What Does California AB5 Mean for Business Owners?

Let me just start this by saying, I’m not your lawyer. If you have an attorney and are concerned the below information may impact your business, please contact your lawyer and discuss how you can address. If you don’t have a lawyer and have concerns, now would be a good time to start interviewing. But nothing below is going to give you the exact solution for YOUR particular business and is general information. That being said, here’s what I think after following this for a while:

         Ever since the Dynamex decision came down in 2018, the business community has been abuzz with how the test will apply to them. Will their industries be affected? Were there any possible exemptions?

         ICYMI, the Dynamex decision completely upended the entire way independent contractors were handled; effectively reclassifying all workers to employees, unless they could meet a certain test that was wildly different from the test previously used to determine classification of workers. That test is known as the ABC Test. Effectively, it states that all workers are considered employees by default, unless the hiring company can meet a three-part test:

  1. The worker is free from the control and direction of the hirer in performance of the work (both if in writing and in practice);
  2. That the worker performs work that is outside the usual course of the hiring entities’ business; and
  3. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The part of this test that had companies freaked were prongs B and C of the test. Nobody was more freaked than those participating in the “gig” economy. Companies particularly like Uber and Lyft already had ongoing cases in the courts. But, they were hanging their hats on falling outside prong B and that the test didn’t apply to them.

         California has answered back with AB5 passing the Assembly, and heading to Governor Gavin Newsom’s desk for signature as early as tomorrow. AB5 aka “An act to amend Section 3351 of, and add to Section 2750.3 to the Labor Code, and amend Section 606.5 and 621of the Unemployment Insurance Code, relating to employment, and making an appropriation therefor” (that’s a mouthful), introduced by Assembly Member Lorena Gonzalez, seeks to address the rise of worker exploitation by clarifying how the Dynamex case will apply to those in the “gig” economy.

         The bill (which can be read in its entirety here), in essence says that the ABC Test will apply, unless there’s already a statutory exception from employment status, and also clearly exempts certain occupations. These exemptions are:

  • licensed insurance agents;
  • certain licensed health care professionals;
  • registered securities broker-dealers or investment advisers;
  • direct sales salespersons;
  • real estate licensees;
  • commercial fishermen;
  • workers providing licensed barber or cosmetology services; and
  • others performing work under a contract for professional services, with another business entity, or pursuant to a subcontract in the construction industry.

If your business falls outside of these exemptions, then the ABC Test will apply. However, if a court rules in an individual case that the ABC Test doesn’t apply, then the Borello standard applies. This is a much less stringent standard and is also known as the “economic realities” test.

         In arguing that the ABC Test doesn’t apply, companies like Uber and Lyft are claiming that the work performed is outside the usual course and scope of their business, as they do not provide rides, they provide technology.

         So, how does it apply to me? Will I get in trouble right away if my workers have been misclassified this whole time? Well, not necessarily. The bill has stated that it will not be applied retroactively. Unless you already have an ongoing suit prior to the enactment. So long as you aren’t already in litigation, you can clean up your business practices by January 1, 2020. Yep, it goes into effect come January 1.

         There’s more. If you took action to reclassify your workers from ICs to employees already, and you believe your workers don’t meet the ABC Test, it’s unfortunately too late for you. You can’t use AB5 as a reason to reclassify workers from employees back to ICs.

         If a business falls outside of one of the exempted professions (commercial fishermen and manicurists have exemptions, but only until 2022 and 2023), a business would be wise to evaluate all independent contractor relationships it currently has, review all of their agreements, and determine whether the work being performed meets the ABC Test. This should be done with the understanding that misclassifying workers carries with it high litigation risk and severe financial consequences if you fail in court. If, however, a court determines the ABC Test does not apply, only then will the looser Borello standard apply. For many businesses, the cost of a potential employment lawsuit far exceeds the costs of re-classifying its workers.

         The case law still remains to be fleshed out. Until then, businesses should start housekeeping in preparation of 2020.


An Internet Lawyer’s Top 3 Business Tips

We are all new to the online era of business and figuring out how to do it well comes with a lot of trial and error. I am offering my top 3 business tips to help your business thrive in internet culture.


