California’s AB5 and freelance software development

Question

Does California’s AB5 affect freelance software developers? If they own their own company (registered as Inc.) then they obviously are not looking to become an employee. They started their company to have autonomy and deliver work as they see fit. Does AB5 force them to no longer own a company and instead become an employee?

Answer 1

This is a duck

I might want this duck to work for me laying duck eggs (only not this duck because it's a boy duck). If I call this duck a chicken; it's still a duck.

Similarly, the duck may call itself a chicken. It may even believe it's a chicken. It's still a duck.

Now, I might want to call the duck a chicken because ducks have fewer workplace rights than chickens. Similarly, the duck might want to be a chicken because chickens can be more ... creative ... with their taxes; they might even be able to funnel their income through special C-corporations (C is for chicken). It's still a duck.

The law doesn't care what you call your relationship or even what you think your relationship is - it cares about what it actually is.

Is a freelance software developer a duck or a chicken?

The actual law can be found here. Starting from the beginning:

2750.3. (a) (1) For purposes of the provisions of this code and the Unemployment Insurance Code, and for the wage orders of the Industrial Welfare Commission, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:

(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

So a freelance software developer who is working without their client's "control and direction" about when, where and how they do their work (obviously, direction on the final product is OK), for a client who doesn't normally develop that type of software (e.g. writing a website for a hairdresser or even writing accounting software for a computer game developer but not writing computer games for a computer game developer) and that there exists such a 'thing' as independent software developers (which there are) can be correctly classified as a contractor. A person who goes into a software house to work on their in-house code is an employee.

So after the initial classification, there is a bundle of exemptions and exceptions. None of them are particularly relevant until we get to:

(e) Subdivision (a) and the holding in Dynamex do not apply to a bona fide business-to-business contracting relationship, as defined below, under the following conditions:

(1) If a business entity formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation (“business service provider”) contracts to provide services to another such business (“contracting business”), the determination of employee or independent contractor status of the business services provider shall be governed by Borello, if the contracting business demonstrates that all of the following criteria are satisfied:

(A) The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.

(C) The contract with the business service provider is in writing.

(D) If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.

(E) The business service provider maintains a business location that is separate from the business or work location of the contracting business.

(F) The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.

(G) The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.

(H) The business service provider advertises and holds itself out to the public as available to provide the same or similar services.

(I) The business service provider provides its own tools, vehicles, and equipment to perform the services.

(J) The business service provider can negotiate its own rates.

(K) Consistent with the nature of the work, the business service provider can set its own hours and location of work.

(L) The business service provider is not performing the type of work for which a license from the Contractor’s State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.

Summarising this: if the freelance software developer is part of a bonafide business providing services to the 'public' and not just to this employer then they can be correctly classified as a contractor.