#213: California’s Disastrous AB5 Law and Why All U.S. Freelancers Need to Speak Up!

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To a whole new level. And now, here's your host, Ed Gandia. Hey there. Welcome to the High Income Business Writing Podcast. I am your host, Ed Gandia, and this is the podcast for business writers and copywriters who want to earn more and less time doing work they love for better clients. Just a quick reminder that you can find details show notes for this episode@b2b launcher.com episode 213 and those notes include a summary of our discussion as well as all the links and resources we mention during the show. I is Henry Telfien, who's a general counsel for pica. Guys, this is a very important issue for self employed service professionals. So if you live anywhere in the U.S. not just California, I urge you to give this episode a listen and do your part to ensure you're protected and to prevent this disaster from spreading to the rest of the country. One quick note before we get to the interview. I realize that we're a very polarized country. So by running this episode, I know that I run the risk of some people think that I'm siding with one side or the other. Okay. Doesn't work that way. This is an issue that affects all of us. So keep an open mind. This is about the future of independent work in America, not about a political party or a political agenda. Hey, folks, I'm joined today by a couple of professionals that are going to be addressing a very important issue that's come to light in our community that is going to really impact a lot of us. Listen. Is the founder and chief advocate for the Professional Independent Consultants of America. And also Henry Telfian, who's general counsel for PICA Professional Independent Consultants of America. So, Liz, Henry, welcome. It's great to have you here.

Thank you.

Thanks for having us.

So before we get into this, I want to make sure folks have a little bit of background on you guys. So if you can just give us a bit of a background or what it is you do what PICA is all about. We could start with Liz and then go on to Henry.

Yeah. Okay, great. Okay, so the short version of my story is I've been a consultant, a management consultant, pretty much my whole postgraduate career since the last century. I started with a big firm for five years when my daughter was born that wasn't going to work anymore. I basically fell into independent consulting or Solo Consulting in 2004. And I never looked back because I had more flexibility, I made more money, I lowered my effective Tax rate, you know, all those great things. Several years into that, I started my first company, which is called Proko Consulting, which is like a talent agency that represents top tier HR consultants across the country with Fortune 500 companies. As a result of building that company, I became known as the person to call if you're thinking about going independent or you have questions about how to run your own small business. And I got asked out to coffee so many times that eventually I realized, okay, people have a lot of questions and there's got to be a better way I can help these people than drinking gallons of coffee. So I reached out to a couple other solo consultants that I know and we said, yeah, let's do this. Let's start this organization to help election year.

It's important that you educate yourself on which political candidates are supporting these kinds of measures. There are several presidential candidates who have said that they want legislation, federal legislation very similar to California's AB5. And many politicians running for state office are also supporting these types of short sighted measures to shed light on these issues, specifically the AB5 fiasco and what's happening in the rest of the country. I've brought in two experts to the show today. The first is Liz Stable. She's the founder and chief advocate of the Professional Independent Consultants of America, or pica. My other guest is Henry Telfian, who's a general counsel for pica. Guys, this is a very important issue for self employed service professionals. So if you live anywhere in the U.S. not just California, I urge you to give this episode a listen and do your part to ensure you're protected and to prevent this disaster from spreading to the rest of the country. One quick note before we get to the interview. I realize that we're a very polarized country. So by running this episode, I know that I run the risk of some people think that I'm siding with one side or the other. Okay? Doesn't work that way. This is an issue that affects all of us. So keep an open mind. This is about the future of independent work in America, not about a political party or a political agenda. Hey folks, I'm joined today by a couple of professionals that are going to be addressing a very important issue that's come to light in our community that is going to really impact a lot of us. Liz Steblay is the founder and chief advocate for the Professional Independent Consultants of America. And also Henry Telfian, who's general counsel for pica, Professional Independent Consultants of America. So Liz Henry, welcome. It's great to have you here.

Thank you.

Thanks for having us.

So before we get into this, I want to make sure folks have a little bit of background on you guys. So if you can just give us a bit of a background or what it is you do, what Pica is all about. We could start with Liz and then go on to Henry.

Yeah. Okay, great. Okay, so the short version of my story is I've been a consultant, a management consultant, pretty much my whole postgraduate career since the last century. I started with a big firm for five years when my daughter was born that wasn't going to work anymore. I basically fell into independent consulting or Solo Consulting in 2004. And I never looked back because I had more flexibility, I made more money, I lowered my effective tax rate, you know, all those great things. Several years into that, I started my first company, which is called Proko Consulting, which is like a talent agency that represents top tier HR consultants across the country with Fortune 500 companies. As a result of building that company, I became known as the person to call if you're thinking about going independent or you have questions about how to run your own small business. And I got asked out to coffee so many times that eventually I realized, okay, people have a lot of questions and there's got to be a better way I can help these people than drinking gallons of coffee. So I reached out to a couple other solo consultants that I know and we said, yeah, let's do this. Let's start this organization to help people launch, run and grow their own successful consulting practices. So we launched a couple of years ago. The easy way to refer to our organization is PICA because a name with 17 syllables is way too many. Professional Independent Consultants of America is just way too many. We do have several professional writers in our organization because even though we have the word consultant in our title, it's really for any professional who's self employed that needs some coaching or guidance. So we like to say that just because it's called independent consulting, you don't have to do it alone because we've got your back. So that's a little bit what Pica is about and my background, how I started this organization. And then I looped Henry into it. I roped him into it. So, Henry, I'll let you introduce yourself.

Okay. Well, my story is a little shorter. I graduated from Harvard law school in 1976, and my girlfriend at the time was still doing her dissertation for her doctorate. So I needed a job. And there was a little labor law firm in downtown Boston with six attorneys and they Said, sure, we can use you for a couple of years because I always wanted to go to California. So I became a labor lawyer and then when I moved to California, I got another job with a law firm, a small law firm, about 30 attorneys, also doing traditional labor law, which is union management stuff. But as the law developed, the employment law factor became much, much more important. Employees started suing for a whole host of reasons. And so traditional labor law firms started branching into what was growing labor, growing employment law. So I became an employment lawyer as well as a labor lawyer. And I've been doing that since 1976. One of the issues in employment law that comes up isn't a person, an employee or an independent contractor. So it's an issue we've been addressing now for well over. Well, really since employment law started. So I worked for a medium law firm and then I became a partner in that firm and then I worked for a major 500 plus law firm and then I quit. I started my own practice where I actually represented employees as well as management. And I quit that and then I've gone back and now basically I'm working for some old clients and I'm working as Pica's general counsel. So basically for the last 35 plus years I've been doing labor and employment law.

So you've seen a lot happen over the past few decades. And now we're faced with something that just kind of shaken everybody up and this issue of the AB5 labor law in California to meet. This is much bigger than what's happening in California because I know that there's some movements to pass some legislation federally across all 50 states. And there's also some states that have their own laws that are kind of coming to light right now and getting much more attention. So maybe you could talk a little bit right now about what's happening in California. We can go on from there. What was the, I guess the impetus behind the law that just threw recently went into effect and how it changed or maybe it's amplified existing laws in this area.

Sure. Well, for most of my time I practiced the law in California and most of the United States was you are an independent contractor if you are free from the control and direction of the hiring entity. In other words, the person who's hiring you doesn't get to tell you how to do your job, when to do your job, where to do your job. That was the law. There were states that had exceptions to that law, but generally that was a law and that was the law the federal government used as well to determine whether you were an independent contractor. Well, what happened was two years ago, the California Supreme Court, in interpreting one particular employment law, said, no, that's not the law. The law is a three part test. And we're going to impose this three part test on California with respect to this law. Now, the problem is when a court does something like that, labor lawyers and employment lawyers who are representing management say, whoa, whoa, whoa, whoa, you're going to apply the same test to other laws like unemployment insurance, workers compensation insurance. And so lawyers being generally conservative, tell their clients, well, we don't know the answer to that question, but the conservative thing to do is to assume they are going to do that. So what immediately happened was all the employers in California said, yes, you have to assume this new three part, we call it the Dynamics test in California and the rest of the United States is called the ABC test. That you're going to have to assume that the California courts are going to apply this test throughout California and they're going to apply it to all employment laws in California. Well, the problem with the ABC test or the Dynamics test is it has two parts that are problematic. The first part, it says you are not an independent contractor unless you perform work that is outside the usual course of the hiring entities business. So let's take the case of Uber and Lyft. What is Uber and Lyft's business? If you take Uber and Lyft's position is we're selling an app, then their business is we're selling an app, but that's not going to fly because what is their real business? They're making their money from selling rides, from selling transportation. So if you look at their real business, then every individual they are using to drive those cars is part of their business. And therefore those people will be classified under the ABC test or Dynamics test as an employee. So that's a problem for your people. Ed, it's the same problem because what is a freelance writer doing? They're producing a product that is part of the hiring entity's business. The hiring entity is the business of publishing articles. And therefore the business of the hiring entity is publication. And the writer is an integral part of the publication process. So under the ABC test, every freelancer who produces even a single article for a publisher would be classified as an employee.

Henry, I want to just pause right there because I want to make a clarification. I got people. My listeners are kind of divided. There are some that are doing writing articles for publication. That's been the traditional view of what a freelance writer does. However, over the past 15 years or so, there's been a huge movement toward this thing called content marketing, where companies selling, let's say, software produce an incredible amount of content to help educate potential buyers and their customers about how they approach their software, how they approach the problems, and so forth. So a lot of my listeners write for, let's say, software companies or health insurance companies or whatever, consulting companies to help produce this content. Now, there's a question here. Is that work considered a core part of what the client does, of what they're about?

And that is the core question. And we don't know the answer to that because we don't have a court case that tells us what the answer to that question is. I mean, being a conservative lawyer, I would tell you, yes, it's an integral part of the business. Why? Because the business could not survive without that explanation to the software. So what I would say, here's an example I often use with Pica employees. If you go to Nike, what is Nike's business selling? Apparel. Merchandising apparel. But Nike also has, say, organizational change, development, organizational change, people on their staff. So if Nike goes out and hires an organizational change person, is that person an integral part of their business? And my answer is no, because they don't need that person to do their business. Yes, they have that person on staff, but that's not an integral part of their business. But if you come in and you help merchandise Nike product, that's an integral part of their business, even though they're producing, manufacturing and selling the product, they're also merchandising it. So it's an integral part of their business. So with respect to your question, I look at it and I say, well, could this business survive without the writers? And my answer is, I don't think so. So it's an integral part of their business. But that's just a lawyer guessing, because the way we develop laws in this country, unless the legislature tells us we have to wait until a court looks at the ABC test and says, with respect to this particular individual who was writing this particular article, that is an integral part of the business. So we don't really know the answer, but I'd be a little leery. And there's something we need to look at from a perspective which is every one of your freelance writers or any individual is being hired. It's not their problem. In other words, the hiring entity says, well, I'm going to treat you as independent contractor. Well, then you say, fine. And you Walk away because you don't care. That's what you want to be. It's the hiring entity that has the problem because the hiring entity is the one that's going to get sued by the state or by the individual. So it's the hiring entity that looks at this and says, must I treat this person as an independent contractor and employee? So again, we look at conservative lawyers and they tell the hiring entity, well, we don't know the answer to Ed's question, but the conservative approach is to say, yes, that is an integral part of the business. So treat them as an employee. Wow.

So I'm assuming this part. You said there were two parts that are problematic with the ABC test. I believe this is the B part, right?

Yes. The other part is the C part. This is a part which says that the individual has to be customarily engaged in an independently established trade or business. So this one says, you must show us that you're really a business. So if you work for only one company and you do all the work for them and only them, and you don't have business cards, and you don't have a website and you don't have a telephone number, and you don't have all the things that businesses normally have, then you're not in business, you're just doing work for one company and you're really that company's employee. So this is problematic in the sense that you must show these things, but these are things that can easily be shown. And one of the things PICA does is it tells people how to do these things so that it can be shown to be in the customary trade or business. So this is something that's a problem, but it's a problem that we can deal with. B part of the test is a problem that we can't deal with. Either you are part of the hiring entities business or. Or you are not. There's nothing we can do about it.

