AB-5 exemptions and opportunities: Should I form an LLC?

2 min read

In order to remain independent contractors, some workers impacted by AB-5 are forming LLCs. Learn more about AB-5 exemptions and how they may apply.

California's new law, Assembly Bill 5 (AB-5), codified a state supreme court decision reclassifying what constitutes an independent contractor versus an employee. The intention behind the law is to stop companies from taking advantage of gig economy workers, which is a class of at least 1 million people. While there are a few exemptions, the reclassification ensures that more people are eligible to receive a guaranteed hourly wage, overtime pay, and other labor protections.

However, not every person who is affected by AB-5 thinks the new change is positive. Some industries, like trucking and media are unhappy with the changes that AB-5 brings. Freelance writers are upset with the new law because the bill limits content submissions to only 35 articles a year per publication. Truck drivers, on the other hand, have a temporary reprieve from AB-5 due to a court decision to place an injunction on AB-5 until the case is fully litigated, meaning the law does not take effect on truck drivers until the case makes it way through the court system.

AB-5 exemptions

In order to retain their independent contractor status and avoid losing income, some workers are forming LLC's and establishing themselves as a separate business entity. In fact, the California secretary of state's office reports that LLC registrations increased 5.71% from 2018 to 2019. AB-5 could be a factor in this increase as more contractors attempt to qualify for the business-to-business exemption. In addition to being a possible way of sidestepping the effects of AB-5, registering as an LLC can also help gig workers protect themselves and their assets by limiting their personal liability.

That said, there's a chance that creating an LLC alone is not enough to skirt AB-5's restrictions. The biggest hurdle for these new LLC's to pass is proving that they are performing work that is different from the hiring entity. For instance, a court can easily find that a freelance writer is doing the usual work of a media company by submitting similar content to what is being published.

Some media companies have taken more clear cut measures for AB-5 compliance, including not hiring any California-based independent contractors and/or converting contractors to employees.

LLC formation

Forming an LLC is an easy way to protect one's assets and limit personal liability. An LLC (or Limited Liability Company) can also be a useful business structure to set up because they tend to have less corporate governance requirements compared to other entities. If you are thinking of forming an LLC as a way to bypass AB-5, it is recommended that you talk to a lawyer.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.