Business Bites Episode 102: How CA's Contractor and Privacy Laws Can Impact Your Business

How CA's contractor and privacy laws can impact your business

Episode 102 on the Business Bites Podcast

The Gist Of This Episode:  On January 1, 2020, California’s AB5 and CCPA will go into effect.  In this episode, Rachel sits down with Emily Baker to discuss what these new laws are and how they can affect your business even if you do not reside in California.  Other states are starting to follow suit so be sure to listen so you can find out steps you can take now to have yourself set up for if and when it does happen in your state!

 

What you will learn:

  • What the AB5 and CCPA laws are and who they will affect
  • What the ABC test is to determine if someone falls under an employee or independent contractor status
  • Why having a legitimate business and the correct business formation can help you 
  • Why you should pay attention to these laws even if you reside and do business in other states
  • and more!

Expand To Read Episode Transcripts

Rachel: Hey, guys, welcome to Business Bites podcast episode 102. You get double the fun today, because I am joined by another attorney, Emily Baker. We’re going to be digging into some discussions about all the hullabaloo in California of independent contractor vs. employee, what that means to you if you do business in California, and also what this can mean for you even if you’re not in California, for the future.

Like I said, Emily is a badass lawyer for online entrepreneurs. I absolutely have been drawn to her online personality. We’re very similar. She has over 15 years of experience and she has seen it all. She was serving as the deputy district attorney in Los Angeles for 10 years and got ever so slightly burnt out. A lot of sarcasm there. Lawyer it’s really easy to do. But she left that career behind and she is now throwing around her badassery everywhere and doing a lot like I do for you guys. She runs a multi seven figure brick and mortar business with her husband for over 15 years and has built companies that equal that for her clients. Oh, we are sisters, Emily. She runs on coffee and curse words and is committed to arming entrepreneurs legal knowledge that they need in order to build their companies like a boss. So welcome.

Emily: Thank you so much. Yeah, our missions are very similar. I love it, because they’re in this space that there are not enough lawyers that see things the way we do to serve the people that we serve. I want everyone to feel like a badass in their business. You know that from your clients when they feel protected and they can stand up for themselves how much their business grows when they know that they’re protected. When people are like, “Maybe if I just don’t make enough money, no one will bother me,” they don’t grow their business. I love serving entrepreneurs, because they do so much more than just what they do in their business, they really do want to make changes to the world. So similar mission to you, I absolutely run on coffee and curse words.

Rachel: You know what’s funny, I was just having this conversation. I’m on travel right now speaking at a couple conferences for entrepreneurs, and I was having this conversation yesterday. I believe that you’re very similar if not identical to me on this. As attorneys, we’re not just order takers. I mean, sure, you tell me you want to trademark, I’ll file it, whatever, but you’re going to get business strategy and questions. I want to know what your plan is, what your mission is, because I want to keep entrepreneurs from wasting time and money and energy on something simply because they heard it half-cocked on a Facebook group that they should have something. I feel like there’s not a lot of lawyers out there that provide that side of things, either, and I feel like that’s really serving clients and it’s going to serve whatever industry that those entrepreneurs are in also.

Emily: I absolutely agree with you. Don’t even get me started on the Facebook group legal advice, because it’s just [crosstalk 00:02:51] …

Rachel: … here’s the right one.

Emily: It just … I know entrepreneurs are trying to find this information and everyone has the perception that law is expensive. I’m like, “How much free material do the lawyers in our space, the good lawyers in our space put out?” There is so much content out there, just go find it. Just go find it. We’re out here to serve you. But I do a lot of business strategy with my clients.

When I was a district attorney, I did the blood and guts stuff and I did the pimp and hoe stuff, because California, but I also did [crosstalk 00:03:29] … I mean, I worked in Long Beach for a while. There were days that pimps would bring in all their hoes to clear their warrants and it looked like something out of a music video. It was ridiculous and fantastic all at once. But I really geared towards white collar crimes before I left the DA’s office and saw a lot of embezzlement cases. Embezzlement from doctors, from lawyers, from professionals that did not even have the systems in place. I’m like, “You’re running a $9 million a year company, why aren’t there any checks … What are you doing?” So I really [crosstalk 00:04:04] … people’s businesses before I started working with businesses. My husband ran a medical practice for over 15 years until he had an injury and now runs a different type of practice, but we had the same stuff happen in our business where we were like, “Oh, we should have done it this way.”

So half of my experience is the lawyer experience and the other half is that life experience that not everybody brings. I know that you do, but it’s something that’s unique in the space bringing … when you see things go bad enough you can predict the way they’re going to go bad.

Rachel: Well, you know what’s interesting, and this is why I love entrepreneurs. You guys that are listening to this, kudos to you. This is why I love the fact of working with entrepreneurs is because guess what? Even if you’re a solo business or you maybe have just a few staff or contract workers, which we’re going to get into talking about, but guess what? I go up against large corporations all the time and you guys, you entrepreneurs listening to this podcast have your stuff together way more than many large corporations that I go against for copyright infringement or trademark infringement. It just baffles me. So kudos to you guys for seeking out this info, coming here and listening to me and Emily tell you exactly what you need to do, however, let’s do our little CYA. We are attorneys, but we’re not your attorneys unless you want us to be. I’m going to link everything in the show notes at rachelbrenke.com/epi … what episode? 102. So epi102. All of Emily’s stuff is going to be there. Let’s just dig into this whole topic. Just another little frame of reference for you guys listening is California … Well, let me back up for a second. [crosstalk 00:05:49] …

Emily: California is special.

