Small business owners struggle to comply with AB 5 

Bending over backwards

 

Justin Randolph didn’t expect to own a yoga studio, especially less than six years into his practice as a yoga instructor.

But last February, 10 months after he and his husband moved to Los Angeles from New York, Randolph had the opportunity to take over Yoga Loft, a Downtown Manhattan Beach yoga studio with windows that stare straight into the Pacific Ocean.

Until Jan. 1 of this year, most yoga studios paid their instructors by the class — allowing instructors to build a following for themselves, and the studio by extension. If the teacher or the studio wished to cut ties it was relatively simple, putting the “independent” in “independent contractor.”

Randolph had essentially fallen into what he was already used to, but from the other side of the table.

Then, last September, Assembly Bill 5 was signed into law.

The bill was designed to bring California labor law into compliance with a 2018 California Supreme Court decision, which confirmed an earlier ruling that a trucking company had misclassified its employees as independent contractors. By January 1, practically all independent contractors except those with jobs exempted or “carved out” of AB 5, were required to  become employees of the businesses they worked for.

“To be honest, I think we knew the 1099 model we were on wasn’t sustainable. We had the desire to actually make people employees,” Randolph said. A 1099 is the payment record businesses give independent contractors at the end of each year. 

Since the law took effect on Jan. 1, Randolph has hired 14 full-time employees, most of whom he worked with as independent contractors prior to the law. As a result his business expenses have increased by almost 40 percent — primarily because of payroll related expenses. “It’s been challenging. We had no employees; everyone was an independent contractor. Now we have to contribute to our employee’s federal and state payroll taxes, Social Security, Medicare, and worker’s comp insurance.” Perhaps knowing how to do payroll right might be of great help in this case.

Since the law was signed, employers at companies large and small, have, like Randolph, been scrambling to figure out how to comply with the law without going broke. Many everyday industries that are not necessarily seen as cornerstones of the economy — yoga studios, musicians, writers and production companies — are waiting for the legal fog to clear.

Tax experts and politicians tend toward an unsatisfactory conclusion: There’s not one solution that works for everyone.

“Not a day goes by that someone doesn’t offer another seminar on AB 5,” said Hermosa Beach CPA Gary Wayland. “But what it comes down to is that, in many cases, you just treat everyone as an employee… There’s a lot of education out there, but I haven’t heard anyone who says you need to do A, B, C and D, and that’ll solve everything.”

Easy as ABC?

The case that triggered AB 5 was Dynamex Operations v. the Superior Court of Los Angeles County. Dynamex, a national package, and document delivery company, was found to have misclassified its drivers as independent contractors, rather than as employees.

As part of its ruling, the Supreme Court created an A,B,C test — three criteria that must be met if a worker is to be considered an independent contractor, rather than an employee

• The worker is free from the employer’s control or direction in performing their work.
• The work takes place outside the usual course of business of the company and at an off-site location.
• The worker is customarily part of an independent trade, occupation, profession or business.

If a person meets those criteria, they’re fine to continue as a contract employee. If not, the person hiring them must treat them as employees, with all that means under California law: contributing to unemployment insurance, disability insurance, state and federal payroll taxes and Medicare.

The distinction between an employee and independent contractor isn’t black and white. Dynamex Drivers were free to set their own schedules, but were in other ways supervised by the company: “on-demand” drivers were assigned deliveries at the company’s discretion, could be made liable for losses if they did not refuse a delivery in a timely fashion, and were expected to wear and pay for Dynamex apparel. They were also hired for indefinite periods, and Dynamex held the right to terminate driver agreements without cause on three days’ notice.

Previously, the divide between independent contractors and employers was subject to the Borello test, an 11-factor test that left grey area for the relationships between employers and contractors.

“There was a bit of uncertainty in Borello. It left flexibility to kind of create your own business relationship,” said DeAnn Chase, an attorney whose practice specializes in representing entrepreneurs and businesses. “But AB 5…it’s an antiquated mindset. The new economy is all about flexibility — people want to set their own schedules and their own lifestyles. This law flies in the face of this new dynamic.”

