The FSC Guide to AB5
AB5 is a new California law that could require businesses in the state to classify performers, cam models, and other adult workers as employees, rather than independent contractors. If you’re like most people in the adult industry, you aren’t quite sure yet how AB5 will affect you. While much about this new law is still unknown, this Free Speech Coalition guide will take you through the basics of AB5 — how it impacts the adult industry, its potential effect on performers and producers, and what you need to do next.
The Basics
California Assembly Bill No. 5 (AB5) was signed into law this September and goes into effect on January 1, 2020. AB5 creates more stringent requirements for the type of workers who can be classified as contractors. Based on these requirements, many workers who are now classified as contractors must be reclassified as employees in order for employers to comply with the law.
AB5 applies to all employers in the State of California and any employer outside the State of California who employs people working in California.
Read the full text of Assembly Bill No. 5 (AB5)
Read the FAQ from the Labor & Workforce Development Agency
Those who willfully misclassify employees as independent contractors could be subject to criminal penalties under the Labor Code and civil penalties of $5,000 to $25,000 per violation.
How does this impact the adult industry?
Under AB5, the State of California presumes that anyone who performs work for a business is properly classified as an employee — not a contractor — with the burden on the employer to prove otherwise.
While AB5 could affect any California-based adult worker who is currently an independent contractor, the largest potential effect would be on performers and cam models, many of whom are currently regarded as contractors. Other regularly hired staff, such as members of a production crew, might also need to be reclassified if they currently are paid as independent contractors.
The bill provides two tests for an employer to determine whether a worker can be classified as a contractor: the ABC test, and the Borello test. Because this is a new law, it is so far unclear if or how it will be applied to the adult industry, or to any other industry that uses independent contractors. It is also unclear how the law will be enforced. In the coming year, it will play out in the courts as lawsuits are filed, and in the legislature. Some industries apply to be exempted under the law, and others may seek to overturn or modify the law.
How does this impact me, as an employer?
The responsibility for compliance with AB5 falls on businesses, not employees. While no one knows how or if AB5 will be applied to adult businesses, the potential liability for misclassification is on you and your company.
There are three potential courses of action for you to take. The one you choose will depend on your appetite for risk in your business.
Option 1: Avoid All Risk
Avoid the potential risk of not complying with AB5 by reclassifying all of your independent contractors as employees by January 1, 2020.
PROS
You won’t have to worry about being on the wrong side of the law if you are audited.
None of your workers will be misclassified as contractors.
It may give you a competitive advantage when it comes to attracting talent when competing against companies that want to require talent to incorporate.
CONS
It will increase your compliance obligations and your operational costs. You’ll need to:
Carry workers’ compensation insurance.
Adhere to California wage and hour laws.
Administer payroll for your employee, which includes payroll taxes paid by you (unemployment insurance and employee training) and payroll taxes paid by the employee (state disability insurance and personal income tax).
Meet California’s onboarding requirements, which include an offer letter, an employee handbook, sexual harassment training, and required forms and pamphlets.
The good news there are resources to help you do all of this. You don’t need to figure it out yourself. Links to resources for workers’ compensation insurance, payroll, and HR administration are provided at the end of this guide.
Option 2: Take a Calculated Risk
Businesses that are somewhat risk averse may wish to review the simpler and more stringent ABC test for current contractors. Any contractor who clearly passes the ABC test is likely able to continue as an independent contractor. According to California’s Labor & Workforce Development Agency:
“The ABC test is designed to make it easier for both businesses and workers to determine in advance whether a worker is an independent contractor or an employee. In other words, it is aimed at being more predictable than the multifactor approach used under Borello.”
Contractors who do not pass the ABC test, will likely need to be converted to employee status. However, in some cases, a contractor who does not pass the ABC test may still retain contractor status — if they pass the alternative “Borello” test.
The Borello test is riskier and more complicated, and only applies to the specific industries and professional services (such as marketing, graphic design and freelance writing) exempted from the ABC test in AB5. If audited, you would have to justify that your contractor fits that description under Borello, and show that the contract with them meets all the requirements.
If your legal and financial experts agree with your interpretation of AB5, as well as your application of the ABC test or the Borello test, you could potentially keep your current contractors classified as such — but make sure to work with those experts to document your decision so that it is defensible if you are audited.
Option 3: Ride the Risk
If you have a high appetite for risk, you can simply do nothing. You can choose to continue to classify any of your workers as contractors regardless of whether or not they pass the ABC test or the Borello test.
