Episode 14: The PRO Act: The Death of Freelancing
This morning, we are discussing something very important to every single freelancer, the ProAct. If this goes into law, it could mean the death of freelancing. Today, I will teach you about what the ProAct is and what you can do about it to protect your rights as an independent contractor.
Today’s topic is urgent. You only have a short amount of time to protect your right to freelance.
If you live in California, you’ve likely already heard of a bill called AB5 (or Assembly Bill 5), which is a follow-up to Proposition 22 which was passed in Fall 2020. It has now evolved into a federal bill called ProAct (or the Protecting the Rights to Organize Act).
On a federal level, this bill passed the House in March 2021, and now it’s on its way to the Senate. Over the next few weeks, they will debate this bill and there’s a good chance that it will pass into law, but it doesn’t have to if you raise your voice as a freelancer and try to stop it.
AB5 and the ProAct both state that if you work too much as a freelancer for one company, you must be considered an employee. In other words, if you have a long-term client that you do more than one quick project for, that client must classify you as an employee. You don’t have the freedom to choose, you’re just forced into it.
What happens when you have other clients who also must classify you as an employee? A total mess, that’s what. It completely strips away your freedoms to be a freelancer. The good news is that later in this episode, I will teach you how to get around this bill. However, every freelancer still needs to speak up and defend their rights to freelance.
I’m going to start off by telling you what the already passed AB5 California bill entails because it is the model for the PRO Act. Essentially, this bill limits you to 35 annual submissions per client, and anything after that means you must put them on payroll.
This includes ANY of your long-term clients. If you’re a writer and you write 35 pieces for a video, that’s 35 submissions. The same goes for editing and so forth. Even if you only have a 10-minute project, this bill makes it count as an annual submission.
MBO’s founder and executive chairman said, “I don’t believe legislators realize the impact this had. This was really designed to create a safety net for people that needed it. And legislators didn’t realize at the time they impacted millions of people and thousands of businesses that are using freelancers.”
She goes on to say that freelancers do not want to trade in their freedom for structure. They don’t have to lose the ability to set their own rates and make their own schedules. She’s referring to the fact that the initial company that spawned this bill’s creation is Uber and others like them who hire a bunch of people to be independent contractors.
Yet, Uber tells them what their rate is, they’re treated like employees, but without the benefits of being an employee OR a contractor. They may have some flexibility with their hours, but that’s it.
Uber workers cannot scale an actual business for this reason. They’re not really freelancers. Sure, Uber had the right to run their business like that, but this could be regulated by the people. Choose not to work for them, and don’t be okay with this kind of working condition.
Clearly enough people are okay with that working condition, though, so they took the job. I think that the government is just using this situation to gain more control over businesses because they can’t stand not having the control.
One area of the AB5 bill that sparks a lot of concern is that freelancers who work frequently for a company must be considered employees. Most freelancers do regular work for their clients. If your services are a normal part of a business, you are classified as an employee, and you lose total control over your job.
Here’s the most insane part of this bill. Many freelance jobs are only a few hours a week. They act like the people who are working more than 20 hours a week for Uber represent all freelancers who only put a few hours in per client.
Most freelance workers are putting in way more than 35 pieces per year. You literally cannot convert a freelancer into an employee when that freelancer is only putting in 5 hours a week for a company. Then, they’d be getting paid full-time for only 5 hours of work. It defeats the whole point of hiring freelancers.
There are so many jobs out there that don’t have 30 or 40 hours of work available, which is why they hire freelancers in the first place. This would absolutely destroy the business who is hiring freelancers.
The funny part is that the government is acting like they’re helping freelancers with this bill. They’re making it look like the freelancer is being taken advantage of here. It’s just a full-on assault against freedom, here.
“Freelancer” has the word “free” in it for a reason and that scares people in the government. Self-employed people are the backbone of our economy because they’re the ones who build businesses and hire people, giving them jobs.
This bill is going to prevent new entrepreneurs from coming on the scene and building a business that can really help the economy. When the government gets involved in something that it shouldn’t, they typically end up causing more harm than good.
That said, I don’t think that everyone who’s behind this bill is trying to cause damage. They genuinely probably think they’re helping these Uber drivers and other independent contractors, but they don’t need to do that.
This is the perfect time to bring up “the Cobra Effect.” Essentially, the Cobra Effect happens when you’re trying to help, but you actually do more harm than good. It comes from a situation that happened in India when the government gave out bounties of cash to people who killed cobras because the cobras were killing the people.
However, eventually there were no more cobras left to kill, so people ended up breeding cobras just to kill them so that they could continue to rely on that government money. The government decided to end that incentive program, but then they ended up with a much larger cobra infestation than ever before.
The point here is that they would have been better off to not have even started the program in the first place. No matter how good government intentions are, oftentimes they just make things worse when they try to fix problems that aren’t theirs to fix.
The government has a very limited role, and that is to protect our natural rights. One of those natural rights is to allow us to pursue whatever career we desire, that’s the pursuit of happiness. If we want to be self-employed, then we should have the right to do so. We don’t have to be forced into being an employee, and as a business, we have the right to hire whatever client we prefer.
Freelancing is a win-win for both the freelancer and the business. As we’ve discussed before, even though a freelancer’s rate is technically higher, it’s still cheaper to hire them versus paying them a salary rate.
