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Is your agency ready for California’s AB5 law on independent contractors?

Updated December 9, 2021

As we ring in the new year, there will be a lot of focus on compliance with the California Consumer Protection Act (CCPA) for PR and marketing agencies. Much less attention is being paid to a potentially much more immediate threat to agencies: California’s new rules targeted at preventing potential abuse of independent contractor status.

Known as AB5 after the bill number in the state legislature, it was originally aimed at gig economy headliners like Uber and Lyft. However, the new California law threatens to capture a much larger swath of workers. Already considered one of the toughest in the nation at enforcing classification of contract workers versus employees, the state now has staked out an even more aggressive stance.

Freelance journalists have been the focus of much of the coverage to date, with the American Society of Journalists and Authors and the National Press Photographers Association filing a lawsuit against the measure earlier this month.

Strict tests for independent contractor status

However, the same provisions that cover media outlets will have a similar impact on many PR and marketing agencies. The law explicitly caps the number of pieces that a writer can provide to a single employer at 35 per year. That means if you have a freelance writer who produces blog posts for your clients and is based in California, they can’t do more than 35 of them in any calendar year.

Many freelancers will be subject to a strict ABC test that requires independent contractors to prove that they truly are independent of the client/employer. The toughest one for many agencies to meet will be the requirement that their work is outside of the core business of the employer. If you have subcontractors doing account work, that’s a tough argument to make.

Tough decisions for agencies

On a recent episode of the Chats with Chip podcast, agency legal expert Sharon Toerek explained that agencies have some tough decisions to make. “In some cases, it’s going to be an easier path for agency owners to simply put those people on their payroll,” Toerek explained.

While switching independent contractors over to part-time employee status may not break the budget, it will erode profits and may make it tougher to find talent. After all, many independent contractors prefer to work that way and don’t want to take on employment status themselves.

In addition, adding to your employee headcount potentially subjects your business to more stringent legal and regulatory requirements (many laws and rules apply only to firms with a certain minimum number of employees).

No contractors in California?

Many agencies are considering simply refusing to use freelancers based in California at all. That’s the approach that Vox Media took with its SB Nation website as it ended its relationship with hundreds of freelance writers.

The solution doesn’t necessarily have to be that drastic, but it may be the simplest. If you still want to use contract workers in the largest state, you need to understand what the rules are. Some roles (including graphic designers and marketing professionals) may have more leeway than others. You need to start by understanding the classification rules.

Even those individuals who are “exempt” from the toughest requirements of AB5 still must clear some pretty high hurdles to meet California’s independent contractor rules.

More states likely to follow

While the Golden State may be ground zero for battle over employment status in the gig economy, other states (including New York) are looking to the AB5 model.

Every agency — but especially those using a virtual agency model or relying heavily on freelance/contract labor — needs to be thinking about the ramifications of AB5 even if they don’t have California-based workers today. Many states have already begun cracking down on existing independent contractor rules and that’s likely to continue to increase in the years ahead.

What your agency should do now

  • Engage your lawyer and/or accountant review the status of all of your independent contractors or freelancers. Start with those in California, but now is a good time to review your overall roster of workers to ensure proper classifications.
  • Evaluate the impact (both direct and indirect) of adding more part-time workers to your team instead of using them as contractors. Since most of the classification rules have gray area, you may find the risk isn’t worth taking, even if it does increase costs and subjects you to other employment rules.
  • Work with your accountant to ensure you are following appropriate tax laws. Having employees, contractors, and/or clients in a state may subject you to that jurisdiction’s sales or income taxes, for instance.

DISCLAIMER: I am not a lawyer or accountant and nothing here should be construed as legal or accounting advice. Please consult with your own professional advisers to determine the right course of action you and your business.

Chip Griffin

Chip Griffin

Chip is the Founder of the Small Agency Growth Alliance and a longtime agency leader and entrepreneur. He helps PR and marketing agency owners build businesses they want to own.

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