AB 5 - FAQ
This is a growing library of Frequently Asked Questions about what I know about AB 5. The following is not pretending nor should it be considered to be a) legal advice; b) tax advice. I'm just a guy bloggin' about what I've learned about this law and how it affects me and my business. You and your business are unique and should be advised by only you, your lawer, and your tax advisor -- not some blog on the internet.
(Last Updated: 1/30/2020)
1) Do I really need to get a business license?
Yes, if you intend to exploit the B2B exemption in AB 5 as a bona fide business. In short, businesses get business licenses. DRA's opinion.
2) Do I really need to incorporate?
If you want to fall under the B2B exemption, you need to have some kind of legal entity. It does not have to be a corporation. It could be, but it doesn't have to be. The official list is: sole proprietor, partnership, or corporation. Read my checklist. (Notice I've removed LLCs because there is reason to believe that court reporters fall under the professional services category and thus limiting the liability is not allowed. Further reading.)
3) Why does the freelance court reporting industry deserve a carve-out exemption from AB 5?
- In the terms used in AB 5, freelance court reporters go through “a prolonged course of specialized intellectual instruction and study… from an accredited university, college, or professional school, as distinguished from a general academic education.”
- Our profession is overwhelmingly comprised of women and many of those women chose to be freelance court reporters exactly because the flexibility of being freelance -- as opposed to being employees -- permits us to determine when we work and for whom without compromising our work-time flexibility.
- We typically work for dozens of clients — court reporting agencies, law firms, government agencies/entities, and as per diem officials for courts — for very short periods of time for depositions and litigated subject matters that are complex and varied in nature involving many areas of the law, in different cities throughout the state.
- We are not the “gig economy” workers that AB 5 is designed to protect, but rather highly trained and skilled professionals with established professional and legal standards that govern our work.
- We have by our own preference and to our own advantage been working as independent contractors in our industry for decades.
- Notwithstanding the rigor of our licensing exam, reporters are not usually four-year college graduates and many, perhaps most, do not incorporate or adopt other corporate formalities. However, the nature of our business is that we are not and have not been taken advantage of by not being made employees, something we do not want and would hurt us financially.
- We choose when we wish to work, what types of legal proceedings we want to work on, how we will produce our work, and how we will prepare for each genre of legal proceeding we work on, which customarily varies greatly each day we accept a work assignment. We set and control our own rates, terms and conditions for each deposition and risk a financial loss. Some reporters at their own discretion charge an hourly fee or a per diem in addition to the transcript page rates. That includes the time and resources at our sole discretion that do not correspond to hours “present” to deliver our end product. We charge for our knowledge and expertise.
- If not exempted, AB 5 will require us to be hourly employees, which we view as an untenable prospect and which will surely result in a significant reduction in our income, something AB 5 was not meant to do.
- If freelance court reporters are not included in the list of exempted professionals our livelihoods will be affected because if the firms that hire us move to mandatory employment solely to avoid getting sued, we will no longer have control of our own work schedule or the professional end-product (transcripts) we provide.
- We will face logistically impossible challenges. And we view this as a risk to the entire profession and its long-standing history of being a place where women can freely arrange their own work schedules all the while enjoying the income that comes from being a licensed professional.
- Unlike some professions where employers have moved to independent contracting as a simple way of skirting employment, that is not true in freelance court reporting. If and when lawyers will schedule depositions is entirely unpredictable and, thus, the flow of business is almost entirely impossible to forecast. In such a setting, when a business has no idea on any given day how much or little business it will get, it makes little sense for a business to incur the consistent overhead of formal employment.
- Because the only way to monetize paying someone a full-time salary when there may be many days of no work is to pay that person less -- formal employment from a freelancer’s perspective is an unattractive and less lucrative option.
- Most court reporters were in part attracted to the profession because of the option of being able, as a well-paid licensee, to not be employees; to enjoy the good pay, independence, and flexibility of the independently contracting freelancing option. For working women without college degrees and who are often the primary caregivers of small children, the flexibility of freelance reporting – of being able to work at the times, places, and at the frequency of their choosing -- is especially critical.
- As employees court reporters’ pay will decrease sharply simply because revenues from certified copy orders, rough drafts and expedites will no longer be shared by the agencies for whom they are employed.
4) Why don’t freelance reporters simply incorporate and form loan-out companies in order to avail themselves of the B2B exemption within AB 5?
Because most freelance reporters already work as sole proprietors which is an acceptable entity formation under AB 5.
5) Then what’s the problem with simply using the B2B exemption instead of requesting a carve-out?
Freelance court reporting has historically passed the Borello test and the new B2B exemption is untested. How any particular court would rule on a B2B exemption from AB 5 is anyone’s guess. It is a dangerous and expensive risk that our industry does not want to depend on.
6) What is the big deal if freelance reporters have to become part-time employees for multiple agencies?
The answer to this question is actually another question: Please tell me of another profession where the work is being done by an EMPLOYEE who satisfies ALL of the following conditions:
- The worker previously passed the Borello test for decades as an independent contractor where they:
- were free from the hiring entity’s control;
- set their own conditions;
- set their own rates more than two times the minimum wage;
- accepted or declined assignments at will;
- purchased their own software and equipment;
- had their own independent contractors.
- The worker is required to complete a program that is accepted by a Board of California (or equivalent) that customarily involves a prolonged course of specialized intellectual instruction and study.
- The worker is required to pass a licensing exam and maintain an active license from the State of California.
- The worker is known in the law as an “officer” and permitted to administer oaths. (CCP § 2025.320)
- The worker is customarily hired by more than one company (typically from 5 to 15).
- The work is performed on specialized machinery ($6,300.00).
- The work is performed on specialized software ($3,995.00) that requires a custom and individualized dictionary usually built up over years in order for it to be used.
- The worker performs the work away from the worker's home but usually completes the work product at the worker's home.
- The worker draws an annual average salary of $79,500 ( US Bureau of Labor Statistics (BLS) - May 2017)
Tuesday, January 14, 2020