AB-5 and LLCs: CDP Provides a Workaround for Independent Contractors

Jane Matthews built a successful business as a video and movie script writer while homeschooling her nine-year-old autistic daughter and shuttling her 15-year-old son to his accelerated science classes at the local college. Her husband’s sales job means that he travels frequently and is unavailable for day-to-day help with the family’s routine. The flexibility of Jane’s home-based business is what makes this all possible, and now she’s in the direct line of fire from AB-5.

Women may have the most to lose when it comes to AB-5

Women tend to be most in need of the flexible hours that draw them to independent contractor work. For those juggling caregiving and a heavy load of unpaid household work, running a business from home instead of commuting is often the only way they can get everything done. Job flexibility allows them to care for family while pursuing careers and generating an income.

The strategy behind AB-5 is that companies will hire their independent contractors

The new California labor law, AB-5, meant for companies to hire their independent contractors as full-time employees, is being met with heavy opposition. The bill’s sponsor, Assemblywoman Lorena Gonzalez (D-San Diego), tweeted that under the law “if you are a true independent proprietor, you can still operate as one.” Yet that’s not happening. California writers who bid on national projects are being blackballed.

What were they thinking?

While Governor Newsom was a proponent of the law for its efforts to address income inequality, and he signed it into law, we’re left wondering if they really thought this through. An estimated 37% of American workers are independent contractors. Newsom talked about creating collective bargaining and other ways to start raising worker wages. While wage inequity is bringing this country to its knees, putting people out of work cannot be the solution.

Many choose independent contractor status for the flexibility it affords

While many independent contractors would love to be hired as full-time employees to start accruing healthcare, retirement and vacation benefits, many others, like Jane Matthews, choose to be an independent contractor for the flexibility it affords. The list of professions that have traditionally and still are working independently is a long one. Some are familiar, others obscure. Many stand to lose their livelihoods. Think musicians, horse trainers, hair stylists, massage therapists, the people who give piano or ballet lessons to your kids. Churches and nonprofits. A wide range of consultants who are hired for a specific purpose, often for a specific time window. Many seniors who pick up part-time jobs to supplement their social security income will be hurt by this law.

One potential solution: Creating an LLC

CDP is assisting independent contractors in creating LLCs as a strategy to get around this bill. By forming a corporation, workers can retain their independent status—and potentially avoid losing work.

• LLCs have become popular because they have fewer formalitiesthan other corporate structures, yet they still provide liability protection.
• Forming an LLC is straightforward. In California,the filing fee to form an LLC is $75, which is included in our fee.
• An LLC includes an annual$800 franchise tax, and you also will need to get a business license.

Do you have questions about forming a corporation? Contact us today for more information or to schedule an appointment. 

Lawmakers promise changes to address worker concerns

California Assemblywoman Lorena Gonzalez continues to defend AB-5, insisting that its intention is to protect those workers who need it the most. Now just a few months into the new year, the law continues to be challenged. Freelance journalists, Uber, Lyft and truckers, among other groups, are involved in litigation.

California Document Preparers is a local Legal Document Assistant firm and we have assisted with organizing small businesses’ LLCs since 2004. We would be pleased to be of assistance.

We charge $599 for our LLC services, which includes:

• Articles of Organization filing
• Operating Agreement
• Statement of Information
• EIN Assistance
• Company Kit

We guide our clients through the Business Formation process and prepare the legal documents. We prepare and file the Articles of Incorporation with the Secretary of State. An LLC can be one or many members—making it ideal for independent contractors. We’re helpful, compassionate and affordable. Schedule an appointment today at one of our three Bay Area offices.

AB-5 Signed into Law: But What Happens Next?

California’s Assembly Bill 5 (AB-5) took effect on January 1, 2020. The bill is an effort to curtail the hiring of independent contractors that leaves many workers without the stability that comes with employee status—healthcare benefits, a retirement account and accrued vacation time.

AB-5 is an effort to force companies to hire their contractors as employees with benefits

Assembly Bill 5 is designed to cut down on the number of contractors in the workforce, known as the gig economy. The gig economy is based on short-term engagements, temporary contracts and independent contracting. A total of 36% of workers, or 57 million Americans, now work in the gig economy, which means they’re missing out on employee benefits.