1. Prepare as if your business will succeed. A lot of new business owners I know approach their businesses as though they don’t need something, because they’re “not there yet.” One example I would use is creating a formal business structure for your company. By the time you “need it,” your business is likely pretty far along, and changing the structure, setting up new bank accounts, getting your EIN changed over, are all things that take time and focus away from your business.

It’s like riding a bike and slamming on the brakes while you’re already riding down the hill. If it’s only you in your business, dissolving an entity is a pretty painless process. Plus, the added protection it provides you are pretty significant. I set myself up as a corporation not knowing whether I would be successful, or whether I could “afford it.” But, at the end of the day, I’d rather approach my business with success in mind rather than not doing something, because it “might” not work out. I would also add that caution when entering into a joint venture or partnership is also a huge component of your business’ overall success. Get something in writing if you’re going down that path. Immediately. 

2. Number 1 leads into number 2. Budget for professional services early on. I know this may sound pretty self-serving, but I’m not talking about just lawyers. I mean accountants, financial planners, and other professional services you may need. Chances are, these people are not free, and you cannot do everything yourself. When figuring out how much capital you need to “start” your business, consider tacking on an additional 2-3k for professionals. This isn’t an ungodly sum, considering many websites cost twice as much. Also, start vetting professionals early on.

Many attorneys, accountants, and financial planners will meet with you for no charge. I offer a 30-minute no-cost consultation to any prospective client. That way, you can determine how a professional structures their fees, whether you like them, whether you feel like you can trust them, etc. Additionally, it ensures you have someone in your corner “when” the need arises, and trust me, the need always arises at some point. Whether you’re facing a legal problem, an audit, etc. It’s always less expensive to help a client with whom I’m already familiar with. Damage control is often more costly than spending the money up front to prevent something from happening. 

3. Know your competition. As a branding and trademark attorney, I would be remiss if I didn’t mention this one. Hopefully, you’ll have an attorney on your side who understands your business and the brand you’re trying to build. Protecting that brand will become crucial to developing goodwill in your business, but it will be a real pain in the butt if you don’t know who else is out there doing something similar/identical to what you’re doing.

You’d feel pretty stupid if you decided to brand yourself as Facebook without knowing about Facebook. Not to mention, you’d wind up with a real headache from Facebook’s legal team. Before you start spending hard-earned dollars on branding, logos, business cards, and websites, hire someone to help you figure out whether you may run into issues with your proposed brand. Just because there isn’t a registered trademark with the United States Patent and Trademark Office, doesn’t necessarily mean you’re in the clear, either.

What is the fair use defense?

Many times, I get asked by clients if they can use someone else’s intellectual property because it’s “fair use.” This term gets thrown around a lot – as if it were some kind of legal permission slip to infringe upon another’s intellectual property without repercussion. Before you can even begin to unpack whether a fair use defense is available to you, it’s important you really understand what it is.


To be clear, if the unauthorized use of another’s intellectual property is deemed “fair use,” that doesn’t mean the use is inherently allowed. Instead, fair use refers to a legal defense afforded to someone who has been sued for, most commonly, copyright infringement. Simply put, the fair use defense permits the unlicensed use of copyright-protected works, even though that use of the work might not be allowed or even, expressly prohibited, by the owner.


Section 107 of the Copyright Act provides the framework for determining whether an unauthorized use would be classified as fair use by identifying types of uses: criticism, comment, news reporting, teaching, scholarship, and research. These are examples of activities that may qualify as fair use, depending upon further examination and evaluation. Typically, it is a judge who will make the final determination as to whether certain uses qualify as fair use. This defense creates a limitation to copyright protection that is intended to balance the interests of copyright holders and the ability to use creative works. Without this defense, any use of copyrighted material without permission or license by the owner could be deemed actionable infringement.


So, what does that mean to someone who doesn’t speak lawyer? Let’s use an example. Say you’re a teacher. You decide to show a movie in class today. You want to keep it somewhat educational, so you show the BBC program, Blue Planet. You grab the DVD (or I suppose it’s more likely to be through the Netflix app these days), pop it in, and play the film. The students are happy, and you are happy because you are able to catch up on grading some papers and get home at a reasonable hour. If you’re a teacher, I bet you can probably relate to this and are nodding your head. But, I bet not a lot of teachers would question the legality of doing what they did. Technically speaking, you violated someone’s copyright by playing the film. “What the heck? How did I do that?” you ask. Well, copyright is a very broad term that covers a lot of stuff. It’s more like a bundle of rights that protects everything from artwork to software. One of those rights is being able to make money off the stuff you create. In this example, the stuff created was the video you just showed to your class, and the one who created it is the BBC. Copyright lets them, and only them, use their movie in the ways they see fit.  If someone uses it without their permission, they can sue them for copyright infringement.


