has attracted so much public attention. The bill was promptly signed into law and is now in effect as newly enacted Section 2750.3 of the California Labor Code. Thanks to several last-minute amendments to AB 5, the statute goes beyond the Dynamex case and now includes several innovations that were added to address the needs of the news media (but not necessarily the publishing industry, as we shall see).
The new law is being challenged by some of the individuals it was supposed to protect, including Uber drivers and freelance journalists. Even if the law is upheld in the courts, it may be further amended to address various unintended consequences, including the argument that it imposes a financial burden on the exercise of the right to freedom of the press. For that reason, this article is a snapshot of a moving target, and the laws may change in the future.
The Carve-Out for Freelance Writers and Editors
As a general rule, Section 2750.3 of the California Labor Code adopts the ABC test, but exceptions are carved out for various specific businesses and professions. One of the exceptions applies to freelance writers and editors (and also to newspaper cartoonists) who work under contract with the hiring party. Rather than the ABC test, a different and longer test is applied to determine if a publisher can deal with its freelance writers and editors as independent contractors rather than employees.
The exception applies to freelancer writers and editors under contract “who do not provide content submissions to the putative employer more than 35 times per year.” A “submission” is defined as “one or more items or forms of content by a freelance journalist that: (I) pertains to a specific event or topic; (II) is provided for in a contract that defines the scope of the work; (III) is accepted by the publication or company and published or posted for sale.” The problematic word in the clause is “journalist,” which raises a question of whether the exception applies at all to freelancer writers and editors who work in the book publishing industry.
By the way, the same exception also applies to graphic design professionals, still photographers, and photojournalists who do not license content to the putative employer more than 35 times per year and marketing professionals whose work is “original and creative in character.”
But the exception applies only if the freelance writer or editor, or the other specified professional, meets all of the additional conditions on the following checklist:
- The individual maintains a business location, which may include the individual’s resident, that is separate from the hiring entity (even if the individual chooses to perform services at the location of the hiring entity).
- Starting six months after the effective date of the new law, the individual has a business license.
- The individual has the ability to set or negotiate their own rates for the services to be performed.
- Outside of project completion dates and reasonable business hours, the individual has the ability to set the individual’s own hours.
- The individual is customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other potential customers as available to perform the same type of work.
- The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.
But wait, we’re not done with checklists yet. Once it has been determined that a freelancer falls into one of the exceptions in the new law, the ABC test is replaced by a different and longer test to determine whether the freelancer is an employee or an independent contractor. The applicable test is the one that was established in a 1989 California Supreme Court case S. G. Borello & Sons Inc. v. Department of Industrial Relations. Unlike the ABC test, which is as simple as 1-2-3, the Borello test consists of 11 different factors, ranging from “whether the person performing services is engaged in an occupation or business distinct from that of the principal” to “whether or not the parties believe they are creating an employer-employee relationship.”
Clearly, the publisher must follow a long and winding road through California’s new law to reach independent contractor status in the Golden State.
An Argument That Authors Are Not Employees
A strong argument can be made that publishers do not engage the services of authors or illustrators who create a book. Rather, publishers acquire intellectual property rights in works of authorship that were created by the authors and illustrators. If and when the argument is tested in court and upheld, then the conventional author-publisher may fall entirely outside the scope of labor law in California, including the section of the California Labor Code.
The argument is strongest when the work of authorship is actually in existence, even if only in the form of a book proposal and a few sample chapters. If no intellectual property exists when the publishing agreement is signed, the contract begins to look more like a contract for the provision of services.
These issues suggest that the word “services” should be avoided in drafting contracts between authors and publishers if the goal is to avoid the burden of the California Labor Code. Some contracts refer to the publisher’s acquisition of right “in the result and proceeds of the services rendered by the Author,” which is advantageous language when the publisher seeks to acquire as many rights as possible, but it is disadvantageous when testing the language of the contract against California labor law.
The argument that books fall outside the scope of labor law is weaker when it comes to other content providers whose work consists of editing, proofreading, typography, house or catalogue copy, and press releases. When it comes to editing and proofreading, for example, the essential task is a service rather than the creation of a work of authorship. The copywriter who produces flap copy, catalogue copy, and press releases is producing works of authorship, but it is harder to argue that the core relationship with the publisher is the acquisition of intellectual property rights rather than the provision of services. The argument is also weakened by the fact that publishers rarely employ authors but commonly employ editors and copywriters.
