Exemptions and possibilities under AB-5: Should I Form an LLC?

Some AB-5-affected employees are creating LLCs in order to remain independent contractors. Find out more about AB-5 exemptions and how they may apply to you.

Assembly Bill 5 (AB-5) formalized a state supreme court ruling that reclassified what qualifies an independent contractor vs an employee. The law’s goal is to prevent firms from exploiting gig economy employees, a class of at least one million individuals. Although there are certain exceptions, the reclassification assures that more workers are entitled for a minimum wage, overtime compensation, and other labor safeguards.

Yet, not everyone who is touched by AB-5 believes the new reform is beneficial. Several businesses, such as haulage and media, are dissatisfied with the changes brought about by AB-5. Freelance writers are displeased with the new regulation since it restricts content submissions to just 35 pieces per magazine per year. Truck drivers, on the other hand, receive a temporary relief from AB-5 thanks to a court order to impose an injunction on AB-5 until the issue is completely litigated, which means the legislation does not apply to truck drivers until the matter is resolved.

Exemptions under AB-5

Some employees are founding LLCs and structuring themselves as a distinct company entity in order to maintain their independent contractor status and avoid losing pay. In reality, the California secretary of state’s office shows a 5.71% growth in LLC registrations from 2018 to 2019. When more contractors strive to qualify for the business-to-business exemption, AB-5 may play a role in this growth. In addition to potentially avoiding the impacts of AB-5, forming an LLC may assist gig workers protect themselves and their assets by limiting their personal responsibility.

Yet, it is possible that forming an LLC alone will not be sufficient to circumvent AB-5’s requirements. The most difficult obstacle for these new LLCs to overcome is demonstrating that they are undertaking work that is distinct from that of the employing organization. A judge, for example, may readily determine that a freelance writer is doing the typical function of a media organization by providing comparable text to what is published.

Several media organizations have taken more drastic steps to comply with AB-5, such as avoiding recruiting any California-based independent contractors and/or converting contractors to employees.

Formation of an LLC

A simple strategy to safeguard one’s assets and reduce personal responsibility is to form an LLC. An LLC (or Limited Liability Corporation) may also be a beneficial company structure to establish since it has less corporate governance obligations than other companies. If you are considering incorporating an LLC to avoid AB-5, you should consult with a lawyer first.