This dynamic is the foundation of the gig economy, ruled by companies that find and “disrupt” gaps in the economic landscape by offering users an opportunity to work one-off services: delivery driving (Postmates), home-sharing (Airbnb), taxi driving (Uber or Lyft), quick-and-easy freelance writing (Fiverr). People can pick up a gig quickly and easily, turn the workaround, get a rating from the person they served and get their money in relatively short order.

The draw to those systems is their independence: Uber’s pitch to drivers, found on the company’s website, presses the idea that “there’s no office or boss…you’ll always start and stop on your time—because with the Uber app, you’re in charge.”

“I think someone who decides to drive a Lyft or an Uber knows the lifestyle they’re signing up for,” Chase said. “I always talk to Uber drivers, and they’re people who either like that they can work a part-time job or a 9-to-5 … I think the expectation of people who are signing up to drive is not for a 9-to-5, full-time job with benefits. If you want a job with benefits, go work for city government.”

But last year, hundreds of drivers, eventually feeling squeezed by the systems they joined, pushed back.

“The pay was good. I was getting about 80 cents per mile,” Uber driver Mario Rodriguez, of Koreatown, told Easy Reader last March. He was making extra money with per-trip incentives, and a bonus for driving a new car. Then, last spring, Uber cut per-mile and per-ride pay minimums down to 60 cents per mile and $2.60 per ride, leading Rodriguez to be one of hundreds of drivers — many of whom stated they work for multiple ride-sharing companies to increase their earning potential — who went on strike, picketing outside of Uber’s Redondo Beach hub.

Chase acknowledged that there are people participating within the gig economy who have been taken advantage of, and that those cases are where “giving people benefits and unemployment and all of those sorts of things is fine,” she said. “But AB 5 is so overbroad that it’s just like a bull in a China shop. It’s knocking down industries, from freelance writing, photography, theater, dental hygienists and bands. It’s going across many industries, and it’s indiscriminate.

Dream disrupted

By day, Donna Butler is a mild-mannered insurance agent.

Based in a ground-floor office space just off of Pacific Coast Highway in Hermosa Beach, Butler’s desk is covered in stacks of papers. Behind her, pictures of her family sit just below an insurance-themed diorama.

But one sheet of paper sticks out among the piles: a setlist, packed with songs that are part of an approved book for her gigs at Baleen Kitchen in King Harbor.

By night, she’s Donna Butler, Bandleader. Her wheelhouse is jazz standards, the kind of tunes that her rich, alto voice can dig deep into: smooth showtunes-turned-showcases like “Summertime,” or “The Boy from Ipanema,” a gender-flipped twist on the bossa nova classic. She also loves blues-tinged rock, featuring a take on Led Zeppelin’s “Rock and Roll” in her repertoire. “The only thing I don’t do is opera,” she said.

Insurance pays the bills for Butler. Music sustains her creative soul. She’ll take hometown gigs at Terranea and the Portofino Hotel, but she’s also happy to spend about five hours driving for a weeknight gig in Ventura. The freedom she gained through insurance sales helped ensure she can express her first love — which, as she’ll tell you, is no mean feat for a woman in her 50s.

But since January 1, she’s been ready, with systems in place, to ensure that she and the musicians she gigs with can be part of a company that she’s set up to comply with AB 5.

“I’m the employer and the employee according to this law. Profit margins are so slim for most local bands that I basically take an even cut, though I’m doing most of the work by booking shows — and there are some cases where I’m paying bandmates more than I make because I feel they should make a certain wage. I want to make it worth their while, because I want to get the best musicians,” Butler said.

Butler’s has loved to perform music since she was 16 years old. But when it came time to a career, she went into insurance, becoming an independent contractor for State Farm because she appreciated the flexibility it offered her.

“I have autonomy over my business — how many staff, where to put my office. It’s a unique situation with insurance,” Butler said.

Music, she acknowledged, was a hard way to make a living. But when her kids left home, she decided to take another swing at the music business. Getting into venues was a hustle, working for weeks and months at a time to get her music samples into the hands of bookers. She was determined to be the one finding gigs, not waiting to be asked to join them, and taking jobs without not knowing who she’ll have as her instrumental sidemen.

AB 5, she said, turned her passion-driven musical career into a business.

“I feel like the rug is being ripped out from underneath me. When I opened myself up as an employer for all of these people, I opened myself up to liability. It makes me nervous about bringing in people whom I haven’t worked with,” Butler said. “Say I bring an oboe player on to a wedding — I’ll probably never have a need for an oboe player again. But is that person going to file for unemployment benefits on making $100 or $200 for a one-show deal?”