Why aren’t more teachers freaking out about showing movies in their classrooms? Because of the fair use defense. One of the uses covered as a “permissible use” of someone else’s material is for teaching. In this case, the teacher showed it for an educational purpose and wasn’t making any money off it. And BBC knows this kind of use is going to happen. Hence why it’s not going to go around suing people for doing this. They know if they do, the teacher is going to say it’s fair use and a judge will agree. This example is just one of many types of fair use that fall under the defense.


I know what you’re thinking. You’re thinking, “That’s great! So, I’m a teacher, and because of that, I can always show movies to students without worrying about a lawsuit.” And you’d be wrong. The reason fair use is so tricky, is because of the facts surrounding how the copyrighted material is used, matter. One little change in facts can take use from being squarely within the fair use defense to being infringement. And copyright infringement suits have big consequences. Most copyright infringement lawsuits provide statutory damages to the winner. This means that there is an amount of money literally written into the law that requires you pay a certain amount of money for every time you infringe. This can often be in the tens of thousands of dollars.


That’s why it’s so important to not take chances when it comes to using someone else’s intellectual property, especially if you are in the business of content creation/reproduction. People using social media apps like Instagram and Facebook to generate income and run businesses are becoming savvier when it comes to the laws on reposting/publishing original content. Earlier established accounts like @Fuckjerry and @thefatjew who made millions of dollars off using unlicensed copyrighted material to re-posting then sell may have been able to get away with that behavior when social media etiquette hadn’t been established. But, as for the legality, that behavior has never been legal. And you better believe businesses are now willing to sue to protect the content. That’s why simple attribution isn’t always enough. The context in which you use someone else’s content matters and the ramifications of unauthorized use can be huge. A seasoned intellectual property attorney can be helpful in helping you decide whether your intended use of someone else’s material is worth the risk.

(fair use image by: Electronic Frontier Foundation)


Listen here for a recent interview with Kristen Roberts on Harder to Kill Radio


“I don’t want to be pigeon-holed. A lot of law firms, when you work at a firm, there’s this goal. The goal is to always become a partner, become a part owner. Well, how do you become a partner? Traditionally speaking, you bring in business and you build up a good business. That’s what makes you valuable to a company. I looked at that and I went, if I’m going to do that anyway, why don’t I just do it for myself? Then at least I get to call the shots and make the rules.”

Thanks to a New Supreme Court Ruling, California Employers May Want to Think Twice Before Hiring Independent Contractors

Companies are always looking for ways to lower their bottom lines, particularly when it comes to their staffing. Similarly, more and more workers are looking for flexibility to pursue personal business ventures and alternative work avenues outside of the traditional nine-to-five. Freelancing, or working as an independent contractor, is an attractive option for both California employers and workers.

But for California employers, a recent Supreme Court of California decision has severely limited employers’ abilities to classify workers as independent contractors. Because of this recent decision, employers may now be unwittingly walking into a trap when hiring someone as an independent contractor.

Dynamex Operations West, Inc. v. Superior Court was based on a class-action lawsuit waged against Dynamex Operations West Inc, a document and package company with big-name clients such as Amazon. The suit alleged that Dynamex sought to misclassify its delivery drivers and label them as independent contractors instead of employees.

Affirming the Court of Appeals’ prior judgment, the California Supreme Court clarified the definition of  “independent contractor,” providing lower courts with more specific guidelines to follow when determining whether a worker is an  “employee” versus an “independent contractor.”

The Dynamex Three Part “ABC” Test:

Previously, classifying a worker as an independent contractor was set forth in a multi-factor “totality of the circumstances” test set forth in the case S.G. Borello & Sons, Inc. v. Department of Industrial Relations.

Although the determination regarding independent contractor vs. employee in Borello examined a multitude of factors, the most important factor was the level and degree of control the employer had over the worker.

