Dynamex / AB 5 Fact Sheet – Everything You Need to Know !

Dynamex decided April 30, 2018

Dynamex makes it harder for companies to misclassify because it uses a simple and objective test for whether a worker is an employee or a contractor. Under the “ABC Test,” if a company wants to classify a worker as a contractor, the company must prove all three of the following: (1) the worker is free from company control and direction, (2) the worker performs work outside the usual course of the hiring entity’s business, and (3)the worker is customarily engaged in an independently established trade of the same nature as the work performed.

Why did the court decide in favour of the workers in Dynamex?

In California, misclassification audits conducted by California’s EDD from 2005-2007 recovered $111,956,556 in payroll taxes, $18,537,894 in labour citations, and $40,348,667 in employment tax fraud.  In the Dynamex case, the DLSE estimated that misclassification costs the state $7 billion annually.

Fully Exempted Workers:

Insurance agents, physicians, dentists, veterinarians, psychologists, lawyers, engineers, private investigators, architects, accountants, securities brokers regulated by FINRA, direct salespeople, grant writers, fine artists, payment processors, real estate agents, repossession agencies, travel agents, graphic artists.

Provisionally Exempt Workers:

Human Resources administrators and marketing consultants are exempt under certain conditions, as are commercial fishermen, manicurists, aestheticians, barbers, and cosmetologists. Freelance writers, press photographers, and editorial cartoonists are only exempt if they produce fewer than 35 pieces per outlet they contribute to.

Applicability to the Adult Industry:

Live streaming models, pornstars/performers, chat/phone/text sex operators, writers, video editors, possibly programmers/web designers, or anyone else hired that performs a service for your company.

Not Applicable to:

Digital sales – models that sell clips on clips stores

Statute of Limitations Wage Claims:

In California, workers have up to 3 years to file wage and overtime claims for oral employment contracts and 4 years on written employment contracts. Wage and overtime claims can be brought on a class action basis under California’s Private Attorney General Act.

Penalties For Underpaid Wages & Overtime:

An employer may have to pay a penalty of $100 for the first pay period and $200 for subsequent pay periods. This penalty is per employee. When the claimed is file as a private attorney general, the state gets 75% of the money collected; the workers retain 25%.

Prior to Dynmaex – Borello Case:

1. Whether the person performing work is engaged in an occupation or business that is distinct from that of the company;
2. Whether the work is part of the company’s regular business;
3. Whether the company or the worker supplies the equipment, tools, and the place for the person doing the work;
4. The worker’s financial investment in the equipment or materials required to perform the work;
5. The skill required in the particular occupation;
6. The kind of occupation, with reference to whether, in the locality, the work is usually done under the company’s direction or by a specialist without supervision;
7. The worker’s opportunity for profit or loss depending on his or her own managerial skill (a potential for profit does not include bonuses);
8. How long the services are to be performed;
9. The degree of permanence of the working relationship;
10. The payment method, whether by time or by the job; and
11. Whether the parties believe they are creating an employer/employee relationship.

What if the independent contractor has an LLC or an Inc?

In order to prove that the IC is truly an IC, or a “bonafide business to business relationship” – it will be on the hiring entity to prove all of the following;

(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.

So what does Dynamex and AB 5 mean to you?

If you are in California or have independent contractors in California applies to you.

If you are in California, does AB 5 apply to all of your workers outside of California? It may, it depends on what your agreements say.

If you are a studio/content producer, your directors, editors, models/pornstars/performers are employees. They have always been before but now that Dynamex and AB5 are law, it will be much harder to argue that they are independent contractors under Borello.

If you are a platform where models “sell” their services – not digital clips – or in addition to clips, if they receive tips for texts/chats/phone/DMs – they will be considered employees. It is not clear how minimum wage issues would be applied to the time spent online interacting vs. time spent online uploading digital clips.

If you are a cam site or independent studio, live-streaming models are now considered employees.

Web designers and programmers may also now be considered employees.

So what do I have to do as a platform, studio or cam site?

Immediately switch over and re-classify your independent workers to employees.

You will need to follow California law for minimum wage, overtime pay, meal and break periods. You will need to accurately track all hours worked, as well as overtime, and rest/meal periods. You cannot leave this up to your employees to track.

You will need to pay payroll taxes.

You will need to secure workers’ compensation insurance.

You will need to have an employee handbook and develop human resource materials. In the employee handbook, utilize an arbitration agreement and a class action waiver to limit your potential retro-liability for past wage, overtime and meal/rest claims and lawsuit. Be aware that requiring employees to use arbitration means that you will need to cover all costs for the arbitration, and if you lose you may have to pay your employees’ attorney’s fees.

Other Issues:

Franchise Tax Board:

Now that you are re-classifying your independent contractors as employees you may face additional scrutiny from the FTB and may be assessed late fees and penalties for failure to pay payrolls taxes. Please see your accountant and CPA about this issue. Your employees may also face scrutiny if they have never filed taxes before.

Contract with an HR and Payroll administration company to handle the day-to-day requirements of running a company and keeping up to date with employment issues.