The full impact of AB5 on the adult industry will not be known until the application and enforcement of the law plays out in the courts and the legislature over the coming year. If you have a high appetite for risk, you could take your chances and wait to see how the law changes — and hope that it changes in your favor.
If you choose this option, you should consult with experts to determine your possible defenses should you be audited.
How does this impact me, as a performer?
AB5 has the potential to reclassify any performer working for a studio or site as an employee of that studio or site, no matter how many different studios you shoot for. If you live or work in California and currently receive income as a contractor for adult work, it is possible that some or all of your employers will decide to reclassify you as an employee rather than a contractor.
Pros
Being classified as an employee provides you with additional rights, protections, and benefits, such as:
Employers would have to pay you at least the minimum wage.
Based on the number of hours you work, you could be eligible for overtime, meal and rest periods, and sick leave.
You would also be eligible for short-term disability insurance, unemployment insurance, workers’ compensation insurance, and Family Medical Leave Act (and other types of protected leave).
Depending on the size of your employer and the number of hours you work, you could also be eligible for health insurance benefits.
Cons
As an employee, classification may change how and what you are paid, and how you work:
Employers could exercise more control over your work, including limiting your daily or weekly hours, in order to conform to policies about overtime and insurance.
If you receive all of your income as an employee and none as a contractor, you will likely not be able to deduct business expenses on your tax returns.
You might make less money as an employee than as a contractor. It costs more for an employer to classify you as an employee than it does to classify you as a contractor. (This is by no means a valid reason for an employer to classify you incorrectly as a contractor.) An employer could choose to pay you less for the same work if are reclassified as an employee.
Even if an employer were to pay you the same amount for the same work, you will see more money deducted from your pay if you were classified as an employee.
State and federal taxes will be deducted from each check.
Social Security and state disability insurance will also be deducted from your paycheck. You may benefit from these in the long run, but they will impact your take-home pay.
What do I do now?
You don’t need to do anything immediately. It is not your responsibility to comply with AB5. It is the responsibility of the companies that hire you. Those companies will likely make a determination about your classification based on their business model and the nature of the work you do for them. If you are concerned about being classified as an employee rather than a contractor, here are the steps you can consider.
Reach out. Contact your various employers to ask them if they plan to change your classification in order to comply with AB5. If they do, ask them what is required of you to ensure that there is no interruption in your work or your payments.
Incorporate. One of the exemptions in AB5 is for business-to-business (B2B) relationships. If you form your own corporation, you may be able to continue being paid as a contractor by your various employers. Your employer would now have a contract with your corporation instead of with you as an individual. Some legal experts differ in their interpretations of this part of the bill, and some employers may choose not to engage with workers in this way, so this option might not work in every situation. Our financial expert recommends a C-corp, and says that neither an S-corp nor an LLC will meet the more stringent requirements of AB5 because those types of corporations can act as a pass-through for income. If you do form a C-corp, at a minimum you need to have a written employment agreement between yourself and your corporation, and you need to pay yourself as an employee, with all the required taxes paid and deductions made.
Prepare. Contact your accountant (or get an accountant, particularly one who specializes in working with artists or independent contractors) to discuss your unique financial situation and the impact that these changes will have on you.
Ask for help. FSC, and our legal and financial experts, will answer any questions you have.
This guide was produced in consultation with Karen Tynan of Ogletree, Deakins, Nash, Smoak & Stewart, P.C., and Walter Wotman, CPA of Morgan, Daggett & Wotman, LLP. Free Speech Coalition, together with our legal and financial experts, will continue to publish more detailed guidance on AB5 as we hear from members with questions about their specific business situations, and as the implementation of the law and the enforcement of it take shape in the coming year.
Additional Resources
Read About AB5
Read the full text of Assembly Bill No. 5 (AB5)
Read the FAQ from the Labor & Workforce Development Agency
Prepare Your Business
Attend the AB5 session at FSC’s Leadership Conference at XBIZ LA on January 16.Sign up for a payroll provider.
We have negotiated a discount with WPS HigherUp, who is supportive of the adult industry.
Secure workers’ compensation insurance.
The State Fund can’t deny you coverage because you work in the adult industry.
Register as an employing unit with EDD for the purpose of paying payroll taxes.
According to California’s Labor & Workforce Development Agency, there is no grace period for compliance. “Employers must pay any payroll taxes that are due based on the employees they have as of January 1, 2020. If employers are not yet registered with EDD as an employing unit, they are encouraged to register and begin filing and paying their taxes (based on established due dates per calendar quarter) utilizing EDD’s online e-Services for Business.”
Check out the new hire checklist from the California Chamber of Commerce.
