This Article is part of a series monitoring developments with regard to California Assembly Bill 5 and its impact on the entertainment industry.

California Governor Gavin Newsom recently signed into law Assembly Bill 5 (“AB5” or the “Bill”), which redefines the distinction between an employee and an independent contractor. AB5 is primarily targeted at gig economy companies such as Uber and Grubhub, whose workers had been classified as independent contractors up to this point. Proponents of AB5 argued that many gig economy workers worked full time but received none of the benefits commonly associated with full time employment—including overtime, minimum wage, and workers’ compensation. Consequently, AB5 was touted as providing increased benefits and rights to a growing gig economy workforce. An additional impetus for AB5 was the legislature’s desire to stem financial losses to the state as a result of worker misclassification, including the loss of tax revenues.

The Bill codifies a recent California Supreme Court case: Dynamex Operations West, Inc. v. Superior Court of Los Angeles (“Dynamex”), which created a test—dubbed the “ABC test”—for when a worker is classified as an independent contractor. Under Dynamex—and now AB5—a worker is an independent contractor only if the worker can satisfy all three of the following conditions:

(A) the worker is free from the control and direction of the hiring entity in connection with the performance of the work;

(B) the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) the worker is customarily engaged in an independently established trade, occupation or business.

While gig economy workers were the principal intended beneficiaries of AB5, some concerns have arisen that the entertainment industry may have become caught in the crossfire. Such concerns have specifically centered on whether talent can continue to use loan-out companies to furnish their services post-AB5.

Subsequent to AB5’s passage, most of the guilds and unions of the entertainment industry (the “Guilds”)—including SAG-AFTRA and WGA-West—issued a joint statement assuring their members that AB5 will not trigger a change with regard to the use of loan-outs in the entertainment industry. The Guilds’ view is that AB5 exempts the business-to-business relationships facilitated by loan-outs and that the Bill specifically contemplates loan-outs via certain rules applicable when one employer loans an employee to another employer. It remains to be seen whether the studios and other constituencies in the entertainment industry will adopt the Guilds’ stance. While not free from doubt, we believe good arguments can be made to support the Guilds’ position. Regardless, the entertainment industry may desire additional administrative guidance and/or a legislative fix so as to achieve more clarity.