As of Jan. 1, 2020, California’s AB5 employment law has become active, with other states thinking about following suit. CNBC writes: “The law requires most companies to reclassify contract, freelance and contingent workers—the backbone of the gig economy—as full-time employees eligible for benefits, a guaranteed $12 - $13 state minimum wage and protections under the state’s employment law.” The law is intended to prevent companies from classifying employees as freelancers and contractors to avoid paying them benefits and more. Part of the law includes the provision that freelancers who write more than 35 articles, a small number for some freelancers, should be reclassified as employees.
However, the unintended consequences of the new law are that many freelancers in California are finding themselves losing work as employers across the country are dropping work or dropping California freelancers all together. There are several lawsuits against the law from companies California Trucking Association and freelancer organizations to halt the law or better define its restrictions.
As the cases make their way through court, here are a few legal tips for freelancers, defined for this article as the writers, designers, and other creatives.
Should I consider incorporating?
Freelancers may want to consider incorporating for several reasons even if they are the sole person in their company. First, incorporating as a limited liability company or a corporation “can get some liability protection,” explains Brendan Healey, partner at Baron Harris Healey. If a freelancer is sued, their company and its assets are at risk, not the person and their personal assets, explains John Breen, Georgia Reithal Professor of Law, at Loyola University of Chicago.
However, freelancers have to do more than just set up their own company. They should separate their assets, like having a separate business bank account to receive and use business funds, so the corporate veil isn’t pierced in a lawsuit. Breen explains that the formalities between a person and their company are really important to preserve that.
Moreover, Healey points out that if a freelancer has more than one customer, and they have some corporate structure, “they can potentially qualify for the business to business exemption” under the AB5 law.
What impact does freelancing have on my taxes?
Employers take out the relevant taxes from their employees’ paychecks, but that is not the case for freelancers. They have to handle paying their own taxes. Chris Brown at Venture Legal writes that freelancers might want to “set aside 30 percent of all net income so you can pay your taxes. You should pay quarterly taxes and, during tax season, you’ll likely have to pay a bit more unless you overpaid.” He suggests talking to an accountant who can help.
What’s the difference between a freelancer and an employee?
This is the core issue with AB5. Broadly, employers exert control over how and when their employees do the work, whereas freelancers have the flexibility with their work and likely work with several companies concurrently. But individual states and IRS have factor tests to determine if a person is an employee or a freelancer/contractor.
Healey points out that there are common elements between the tests regarding the company’s ability to control the work, the circumstances it is done, and the means by which it is done. “If you are providing the workspace, the computer, that starts to look less like a freelance relationship than an employee/employer relationship,” he says.
What’s with the indemnification clauses?
While it is highly advisable that freelancers have some sort of contract with the company they are working for, freelancers should be aware of potential indemnification clauses in the contract. In many contracts with freelancers, the indemnification clause holds that the freelancer is accountable if the company is sued over the freelancer’s work, such as if the work was libelous or the result of copyright risk.
Healey explains that companies—like publishers, like these clauses—because “the freelancer is in a better position to know whether he or she got it right; they are the ones who talked to the sources...indemnification follows control.” Freelancers, however, may not want to be exposed to that kind of liability, especially since the publisher tends to be bigger and have more resources than the freelancer, Healey points out.
In the face of such clauses, “all the more reason have a separate entity set up,” explains Breen when dealing with the clauses. He suggests trying to eliminate them if you can, but that may not always be possible.
What should I know about copyright?
Copyright is a tricky subject because there are so many different ways companies handle copyright with freelancers. Some companies ask for copyrights for a limited period of time, such as a few days, a week, several months, or even a year, whereas some companies will ask for the complete copyright. Ultimately, the freelancer has to think about what they think they will do with the future, Healey says. If they want to make an anthology of their work, retaining copyright or obtaining a license may be important.
But Healey points out that “you can’t assign copyright without assigned writing” so if there is no contract, the freelancer likely retains the copyright. But he points out that you “may be subject to the terms of the agreement on the website.”
When should I consider hiring an attorney?
It can be tricky knowing when to bring an attorney. Bringing in an attorney over nonpaying clients can be a mixed bag. Healey points out lawyer fees and court costs may eat into the money at hand, but it depends on the situation, of course.
But if a freelancer receives a call from a source’s attorney to try to shut down the story, or they get sued for defamation or copyright infringement, they should definitely consider finding counsel, Healey says.
Breen recommends with contracts that people “never sign anything you don’t understand the term, that’s where a lawyer can be helpful.”
Several cities have special organizations such as Lawyers for the Creative Arts in Chicago that can provide pro bono work for creative people.