Generally speaking, the more control the employer had over how, when, and where the work was performed, the more likely the worker was an employee. Thanks to the Dynamex decision, the California Supreme Court has substantially narrowed employers’ ability to deem a worker an independent contractor.

Under the Dynamex three part test, the business has the burden of proving that the worker meets all three of the factors in order to be considered an independent contractor:

  1. They must show the worker is independent from any control of the employer;
  2. The worker performs in a capacity that is outside the core business of the company; and
  3. The employee has an established trade, business, or occupation outside of their employment

Under the Dynamex test, it is difficult to see how any worker could ever be classified as an independent contractor. Consider the following example: A successful blogger enters into an independent contractor agreement with another blogger to write articles for his/her website from her home.

Under the new test, it is very likely the employer will fail at least parts A and B of the test. To some degree, the blogger will need to control when the articles are finished and how they are written. Not to mention, the services are most certainly a core part of the blogger’s business (article writing).

Implications and Penalties for California Employers:

It is clear that those hit hardest by the ruling will undoubtedly be California employers using independent contractors. Fines for misclassification of an independent contractor can be levied against the company both from the state as well as from the IRS.

These fines can range from $5,000-$15,000 per violation for state labor code violations to a minimum of 1.5% of the wages paid levied by the federal government. And there’s even more bad news for employers: some of the labor code violations are enforceable through the California Private Attorney General Act, meaning attorneys’ fees and costs are recoverable by the misclassified worker, thereby further exposing California employers.

Hiring an independent contractor is an attractive option to most employers, especially small businesses. It gives a company the opportunity to have someone work fewer hours without the heavy burden of paying employment taxes or any state/federal withholdings. It also alleviates the employer from being required to make certain retirement contributions it offers to employees.

Not only does hiring an independent contractor appeal to businesses, it also appeals to workers. Many people are bootstrapping their own businesses and do not want to be beholden to a company where they are required to work particular hours. Others want the flexibility of indicating whether they will accept certain work and/or projects from their employer.

However, with the imposition of the Dynamex ruling, it is difficult to see how the incredibly successful “gig” economy can survive.  

This ruling has many business owners concerned about the consequences of mislabeling someone as an independent contractor and being challenged. As a result, we may expect to see a slowdown in the hiring and creation of jobs, particularly in the small-business sector.

If you are an employer in the state of California and have independent contractors working for you, it is vital that you understand how misclassifying someone as an independent contractor versus as an employee can affect your bottom line. Contact Trestle Law today to discuss your businesses’ employment needs and how you can protect yourself.


Top 5 Legal Mistakes New Business Owners Make

Getting the courage to take a leap into entrepreneurship is tough on its own. Believe me, as a former law firm employee turned law firm owner, I know the challenges new business owners face. But, it’s time for me to put on my lawyer hat, and give you a rundown of the top 5 legal mistakes new business owners make time and time again.  Hopefully, this list will help you avoid these pitfalls and get you moving in the right direction!

Failing to Budget for Professional Services

For many individuals, a business starts with a unique idea. Those marvelous ideas are honed, tinkered-with, and developed over late nights, early mornings, and lost weekends. For the majority of entrepreneurs, the leap from full-time job to business owner is not one taken lightly. The majority of entrepreneurs that I have worked with spend considerable time, energy, and funds before they fully commit to leaving their full-time jobs. They set aside capital for operating expenses, government fees, and office equipment.

The amount of energy and focus people are willing to dedicate to starting a legitimate business venture begs the question: why are so many entrepreneurs hesitant, or even downright against, setting aside startup capital to pay for professional fees?

Everyone knows lawyers and accountants can be expensive. But it can be even more expensive if you are stuck with fines and penalties for doing something incorrectly. One of the best pieces of advice I’ve received from a business owner friend of mine was, “work on your business, don’t work in your business.” It’s important to remember what your strengths are. Nobody is an expert at everything. It is better to hire out, contract out, or delegate out the work you know isn’t in your wheelhouse, and spend your time on your strengths.

Now, I know there are those do-it-yourself companies out there that can get your basic business structure set up, but those companies typically use boilerplate documents that don’t always contain the right provisions for your business. A well-crafted shareholder agreement or operating agreement is going to be essential down the road when you’re looking to sell your business, or solicit potential venture capital. No investor wants to give their money to a business with messy books.

