Episode 16: How The PRO Act and AB5 Impacts Freelancers (Complete Guide)
Is the PRO Act really a threat to freelancers? Today, in this follow-up episode, I’m going to dive deeper into the PRO Act and the California Assembly Bill 5 to give you a more complete guide on what these laws mean, along with what their key differences are.
The word “free” is in freelancer for a reason. You’re FREE to work whenever you want, wherever you want, and however you want. You set your own hours and you determine your own income. Further, you’re free to have multiple clients, and you get to choose who those clients are.
Like California’s AB5 law, the PRO Act could very well take these freedoms away from us. But it’s important to understand the differences between the PRO Act and AB5, because they’re not the exact same.
AB5 went into effect in January of 2020. Since that time, many freelancers in California have suffered because of it. They’ve lost their jobs because companies can no longer hire freelancers thanks to AB5’s new rules.
In November of 2020, a modified version of the bill called Proposition 22 came through, exempting certain freelancers from this law. Regardless of whether or not they got exempt didn’t really matter at this point, though. This is because California businesses don’t understand the bill due to its unclear nature, and in turn, they’re afraid to hire freelancers at all. Breaking the law is not exactly in a business’s best interest, so they don’t see this as a risk worth taking.
Now, the PRO Act is a national bill that passed in the U.S. House in March 2021. This bill is on its way to the Senate right now. While this bill doesn’t have a huge chance of passing the Senate, it’s still possible that it may. And this bill affects all freelancers across the United States.
I’ll explain this by using the “ABC Test.” This test is nothing new, and it has been used for years to get worker’s comp and unemployment benefits, it’s just not to classify a worker in general in California. The ABC Test states that an independent contractor must be classified as an employee to the company hiring them, UNLESS they meet all three of these conditions:
A. The worker is free from the control and direction of the hiring entity in the connection with the performance of the work.
B. The worker performs work that is outside the usual course of the hiring entity’s business.
C. The worker is customarily engaged in an independently established trade occupation or business of the same nature that is involved in the work performed.
Let’s start with A. This part of the law can easily be interpreted as the company giving the freelancer feedback. But it can mean more than that. It can also mean that the employer is telling you where and when to do the work, and that they can also control how much the “freelancer” is getting paid.
Let’s take a look at B, which is the hardest section to pass the ABC test, and it’s also the most frustrating part. Unless you’re a brick and mortar type of freelancer, you’re going to be participating in work that’s part of the business’s usual routine. In this case, companies would have to hire all their freelance contractors as full-time employees, even though they only need a few hours of work from them per week.
C is more sensible, stating that you are a freelancer who either has multiple clients, or who wants to have multiple clients. You’re making your services publicly available like a normal business would, not working 40 hours a week for one business or client.
I agree with A and C, which both pass the ABC Test. However, I still don’t think these statements should be put into laws. The free market will allow this to happen, and the government just doesn’t need to get involved in it.
B is where freelancers are getting screwed. One key difference between the PRO Act and AB5 that people aren’t understanding is that in the PRO Act, the classification of making a freelancer become an employee only applies for the purpose of giving the freelancer union bargaining rights.
Basically, you’re still a 1099 independent contractor, but you’re being classified as an employee for the sake of having union rights. AB5 is more damaging than the PRO Act is, but I’m still very concerned about both. Here’s why.
First off, if you give them an inch, they’ll take a mile. Once you get on the road to taking away freelancer rights, it’s only going to get worse. But the biggest reason I’m concerned about the PRO Act is that even if you're exempt from the AB5 law in California, many employers don’t see the differences between these two bills.
As a result, they don’t want to accidentally break the law by hiring a freelancer, so they just don’t. There’s actually some discrimination going on about this in California already, with some some job postings specifically stating not to apply if you’re a freelancer. This same thing is going to happen if the PRO Act is passed.
I also need to touch on union bargaining rights here. Basically, the government is treating freelancers like they’re mistreated and like they need pity. This is because we don’t receive health benefits and we pay for our own insurance and whatnot.
But this just shows that the government does not understand what freelancing is. Part of being self-employed is making enough money to purchase your own insurance and cover your own time off while still living comfortably.
It’s very normal for me to pay my own health insurance and social security taxes. I don’t need bargaining power because my clients are setting my wage or rates, I am. When you are a freelancer operating within a free market, you are able to negotiate with your clients and allow supply and demand to dictate what you get paid and how. It’s a huge win-win for both you and your clients.
If you’re a freelancer, you need to believe in the free market and defend it, or you don’t get to freelance. Your very career depends on the free market functioning like it’s supposed to. The government does not realize that there are 57 million of us freelancers, and we are key to keeping small businesses going.
This is because it costs less to hire us, yet we contribute more to the economy and make more money than we would as full-time employees. You cannot possibly convert a 5-hour per week freelancer into an employee for your company. Especially if that freelancer has other clients, which they likely do.
Now, how do you avoid these laws? First, email your local senators to stop the PRO Act. Simply go to their website, fill out a contact form, and express your concerns with the law and why it’s going to cause issues as it is.
Then, share this info on social media and with your friends and your family. The most important thing you’ll want to do is to create an LLC. You need to do this anyway, but this will help you because you’ll use an EIN number rather than your SSN.
Registering your business through an LLC maximizes your protections. You need to create your LLC, and open a separate banking account for your business. As a business entity, you can escape this law’s effects.
Furthermore, working through platforms like Upwork or Fiverr is also a good way to get around the PRO Act and AB5. If you’re a digital worker, taking all of these steps will help you protect your business no matter what happens with the PRO Act since you’re seen as a vendor, not a freelancer.
In conclusion, this type of legislation is dangerous because it tampers with our natural and basic rights to pursue whatever career we want to. It’s a violation against us, and just because it’s not affecting you now doesn’t mean it won’t soon. Many states like New Jersey and Massachusetts are considering similar laws.
So, get involved now. Speak up, write to your senators, and spread the word. Create an LLC. If this information has helped you, subscribe to the YouTube channel and follow the podcast for more early morning talks and updates. Until next time, keep fighting to protect your rights as a freelancer.
Listen: