On Sept. 18, 2019, Assembly Bill Number 5 (AB5) became law in California paving the way for dramatic changes in California's gig economy. AB5 was designed to provide labor protections for "misclassified independent contractors", including the application of minimum wage laws, overtime, sick leave requirements, and unemployment and worker's compensation. Once put into practice, however, AB5's negative impacts on various industries—which rely substantially on an independent contractor workforce—quickly became illuminated. After over a year-and-a-half of lobbying efforts by the music industry and negotiations with lawmakers, it was announced on April 17, 2020 that AB5 will be amended to accommodate musicians' unique niche in the California economy.

The Dynamex "ABC Test"

AB5, which added Section 2750.3 to the California Labor Code, codified Dynamex Operations West, Inc. v. Superior Court, a California Supreme Court case which used the "ABC test" to classify an individual as an employee or independent contractor. While the previous Borello & Sons, Inc. v. Department of Industrial Relations test used in California placed the burden of proof on the employee to prove misclassification using a variety of flexible, discretionary factors, the ABC test shifted the burden of proof to the employer and created a presumption of employee status.

The ABC test, as outlined in AB5, requires an employer to establish three different factors to prove that an employee is an independent contractor:

(1) The worker is free from the control and direction of the employer in the performance of his or her work;

(2) The worker's work is outside the usual course of the employer's business; and

(3) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

AB5 carves out exceptions when the less stringent Borello test should be applied. AB5 exempts some occupations that provide "professional services" (e.g., physicians, attorneys, architects, and fine artists). It allows freelance photographers and journalists to act as independent contractors as long as they contribute fewer than 35 pieces per year to a publication. AB5 also contains a provision establishing an exception for business-to-business contracts. Since AB5's codification, lawyers have debated some of the ambiguities inherent in these provisions, such as how to define a "fine artist" and whether AB5 will affect the use of loan-outs.

The AB5 Controversy

AB5 has been highly controversial for several reasons and has received widespread criticism from both employers and contractors—primarily within the "gig" economy. Various gig companies collectively launched a campaign to add a referendum to California's 2020 ballots to exempt them from AB5. A myriad of businesses announced the certainty of downsizing if AB5 forced the reclassification of its workforce. In the media space in particular, freelance journalists and photographers worried that companies would terminate their contracts before they reached AB5's cap on work contributed to a single publisher. The American Society of Journalists and Authors, the National Press Photographers Association, the California Trucking Association, Uber and Postmates each have filed lawsuits against the state of California with claims that AB5 is unconstitutional.

As a result, California state senators and assembly members introduced bills and a California constitutional amendment to repeal AB5, as well as other bills designed to add additional exemptions for journalists, newspaper carriers, interpreters and translators, and small businesses. In 2020, Assemblywoman Lorena Gonzalez began introducing amendments to create additional exceptions to AB5 to address some of these concerns, which undoubtedly would have an adverse impact on California's gig economy.

The Musician Exemption

The music industry, in particular, has been an outspoken critic of AB5's almost certain repercussions. Independent musicians often rely on short-term "spec" agreements that classify session musicians, roadies, sound engineers, etc. as independent contractors. The Los Angeles music community expressed fears that AB5 would force artists and musicians out of Los Angeles to other industry hubs such as Nashville and New York. Others worried that independent musicians would stop collaborating with session musicians, songwriters, and producers who may be classified as employees.

The new amendments to AB5 should assuage some of those concerns by reverting to the Borello test for most music professionals who had been subject to the stricter ABC test under AB5. While not yet publicly disseminated, stakeholders (including the RIAA, A2IM, MAC, IMPU, SONA, AFM, Recording Academy, IATSE, SAG-AFTRA, and the Teamsters union) have agreed on amendments to the Bill. Assemblywoman Gonzalez and Majority Leader Ian Calderon announced that the amendments will allow for musicians, vocalists, and other recording artists, as well as composers, songwriters, lyricists, musical engineers, sound mixers, record producers, and others involved in the creation, marketing, promotion, and distribution of sound recordings and musical compositions to collaborate and contract with each other without the ABC test applying to their relationships. For standalone live performances, the ABC test will only apply to headliners at concert venues with more than 1,500 seats and performers at large festivals with more than 18,000 attendees per day. For companies with longer term relationships with live performers, the ABC test will remain applicable in instances where the nature of a musician's work inherently draws significant control and direction from their employer (e.g,, musicians regularly performing in theme parks, symphony orchestras, and musical theatre productions).

Moving Forward

In the wake of these new amendments, it remains to be seen whether leaders of other industries will work with California government officials to create additional industry-specific exceptions to AB5, or whether other approaches through bills or lawsuits will be successful. For now, musicians can be grateful that California officials have accommodated their concerns and sought to return to an economic environment that allows musicians to collaborate on their terms.

Sidney S. Fohrman is a partner and Ariel D. Shpigel is an associate at Sheppard, Mullin, Richter & Hampton.