Plan to set aside about $2,000-3,000 for professional services. I know that sounds expensive, but let’s be serious. A well-crafted website can set you back at least $2,000, so investing in something as crucial as your legal and financial stability will be well worth the money spent. Start vetting accountants and attorneys early on – preferably before you launch your business. Many attorneys offer consultations at no charge to you, so you can at least understand what kind of person you want to work with.

Finalizing your Brand without Knowing the Competition

I can’t stress this one enough. Your business is your brand. Consumers find you, identify you, and relate to you by the brand you choose. However, developing a brand that infringes on another already-existing brand’s rights can prove disastrous for a new business. You can be faced with litigation, damages, and ultimately have to change your business name. Imagine investing time, money, and energy in a business name and logo, only to get a cease and desist letter from an attorney saying you are infringing on their client’s trademark. Believe me, it happens more often than you think. I once helped an established local restaurant stop a fledgling restaurant in another county from using the same restaurant name.

Ultimately, the defendant restaurant wound up having to change its name. Hiring an attorney to perform a clearance search can really save your business dollars in the long run. Remember, trademark rights in the United States are not based on the first to register, but the first to use a particular mark in commerce. So, you can still infringe on another’s mark even if they do not have a federal trademark registration. An experienced trademark attorney can perform a clearance search and evaluate potential likelihood of confusion with other existing trademarks and common law marks that are in use.

Hiring without Developing HR Guidelines

Human Resource (or HR) guidelines provide a framework for how employees are expected to behave. They describe the company’s standards, objectives, and goals for all areas of employment. This includes termination, recruitment, benefits, compensation, and employee relations. HR Guidelines provide instructions on how staff should be performing their jobs and behaving. These are the policies that keep everyone on the same track, as moving parts of a machine designed to achieve a specific goal.

Without them, the parts cannot work in tandem, and you will end up with a fragmented, and ultimately broken workforce. This may seem like a dramatic way to look at things, but believe me, I’ve seen first-hand just how important proper guidelines can be in the workplace. People like to be aware of exactly what is expected of them. HR Guidelines make workers feel more confident and capable of working as part of a team. No business can survive without them.

Failing to Incorporate

The word ‘corporation’, stems from the Latin term, ‘corpus’ which means ‘body’. When a company incorporates, it evolves into a legal person in the eyes of the law. As such, it can be sued, sell and buy property, be taxed, establish contracts, and even commit crimes. Perhaps the most important aspect of a legal corporation, is that it provides protection for its owners regarding personal liability. A corporation becomes a legal entity, separate from those who created it.

Most often, I hear business owners state that they are not “quite there yet” with their business to warrant incorporating. That’s an understandable viewpoint, considering a corporation or LLC require certain annual/biannual filings, governmental fees, and added tax concerns. However, there’s that saying that goes, “dress for the job you want, not the job you have,” and I think the sentiments of that adage can apply to a business owner’s decision to incorporate. If you are running your business, and suddenly, you are “big enough” to incorporate, not only are you going to have to deal with the hassle of setting up your legal entity while also running your business, but you will need to change your bank accounts, and you will have to talk to your accountant about how transforming into a legal entity will affect your taxes for the year. Often times, while you may be worried about the cost of setting up the entity, you will benefit from its structure in the long run.

No Shareholder Agreements

Even though you’re not legally required to have a shareholder’s agreement, I can’t recommend it enough. And I’m not just talking an agreement that outlines how the profits will be shared. I believe that the most important part of a shareholder agreement is your exit strategy. Sadly, most US marriages end in divorce. A business relationship is very similar to a marriage in terms of tying yourself financially to another person. When the relationship ultimately breaks down, emotions run hot, making any kind of decision regarding the business much more difficult. In addition to an exit strategy, shareholder agreements ensure that everything remains fair and straightforward within a company. They ensure that responsibilities for shareholders and the running of the company have been properly planned. Without formal shareholder agreements, you increase the potential for conflicts arising between shareholders, leading to a disrupted and ineffectively run business.

I once witnessed the dissolution of a company where shareholder agreements weren’t implemented, due to the personal circumstances of one individual. Because there was no formal paperwork, each shareholder’s financial interest in the company was broken down and destroyed. Remember, a shareholders agreement can assist in raising finance from creditors and banks. It demonstrates the stability of a business, and shows that you are a sensible, forward-thinking business.