Finally, as an aside, the risk-averse publisher should avoid the use of a work-for-hire contract when dealing with a California author. A couple of existing sections in California law, seldom relied upon or even noticed until now, have long stated that an individual who provides a work of authorship on a work-for-hire basis is deemed to be an employee of the acquiring party. Combined with Section 2750.3 of the California Labor Code, however, these existing statutes represent a sharply elevated risk for a publisher who seeks to acquire a writer’s or artist’s work on a work-for-hire basis.
Some Risks of Noncompliance
The risks of noncompliance with California law may never actually arise, but if they do, the legal problems may come from unexpected directions.
An editor or copywriter who is willing to be characterized as an independent contract now may decide to bring a claim later on if the working relationship deteriorates or ends. The aggrieved independent contractor may decide to belatedly seek the benefits of employment.
If the independent contractor makes a claim for overtime compensation or unemployment benefits, the publisher may also face an enforcement action by the California Employment Development Department or the California Labor Commissioner’s Office.
If the Internal Revenue Service or the California Franchise Tax Board audits the tax filings of the publisher and/or the independent contractor and finds that no payroll taxes were withheld from the compensation paid to the independent contractor, the taxing authority may argue that the independent contractor should have been treated as an employee for purposes of payroll withholding.
The only “safe harbor” under California law is to treat the worker as an employee from the outset, but that approach can be so costly and burdensome that the solution is a nonstarter for most publishers. Still, there are other ways to reduce, if not eliminate, the risk of using independent contractors.
Some Practical Approaches to Managing the Risk
The fundamental precaution is to ask the independent contractor to sign an appropriate contract that complies with the requirements of the new law, including all the applicable tests of independent contractor status. However, a contract will be disregarded if it merely recites the statutory text and the legal tests are not satisfied "in fact."
For example, it is not sufficient to sign a contract that purports to negate the right of the publisher to control and direct the work of the independent contractor. If the publisher disregards what the contract provides and exercises “control and direction” over the worker, then the evidence of the publisher’s conduct will outweigh the self-serving language of the contract.
Here are some practical approaches that will strengthen a claim of independent contractor status if it is challenged by the service provider, taxing authorities, or government agencies.
- The independent contractor should have a business license and any other licenses and permits that are required under applicable law.
- The argument for independent contractor status is strengthened if services are provided through a business entity like a corporation or a limited liability company rather than as a sole proprietor.
- The hiring party must issue Form 1099s as required by applicable law to the independent contractor.
- The independent contractor must be free to provide the same services to other customers. For that reason, noncompetition clauses and exclusivity clauses should not appear in the contract between the publisher and the independent contractor. And if the independent contractor status is challenged, it will be highly advantageous if the independent contractor has an existing client list that includes other publishers.
- Strategically, it is advantageous to the publisher to use independent contractors only for services that are never provided by an in-house employee. If the publisher employs some editors and uses other editors on an independent contractor basis, the legal risk is elevated, and especially if an editor is discharged from employment and converted into an independent contractor.
- As discussed above, the contract between the publisher and the independent contractor should acquire rights by assignment or license rather than as work made for hire.
If a claim is actually made, the legal relationship between the publisher and the independent contractor will be made on the basis of whether there is a contract, what the contract says, and—above all—what the publisher and the independent actually did in dealing with each other. All of the approaches suggested above may turn out to be helpful, but none are decisive.
Given the strong preference for employment status under California law, a legal challenge to independent contractor status will always be an uphill fight and one that can be lost.
Important Notice: This article is an overview of recent developments in California law and does not constitute legal advice. Some elements of the law discussed here may change in the future. Readers must consult an attorney with appropriate experience and expertise to determine if and how the current laws may affect their legal rights and legal risks.
(A version of this article appeared in the Jan/Feb issue of IBPA Independent magazine.)
Jonathan Kirsch is an author, book reviewer, and attorney specializing in copyright, trademark, privacy, and publishing law. He has long served as general counsel to IBPA and is a recipient of the Benjamin Franklin Award.