Yeah, the C parts, we call that lovingly being a permalancer. You're essentially an employee without benefits. Right. I find that this is really common, for instance, in the software industry. Right. With coders, software developers. All these companies are hiring permalancers by the hundreds of thousands in some cases. But in our cases it's really not an issue. Most of my listeners have at least two or three clients. Right. And I know the B part is going to be the biggest problem. But from a C, the C element, are there things we can do? Like for instance, if we're a sole proprietor, should we incorporate do more formal things that will help ensure that this is really not an issue.

Liz can answer that question. This is what Pika does.

This is what Pika does, yeah. The short answer is yes. In fact, we have an article on Pica's website that I'll send you, Ed. So you have it in the show. Notes, but perfect. There's a list of 14 things you can do to firmly establish yourself as a business. One of the easiest things is to get a business license, have a website, even if it's a one page brochure type of website, because it's got resources for easy ways to do that and other things. It doesn't mean that you have to set yourself up as an LLC or an S Corp or whatever. Although. And Henry, correct me if I'm wrong, that there's nothing in the law that says you can't be a sole proprietorship and still be legal, but you will look more like a business if you are set up as an LLC or S Corp or something along that line.

Gotcha. Okay, so I like to ask one more question about this whole mess and then we can move on. But I'm just trying to really wrap my head around why AB5 then came to light. So we had Dynamex, we had this ABC test in California. What did AB5, this new labor law, actually do that wasn't already in place?

Okay, well, as you can imagine, once the Dynamics test came into being in California, there was a lot of people who were concerned. Employers were concerned because suddenly people that they had traditionally treated as independent contractors were going to be treated as employees. And there was no way around the problem. And the unions and the trial lawyers were concerned because they wanted more employees, more individuals to be employees. The unions so that they can organize them, and the trial lawyers so that they can sue employers, asserting that individuals didn't get lunch breaks or weren't paid on time or all the other things that employees have to be treated by under the law. So there was a lot of pressure put on the legislature to do something to clarify when Dynamex is going to apply. Because like I said, the California Supreme Court simply said Dynamex applies for this particular set of laws and didn't say anything more and didn't even tell us whether it's retroactive. So there needed to be clarity. Otherwise there was going to be a lot of people who were suddenly being treated as employees who might not be treated as employees. For instance, lawyers who don't want to be treated as employees suddenly might be treated as employees. So there was a lot of pressure to clarify what the law should be. And that's how AB5 came into being. Now, the problem was, of course, the California legislature is extremely Democratic, and for the most part, they get their contributions from the trial lawyers and from the unions. So they have a bias towards the union and trial lawyers position. That being said, the Chamber of Commerce, of course, also is a big contributor, and they put in their two cents. But ultimately, the bill that came out, AB5, was leaning more toward the trial lawyers and unions position. And so what AB5 tried to do was to say, look, if you hire someone in California, the Dynamex test applies, and it applies for most all employment laws in California. So that clarified one of the issues of Dynamex. When does it apply? But. And this is the important but. And this is the but that applies to your people. We're going to carve out exceptions for certain people, and with respect to those people, we're going to tell you what the test is. But they still have to meet the Borrello test, which is the old test, which says they have to be free of control. So as long as you are free of control and you come within an Exception Created by AB5, you will be an independent contractor. So Dynamex will not apply to you, and you will be classified as independent contractor. So what AB5 did was it carved out lots of traditional occupations which have always been treated as independent contractors. Lawyers, for instance, Realtors, people who have always been under the law, considered independent contractors. AB5 says, okay, you're still independent contractors as long as you are not being controlled by the hiring entity. And one of the categories that was included was freelance writers. So freelance writers, as long as they come within the exception, we can talk about the contours of the exception. Are independent contractors, as long as they are free of control of the hiring entity, they don't come within the ABC Dynamics test.

Well, let's talk about the specifics there, because again, what I read, at least it seems like it was very limited in scope. And they just looked at kind of the traditional freelance journalist writing for a publication like the New Yorker, for instance. But really the biggest opportunity in most of the volume of the writing is actually being done on the commercial side, which, again, is part of the content marketing strategy of so many companies, in fact, so many journalists, because publications are dying left and right, have had to now shift to writing commercially. So is there an exception for this kind of work or that they only look at kind of the traditional view of a freelance writer.