The law implements a California Supreme Court decision that imposes a three-pronged test to identify those workers who are still free to be contract workers and those who must be a hired as employees.

• A worker can be an independent contractor only if he or she is free from the control and direction of the hirer
• A worker must perform work that falls outside the usual course of the hiring entity’s business.

Under the requirement, janitors could work as independent contractors only when they have contracts with companies not in the business of cleaning. Companies that outsource their cleaning or janitorial services would be exempt from the law. Or a rideshare driver could work under a contract with Uber or Lyft only if those companies were primarily in the business of, say, selling vacuum cleaners.

It’s a rigid framework, says labor law firm Fisher Phillips, that will appear, in “the nightmares of your average gig economy business executives.”

Contractors are starting the New Year with a lot of uncertainty

Many contractors and freelancers choose to work as contractors for a wide range of reasons. Says one Uber-driving mom, “I have to pick my kids up or drop them off. I do that and come back to work, which is driving. What shift or employer is going to let me do that other than this?”

Creating pathways to form (stronger) unions

Yet Gov. Newsom’s next step “is creating pathways for more workers to form a union, collectively bargain to earn more, and have a stronger voice at work.” Newsom’s plan includes persuading political, labor, and business leaders to support an effort in which “workers excluded from the National Labor Relations Act” would have “the right to organize and collectively bargain.”

Unions have done a lot that is right

A lot of courageous people struggled and died so that we could have a 40-hour work week, safe working conditions and benefits. We’ve watched as those benefits have continued to dwindle.

Yet AB-5 may hurt many part-time workers

• Seniors who may be picking up contract jobs to supplement their social security incomes.
• Churches with declining congregations that can’t afford full-time staff.
• Seasonal businesses and others who rely on part-time workers in the off-season.

Opponents believe that AB-5 will rob workers of the freedom and flexibility they want and often need from freelance work. For thousands of workers, freelancing work is attractive for its flexibility. Workers may have a spouse or partner with a full-time job, and they’re the ones who need the flex time to care for the kids while continuing to have careers.

Independent contractors may not feel exploited

According to The Los Angeles Times columnist George Skelton, “there are tens of thousands of independent contractors who apparently don’t feel the slightest bit exploited. And they don’t want anything to do with formal employment or unions.” On the other hand, many employees who wish they had protections such as unemployment insurance and overtime pay may appreciate the new protections.

There are some exemptions from AB-5

Prior to its passage, AB-5 was the subject of major lobbying efforts on both sides of the issue. The result is that more than 50 professions or types of businesses are exempt from the bill. Exemptions include doctors, dentists, insurance agents, lawyers, real estate agents, hairstylists, and a variety of creative professionals.

AB5 also exempts business-to-business contractors who meet 12 specific requirements and referral agencies that meet ten specific requirements.

The “exemptions” and their consequences

The bill will make it illegal for contractors who reside in California to create more than 35 pieces of content in a year for a single company, unless the outlet hires them as employees. A nonprofit legal foundation is suing California on behalf of freelance workers who say that AB-5 will destroy their livelihoods. Thousands of California female freelancer writers, single moms and minorities stand to lose their livelihoods due to this bill,” said one freelance writer. “I was told by a client that because I live in California they can’t use me.” They’re blackballing California writers. For those who are competing for national writing gigs, AB-5 is a direct threat to their income.

What’s next for AB-5?

We can likely expect to see some lengthy legal battles over enforcement. AB-5 enables the California attorney general, city attorneys and local prosecutors to sue companies over violations. Large companies with deep pockets (Uber and Lyft, where this whole thing started) would likely fight their cases for years.  There’s a lot at stake when people’s jobs are on the line. Expect years of lobbying efforts for industry-related exemptions at the legislative level.

Living Trusts are an important parts of estate planning

When it comes to financial planning, a Living Trust is an important part of the process. Our Trust package includes a Power of Attorney and Advance Healthcare Directive. Our dedicated team has assisted hundreds of families in creating and updating their Trusts. We’re responsive and available throughout the process. We’re helpful, compassionate and affordable. Schedule an appointment today at one of our three Bay Area offices.