Through these propositions, the government is trying to put immense restrictions to the point where contractors might as well not even be considered contractors anymore. The ironic thing is that companies like Uber were exempt from this bill a few months after its initial signing.
While this bill was originally inspired BY Uber, now it’s not even “helping” Uber workers and it’s left here hurting the rest of us.
The truth is that people are actually losing their jobs because of this. Many companies will no longer be able to afford hiring these contractors, so they’re going to have to let most of them go. Small businesses won't make it. Freelancing contributes $1.4 trillion to the U.S. economy now, so that adds to the loss even further.
I am here today to not only explain the impact of this situation, but to also teach you how to buffer it if it does pass. You can protect yourself from this bill.
The ProAct was passed on March 9th of this year, and it’s being debated in the Senate over the next few weeks. Make sure that you write your senators and tell them that they’re insane if they consider this, and why that is.
Regardless of whether or not the ProAct gets passed, this mode of thinking will bleed into other states and it already has influence over some states that are considering it.
We are fairly politically neutral on this show, but in this case, I have to be a little more direct. This is a political issue that is directly impacting you as a freelancer. The further left you go on the political spectrum, the bigger the government gets, and the more anti-business it tends to become.
Conversely, the further right you go, the smaller the government gets, and the more freedom you have as a business. I personally do not believe in the two political party system at all, but you do need to be mindful of who you’re voting for if you want to continue being able to freelance. Petition your local government to not support this attack regardless of what political parties you support.
To give you more context, I’m going to directly read some text from this ProAct. The first section I’m going to give you states, “any individual performing any service shall be considered an employee, and not an independent contractor, unless the individual is free from control and direction in connection of the performance in service.”
In other words, if you’re getting any direction from your client, you have to be considered an employee. This could include something as minor as a client’s feedback on your work. If you’re not working in a vacuum, and most freelancers are not, then you have to be considered an employee.
The ProAct goes on to state that anyone who does unusual work that doesn’t fall under the usual course of business can be exempt. As you can see, they’re trying to word it to where pretty much no freelancers will be exempt from this.
Basically, employee businesses do not like it when you work for someone else, either. This law further strips away your rights as a self-employed contractor. The rest of the law has to do with unions, and it essentially forces freelancers to join unions. We won’t even get into the agenda behind where this is going, but overall, now you’re an employee who has to join a union.
So, what do you do about this? The first thing is of course, raise your voice and encourage other freelancers to do the same. If you live in California, stand up to your local government. Short-term, you need to start an LLC or a corporation, which I recommend doing anyway regardless of this bill.
Unless you really do only intend to freelance as a temporary job on the side, you need to be protected from bills like this. If you start an LLC, you’ll no longer be considered an independent contractor.
You’ll still pay self-employment taxes according to the IRS because the profit and loss from your LLC is passed onto your personal return, but you’re not considered an independent contractor to your client because they’re working with your business, and not you individually.
You’re providing your EIN number that you get when you create an LLC or a corporation. You no longer fall under the jurisdiction of this law because now, on their expense sheet, your business is just an expense that they paid for. It’s no different than me paying for services such as QuickBooks and PayPal.
I’ll talk about why I chose to create a corporation rather than an LLC in a later episode, but an LLC is good enough to protect you. With this, you’ll also need to create a separate bank account, which you should do anyway, again. Open up a business-specific account. This is important for taxes as well.
Do not mix your personal finances with your business finances. I made that mistake in the first year when I was freelancing, and it was such a mess during tax season. Another reason is that for your own legal protection.
If your personal finances and your business finances are mixed and you’re getting 1099s and you’re dumping that income into your personal account, this can cause issues if your business were to get sued. This way, if your business gets sued, YOU are getting sued and your personal finances are at risk.
As you can see, this is something you need to invest in regardless of the ProAct. And you want to start your LLC officially with legal advice. Google isn’t your friend when it comes to this. Setting up an LLC is serious business and it’s best to hire a professional to help guide you. Every state has different laws regarding an LLC as well, so that’s also something to consider.
You don’t have to hire the most expensive lawyer, and you may even know someone in the legal system who can help you out, but definitely seek proper guidance. Don’t try to start it all by yourself.
Further, when a potential client sees that you have an LLC, they’ll take you more seriously and see that you’re just doing this lightly. Further, if you use programs like Upwork or Fiverr, going through a service like this gives you a bit of a buffer because you’re avoiding those 1099s.
This is because it doesn’t itemize freelancers on Upwork individually. If I pay 5 different freelancers through Upwork, it shows up as one sum fee of all that I paid to them via Upwork. It’s not in my books that I hired an independent contractor for this service or that service. It just shows that I paid Upwork. So, you’re paying Upwork, and Upwork is paying the freelancer.
Another good reason to set up an LLC is that you can then use your EIN rather than your SSN. That’s a security issue that dissolves when you start an LLC. As you can see, there are many perks to getting an LLC.
Well, that’s all for this episode. I really hope that this inspired you and opened your eyes to what’s currently going on within our government relative to freelancing. I hope you join me in doing something about this, whether it’s by spreading the word, or contacting your local government officials.
Definitely reach out to me if you have any questions or comments. I look forward to talking to you during our next early morning conversation.
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