As an independent insurance agent, Butler has an exemption under the language of AB 5.

As a musician, it’s less clear — the law has an explicit cutout for “fine artists,” but doesn’t define the term, subjecting it to interpretation.

When asked about the “fine artist” exemption, employment litigation attorney Adam Siegel’s first response was a burst of laughter.

“I’ve got clients asking me that very same question, and I don’t have a good answer for them,” Siegel said. “When you Google the term ‘fine artist,’ it’s defined as a sort of painter. At least that definition of ‘fine artist” seems to be narrowly defined, but it doesn’t necessarily go beyond that.”

Public statements from Assemblywoman Lorena Gonzalez, author of AB 5, state that the definition was “intentionally broad,” and that future changes to the law would be put in place to “protect workers and artists.”

Butler was among dozens of people, musicians, and writers alike, who attended a meeting at California Senator Ben Allen’s Redondo Beach office in late January.

The meeting was essentially a forum for people who feel the law is leaving them behind — and a place for Allen’s staff to incorporate their feedback into action, working with Gonzalez on applying fixes to a bill planned for the 2020 session.

In the weeks since that meeting, Butler has continued her activism. But she still feels left behind — as an employer, she’s currently losing money. And she firmly believes that if she tries to bargain with venues for more money, she’s going to be passed over for other talent, that might be younger or willing to work for less money.

“I worked hard to get here. It’s hard to do in my 50s, being a female, being older,” Butler said. “I don’t want to take a hiatus and lose those gigs and relationships while we’re figuring this out.”

Event producer Michael Bell, of Bell Event Services, is in a similar bind employment bind. Productions like Fiesta Hermosa, and the Redondo Super Bowl Sunday 10K races, include dozens of moving parts in his audio-visual speciality.

“I’ve got eight employees full-time. When we do the bigger events, I’ll bring in extra people. But with the new law, I’m forced to make them employees, even if it’s just for two days,” Bell said.

Bell believes the law’s intent is good, that people who are being misclassified shouldn’t be forced to be independent contractors. “But at the same time, I’m forced to make independent contractors employees when they don’t want to be,” he said.

Making his life more difficult is the business-to-business clause — part B of the ABC test, which bars him from bringing on subcontractors within his same industry without making them employees.

“Smaller companies are competing with the big event companies that have the manpower and resources; us little guys, we band together,” Bell said. “We’re not all going to be able to run out and get union-scale jobs, and me as an employer, I’m going to have to redo my business model. I can’t think about growth, I have to think about survival.”

Employment-rights attorney Debra Lauzon said, “I think you’ll generally find most employers don’t like laws that cost them money,” she said.

But this law, she said, is intended to do a few things: one, stop exploitation of the worker, who is essentially experiencing wage theft by employers who misclassify them to save money.

Second, she believes, it helps the state recoup taxes. “I think it was in the billions in taxes from employers basically ripping off employees [misclassified as] contractors,” Lauzon said.

According to an estimate from the Division of Labor Studies and Enforcement, employee misclassification costs California more than $7 billion annually.

“I understand employers are not happy. I’ve been a small employer…but I don’t understand why the person who is doing the job is supposed to be the person taking the hit,” Lauzon said.

“I’m always in favor of something that helps employees. I’ve seen way too many cases of employees — of people — getting harmed.”

Randolph, the owner of the Yoga Loft, wants to help his employees without shifting the costs onto his studio’s members. So far, he’s been able to maintain without raising costs.

“The challenge is really the cost, and figuring out how we can grow to make up for that. I didn’t want to cut people, and I didn’t have to…but it took days sitting with records and books,” Randolph said.

Boosting costs could risk him losing the community he has inherited by taking over the studio and built over the last year. He’s got a great rapport with members. Every person who walks past him into the studio waves to him, shares an in-joke, gives a hug, or some combination of the above.

But the lower margins for error have also kept him from experimenting, offering new classes or bringing in big-name instructors. The only choices he can make now are those where he knows he can’t lose money.

“I think we will evolve and shift, and I don’t think it’s all bad,” Randolph said. “Ultimately, I’m not against the law. The timing just sucks.”

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