Over the past several weeks I have read numerous articles and opinions about California Assembly Bill 5, otherwise known as the gig-worker misclassification law. I have also read numerous comments on various message boards about how a platform/studio or company can “get-around” AB5. I have also read numerous social media posts from models and performers saying how they registered an LLC or Inc in California based on what a studio has told them they had to do to work.
Stop! Much of what I have read and heard is grossly inaccurate.
Do not register an entity in California, it probably won’t help you and may end up hurting you as a model and performer. And if you are an owner of a studio or a platform, do not think that you can get around AB5 simply by paying an LLC or Inc instead of a person. Please, also stop telling models and performers to incorporate, you may be putting them at risk. If an Inc or LLC were easy solutions to this issue, Uber and Lyft would be doing it for their drivers instead of funding a $100 million initiative to overturn AB5.
Models and Performers…
Do not think that having an Inc or an LLC will help with AB5. You may also end up revealing your real name and address to the public. If you establish a business in California, whether it is an Inc or LLC, you cannot be anonymous. There are only 4 states that allow your identity to be hidden from the public when you register an Inc or LLC; Wyoming, Delaware, Nevada and New Mexico. Be aware though, establishing an anonymous entity in those four states is usually very expensive.
I have seen countless tweets where models and performers have stated that their CPAs or accountants have set up an Inc or LLC for them. Also, Legal Zoom isn’t a good choice either. Using either is a very bad idea. I have nothing against DIY incorporations services, CPAs or accountants, but they aren’t lawyers and do not understand nor can they give you advice about California employment law. As an attorney, I do not give my clients tax advice because I am not a CPA and you shouldn’t take legal advice about setting up an entity in California from a CPA. Also, AB5 is a very complex area of law and your friend who is a personal injury attorney also shouldn’t be establishing your Inc or LLC. Invest the funds and get an experienced employment law attorney in California to advise you.
As a part of establishing a business entity in California, you are also required to file a yearly or bi-yearly Statement of Information with the Secretary of State.
Statement of Information for LLCs – https://bpd.cdn.sos.ca.gov/llc/forms/llc-12.pdf
Statement of Information for Incs – https://bpd.cdn.sos.ca.gov/corp/pdf/so/corp_so550.pdf
For each form you will need to list your real name and if you use your home address for your business, you will also need to list your home address. Anyone who knows your company’s name can easily search the Secretary of State’s database of business entities. They will then know your name and your home address. With that simple information, they can then get more information about you personally from other online databases that can be used to search for people anywhere in the US.
Be aware that you will need to keep your personal information updated with the State of California – every year for Incs and every two years for LLCs. If you fail to file a Statement of Information when required, the Secretary of State of California will suspend your corporation from doing business in California. Which means that your company will have no legal standing to enter into contracts or sue someone in court. Being suspended also means all your contracts are void and unenforceable. Basically, your company will no longer exist. And you will be forced to file penalties and interest to re-establish your corporation so it can operate properly.
If you have an Inc, you are also required to hold yearly shareholder meetings and record those meetings in your corporate books. Failure to do so can invalidate your corporate protections.
Establishing an Inc or LLC is easy, maintaining it is more complicated.
Platforms and Studios…
If you own a platform or a studio and if you are in California or employ models/performers in California, AB5 applies to you. I have heard that studios and platforms are now requiring their models/performers to establish LLCs or Incs for them to continue to work. The solution to AB5 is simply not that easy. For a platform or studio not to have wage and overtime liability under AB5 or the California Supreme Court decision in Dynamex (Dynamex Operations West, Inc. v. Superior Court of Los Angeles) requires more than just paying an LLC or an Inc rather than a natural person. This is a complex area of law that requires advice from an experienced and knowledgeable employment lawyer about how your business operates and can provide a relevant analysis of not only AB5 and Dynamex but also of the Borello case and the standards set forth by California courts under the “bona fide business relationship” line of cases.
For example, for you to have a bona fide business relationship with an LLC or Inc, you will need to show a court the following;
(e) Subdivision (a) and the holding in Dynamex do not apply to a bona fide business-to-business contracting relationship, as defined below, under the following conditions:
(1) If a business entity formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation (“business service provider”) contracts to provide services to another such business (“contracting business”), the determination of employee or independent contractor status of the business services provider shall be governed by Borello, if the contracting business demonstrates that ALL of the following criteria are satisfied;
(A) The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
(B) The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.
(C) The contract with the business service provider is in writing.
(D) If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.
(E) The business service provider maintains a business location that is separate from the business or work location of the contracting business.
(F) The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
(G) The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.
(H) The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
(I) The business service provider provides its own tools, vehicles, and equipment to perform the services.
(J) The business service provider can negotiate its own rates.
(K) Consistent with the nature of the work, the business service provider can set its own hours and location of work.
(L) The business service provider is not performing the type of work for which a license from the Contractor’s State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.
For it to be a bona fide business relationship you need to satisfy ALL those points, not just most of them.
As you can see it simply not enough to show the court that you paid an LLC or Inc and you have a 1099 to prove it. You will still be held to be an employer under AB5 and liable for wage, overtime, meal breaks ect., – even if you did pay someone’s LLC or Inc.
You also are relying on whether that business you are paying is being operated properly. One of the issues that I see – is where the owner of the LLC or Inc is a model/performer – does that model/performer have a loan-out agreement in place with their own company? An LLC or Inc cannot be used simply as an alter-ego for the person who owns it.
One other issue that I see being missed in this conversation is that most people in adult believe that January 1, 2020 was doomsday for California employers. That is also simply not true. Dynamex Operations West, Inc. v. Superior Court of Los Angeles was decided in April 2018 and was held by the Ninth Circuit Court of Appeals to apply retroactively. Currently, the California Supreme Court will also decide whether Dynamex applies retroactively. We are still waiting on that decision. None-the-less, even if you terminated all of your California based models/performers on December 31, 2019, you still have retroactively liability for wage, overtime, meal breaks ect.
Conclusion
For platforms and studios – AB5, Dynamex, Borello and the bona fide business relationship cases must all be analyzed in order to determine a studio or platform’s responsibility in their classification of models/performers. There is not a simple solution and the potential liability will be in the millions of dollars for the largest of California adult entertainment employers. We already know this based on the past lawsuits filed against gentlemen’s clubs for misclassifying dancers as independent contractors rather than treating them as employees.
I cannot stress enough that as an employer you need advice from a lawyer with substantial California employment law experience. You should retain one to work with your current legal team to ensure that you are compliant otherwise you could be staring down the barrel of a misclassification class action lawsuit filed by a plaintiff’s attorney on behalf of all your employee models and performers.
For models/performers – having a California Inc or LLC may be risky if your safety and anonymity is an issue. Before you pay Legal Zoom or your CPA/accountant to set up your Inc or LLC – consult with an attorney with California employment law experience so that you have all the information needed to make a reasonable decision whether having a company is the right answer for you.
If you are attending AVN or Internext-Expo.com in January 2020 in Las Vegas, I will be doing several free seminars on AB5 and the issues I have raised in this article. It will be worth it for you to attend.
You can find my AVN and Internext seminar schedule here;
https://adultbizlaw.com/2020/01/05/avn-schedule-legal-qa-seminars-meetings/
if you cannot attend my seminars and would like to set up a paid consultation about AB5 and these issues, please email me at Michael(at)fattlegal.com
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