California Law Creates New Risk Factor

Last year, California enacted AB 5 imposing the so-called A-B-C test for employee status under California’s Labor Code.  The legislation basically extended the California Supreme Court’s holding in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018) which imposed the test in the more limited context of claims for wages and benefits arising under wage orders issued by the Industrial Welfare Commission.

Although aimed at the gig economy, AB 5 has impacted a wide range of traditional businesses.  For example, it was widely reported last year that Vox media had laid off hundreds of California free-lance writers in response to AB 5.  Not surprisingly, the American Society of Journalists and Authors, Inc., and National Press Photographers Association has filed a lawsuit in federal court challenging the new law (A hearing on California’s motion to dismiss is scheduled for March 23).  A ballot initiative measure is currently in circulation to change for “app-based” transportation and delivery drivers.  This month, the California Trucking Association succeeded in obtaining a federal court order enjoining enforcement of AB 5 as to any motor carrier operating in California.

I am music and I write the songs, but am I an employee?

Great uncertainty still abounds about the applicability, application and even constitutionality of AB 5.  Thus, it is not surprising to see issuers identifying AB 5 as a risk factor in their filings with the SEC.  For example, Warner Music Group Corp.  included this risk factor in its Form 10-K concerning independent songwriters and and recording artists:

“Although we believe that the recording artists and songwriters with which we partner are properly characterized as independent contractors, tax or other regulatory authorities may in the future challenge our characterization of these relationships. We are aware of a number of judicial decisions and legislative proposals that could bring about major reforms in worker classification, including the California legislature’s recent passage of California Assembly Bill 5 (“AB 5″). AB 5 purports to codify a new test for determining worker classification that is widely viewed as expanding the scope of employee relationships and narrowing the scope of independent contractor relationships. Given AB 5’s recent passage, there is no guidance from the regulatory authorities charged with its enforcement, and there is a significant degree of uncertainty regarding its application. In addition, AB 5 has been the subject of widespread national discussion and it is possible that other jurisdictions may enact similar laws. If such regulatory authorities or state, federal or foreign courts were to determine that our recording artists and songwriters are employees, and not independent contractors, we would be required to withhold income taxes, to withhold and pay Social Security, Medicare and similar taxes and to pay unemployment and other related payroll taxes. We would also be liable for unpaid past taxes and subject to penalties. As a result, any determination that our recording artists and songwriters are our employees could have a material adverse effect on our business, financial condition and results of operations.”