Well, as always, the law is unclear and doesn't tell us. I mean, the way it is written, I agree with you. It sounds like they're talking about a freelance writer writing for a publication such as the New Yorker. Whether a court, because ultimately a court looks at this and decides, does it include a commercial writer? Whether a court would say commercial writer meets this standard or not, I really don't know. And it's something we're not going to know until it gets litigated or the law gets clarified. So again, we look at it from the point of view of the commercial hiring entity. When they look at this law, what is their lawyer going to tell them, yes, you're going to be okay, or no, this exemption does not apply to you, and therefore you fall under the ABC Dynamics test. And you can't hire the person as an independent contractor. It's going to depend on the particular commercial hiring entity's lawyer and what that lawyer tells them to do.

So we're kind of in no man's land right now, right? This law went into effect January 1st, and everyone, I guess, is just kind of on standby and trying to figure out who's going to blink first. What is happening out there in the meantime? In terms of, let's just say, people like writers and copywriters out there, two things are happening.

Certain groups have filed lawsuits asserting that the law, for various reasons, shouldn't be applied or is unconstitutional. So instance, the interstate truckers got an injunction saying the law doesn't apply to them. The freelance writers and Uber and Lyft are all trying lawsuits as well. But so far those lawsuits have not succeeded. They're proceeding, but they haven't gotten an injunction. So law currently applies to those people. And there is new activity in the legislature because this law is so poorly written that we don't really know when it applies and when it doesn't apply. And the freelance writers, for instance, have really mobilized to say, hey, this is simply not fair to us because we write a lot more than 35 submissions a year, and therefore they've been putting pressure on the legislature. So the author of this legislation, Gonzalez, has had a lot of pressure put on her, and she's agreed to relook at it and see how it needs to be clarified. So there's a lot of things going on. Whether any of these things are going to be successful or not, we don't know. But there is movement, and therefore, you just have to stay tuned and see what happens.

I'd like to add in here, too, that we're not really, from a legal perspective, yes, we're kind of in a wait and see situation. But as Henry just mentioned, people are mobilizing. And I'd like to point people to one Facebook group in particular. It's got over 10,000 members. And every day people are like, putting new ideas out there and raising new issues. And it's called freelancers against AB5. And as we pointed out earlier, it's not just a California issue because other states like New Jersey and New York have similar legislation pending. So it's becoming a big topic. And even on the bigger picture, it's more about how. And Henry, this is more your talking point, I think, but it's more about how the. Our legislators feel like we need protecting. We're not able to manage our own businesses and our own affairs, so they're going to regulate it for us.

Yeah. It's like, I don't know if this analogy is accurate or if it works, but the first thing that came to mind is this is like somebody finding a roach in the kitchen and deciding that the best solution is just to burn the house down. I understand that certain workers have been exploited. I get it. But this seems to me like a law that would have applied 50 years ago, and it is flawed. But at a time where we are moving in such a totally different direction, where people really want to take charge of their careers and what they do for a living, and there's more ways than ever to do that, and this seems like such an antiquated way to take care of the problem. Again, burning the house down to take, you know, kill the roach. It's very puzzling to me.

I couldn't agree more. Because more and more people want to be self employed and want the flexibility of running their own business. And now we have people in the legislature saying, oh, no, you know, clearly you don't know what's best for you. We're going to tell you what you can and can't do.

Wow.

All right, so I want to clarify something in terms of some of the dynamics here. If you are a company hiring, let's say, a freelance writer in California, it doesn't really matter where you're located. Well, let's say the company is in California and you're looking to hire a freelance writer in California, this definitely applies to you, correct?

Correct.

Okay. If you are a company in California, based in California, looking to hire a writer in Maine, does this apply to you?

Probably not, because the general rule is the law of the state in which the work is done applies. So the general answer based on general law would be if I'm a California company and I hire someone in Maine to do the work in Maine, then Maine law applies. But that is a general proposition and once again, we have to wait until some California court tells us, yes, that's going to be the rule. So I'd say in general the main law should apply because the work is done in Maine.

Gotcha. So same thing with a company in Maine looking to hire a freelance writer in California. The work would be done in California, so generally speaking it would apply there.

Correct.

What I'm hearing from the street is that a lot of companies have decided, because again, we're in limbo right now, that they're not even going to bother and they're going to be, like you said, Henry, very conservative and they're terminating contracts, refusing to hire writers and other contractors in California. Is that an accurate representation of what's going on or do you think that's a lot of hype?

That's what we hear. Whether it's really happening or not. It certainly happened in certain cases. We know of certain cases that the journalists have reported on. Whether it's a widespread phenomenon, I don't know.

Let's talk a little bit about where this is going because again, we've talked about how other states have similar pending legislation. I know there's one in Congress as well that would impact the entire country if this passed. Where do you see this going? And I know we're really speculating here, but I'm just curious to get you.

Guys take on that sort of depends whether you're in a Democratic state or a Republican state. If you are in a Democratically controlled state, this is the future because they don't like the Uber Lyft model and they view those employees or individuals as being exploited and therefore they want to do something about that. And AB5 is a way to deal with that issue. If you are in a Republican controlled state, say like Texas, then they tend to view it as Liz was saying, you don't need our protection. You're capable of making these decisions yourself. And we're going to use the standard right to control test. As long as you're free of the control of the hiring entity, we will classify you as independent contract. From the federal point of view, the House of Representatives has already passed legislation which would enlarge or it doesn't mirror AB5, but it comes a lot closer to saying individuals are going to be employees and not independent contractors. However, the Republican Senate would never even consider such a law. So it's dead on arrival in the Senate. Now, if we get a Democratic Senate and the filibuster goes away and we get a Democratic president, then maybe that law gets passed. But at the moment, on the federal side, that kind of legislation is probably dead. But we don't know what's going to happen in the 2020 election. So we don't know the end of the end result, but that's where it's heading. The Democratic states want this kind of legislation. The Republican states don't want it.

Do you foresee some kind of correction here? So I think, let's face it, in many respects, the pendulum has swung too far one way. I get it, and a lot of people have been exploited. This seems like these regulations are about the pendulum swinging to the other extreme. Do you think that we'll end up in some kind of balance at some point? It's hard for me to see a future where this is completely out of whack, especially where things are moving in terms of the economy and worker choice and so forth.

That's hard to say. I mean, there's certainly going to be amendments to AB5, I think, because it's just too much pressure. And I think the freelance writers are going to get a better exemption than they currently have. How much better? I don't know, because there really hasn't been any discussion yet. And whether it will apply to commercial writers, I don't know. But there's certainly movement to make it less harsh than it currently is. But I don't think you're going to get a major reversal because as I said, this is a very democratic state and they view this kind of protection as necessary to prevent the gig economy, employees from being exploited. And with respect to all the other states that have abc, you know, they aren't going to change their law. They're going to keep what ABC has. So with respect to every freelance writer, they have to look in the state in which they work and see whether the ABC law applies, because they're already going to be covered by this.

Gotcha. Liz, I'm curious, and you mentioned that 14 things you could do. But what can freelance writers in California do to help the situation actually, really beyond California, what are maybe some of the things from that list that you feel are extremely important that people start taking to heart?

Yeah, I forgot a few things. I mean, the list I mentioned that I'll send to you in the show Notes is more about how to set yourself up as a business to meet one of the requirements of the ABC test. But in a more practical way, don't just sit by and wait for something to happen. And it's really get involved. Join that Facebook group, freelancers against AB5, even if you're not in California, because as we've mentioned, this is spreading across other states. And definitely contact your local representative and say, hey, this is important. This is my livelihood. I want you to change AB5, repeal AB5, fight, you know, change AB5, whatever. And maybe not even just your local representative, which many, by the way, are up for reelection. So be a hot topic for them. And Henry and I were talking about this last night. Contact Lorena Gonzalez office directly. Send her paper mail. Like, let's inundate her.