Rachel: … Where do we even start? Well, Cali is super special. Where do you start on this topic? I have related episodes, so we’ll put those in the show notes so you guys can check out. I don’t want to inundate your ears with all the numbers right now. But when you’re looking at expanding your team, that’s one of the best ways to scale and grow. However, that’s also one of the places where especially now while we’re here talking is it’s not as simple as picking up a graphic designer to do some contract work for you every once in a while. There’s a lot of evaluations that need to be done, there’s new tests that are rolling out.

Emily’s on here specifically because … not just because she’s a badass, but California is one of the states that is kind of spearheading this change by state to more heavily regulate business owners when they are having employees or contractors, making sure that they’re properly statused, because as a little crash course, if they’re an employee, you should be paying employer taxes, those employees can have certain benefits under the law, etc. Whereas 1099 contractors like people you find through Upwork or Facebook groups or just the friend down the street who works every once in a while for you, well, that’s under the old context. You guys will see the difference here in a bit.

But those are typically they’re going to be responsible for all their own taxes, you don’t necessarily have taxes on the wages that you’re paying them, and so the state is cut out of that whole conversation. They’re putting their hand out and they’re not getting the money they want, especially in this onslaught of online entrepreneurship, which is who Emily and I work with a lot. Or virtual, many of you guys have very flexible businesses. So Emily, I don’t even know where we should start with this. [crosstalk 00:07:31] …

Emily: I’m just going to dive in.

Rachel: Good.

Emily: We can just dive in. So a lot of your audience is going to be familiar with the older test for independent contractors. That still stands in most states. It’s the test that the IRS uses, the Borello test. You can go through it and just kind of be like, “Okay, are they an independent contractor or not?” California has changed that test and changed that examination by implementing a different test called the ABC test.

In the news, you’ll see this referred to as the Uber Law, because Uber and Lyft were really fighting against this being implemented, because Uber doesn’t want to make all of their drivers employees. I get it, that’s a lot of liability to take on. A lot of the Uber drivers … because now every time I get in an Uber to travel, I’m like, “So I want to hear what you think.” I’ve been traveling a lot towards the end of this year and have asked a lot of Uber drivers.

A couple have said that they’re looking at figuring out if they can run their own business, which is an issue when you’re talking about a regulated industry like transportation. So they’re like, “I want to start by own business, but I don’t think I can, because I’d be a transportation business and there’s a bunch of licensing rules around that.” Then they’re like, “But I don’t want to be an employee, I don’t want to have to clock in and clock out and I don’t want to have to take meal times and lunch breaks. I want to log into the Uber app when I have time, I want to go do the rides when I have time, and I want to log out when I am over it or when I want to be done.”

So the drivers are a little frustrated with the loss of flexibility. The company is frustrated with looking at mounting costs, because now you’re going to have to charge more, because you’re going to have to pay your drivers more or your drivers are going to earn less. So everyone is kind of mad about this law. I don’t know who’s not mad about this law.

Rachel: The government.

Emily: Yeah, exactly, the state’s not mad. But they’re creating an entire new agency under the labor code to enforce this. What I believe will happen, and this is my speculation based on what I’ve seen happen in this state and how I’ve seen things enforced, I think they’re going to start with using the taxes to try to red flag accounts. So I think they’re going to start looking at people filing as 1099s and what companies they’re filing with and then start flagging them going forward to look and see if they’ve been switched over or not. The labor code-

Rachel: Well, actually on that note, I want to bring up a real live example for a-

Emily: Absolutely.

Rachel: … client of mine in Virginia. So we’re not under this test yet, but I want you guys to be thinking this. Don’t sit here and go, “Oh, well, my state doesn’t have any plans for any of this.” This is still a real threat in the misclassification of team members, on your staff, your team, whatever you want to call them … I hate calling them staff.

Emily: I do, too.

Rachel: They’re my team, we work together. But we had a client who came to the law firm after the fact, after the problem happened, and they had an employee who was a contractor but they had classified themselves. They didn’t ask an attorney, they just kind of Googled, figured out the class, and they called her a contractor. Everything was fine and dandy and then the company decided, “Hey, we’re going to promote her, give her a pay raise, and move her to W2 employment, do all the right things,” but they didn’t tell her before they put the job posting out on the market. She runs into the job posting for her original position and thought she was being terminated. So instead of going to the company, where did she go?

Emily: Lawyer.

Rachel: Straight to the … it’s not exactly lawyer. Well, maybe. She went to the existing board in the state and filed a complaint. What did that do? Well, it caused … even if … and it’s going to end up being fine, because I really do think she was a contractor, but guess what? That business is still now … it’s so funny, they were going to promote her and now they’re stuck in this battle. But they’re having to spend their time, money, and energy dealing with the board. I think that’s why it’s so important in this conversation is not just the law that’s there, but Emily and I were talking pre-show about how even in states where you don’t have this law, you’ve got to be really careful about the classification that you use. We really do err on the side of conservative… I’m risk adverse in some things, and this is one of those situations, just because even if you’re in the right, you’re going to end up spending that time, money, and energy proving it.

Emily: Absolutely. A lot of the times, the amount of money you’re going to spend is a lot more than what you would have spent paying the payroll taxes. When somebody is truly an independent contractor … when I bring a web developer in my business, it’s based on a project. Build a website, I’ll tell you if I like the colors. Go forth. That’s a great way to use a contractor. But if I brought in somebody day-to-day to help do my own work, I would need to bring them on as an employee. I think a lot of companies are afraid to do that, because they don’t know how to bring on employees and they’re nervous about doing it wrong.

But the problem is now in California, the violations go up to $50 thousand per employee. If you have multiple employees, it goes up to $25 thousand per violation. So there are real fines here. If you guys don’t live in California, I’m just going to … This might shock you, just hold on. [crosstalk 00:13:00] … will get its money no matter what. The state of California will get its money. So if they find areas where there’s going to be fines, they are going to fine you.

So I think that one of the ways … because people are always asking me, “Well, how would anyone know?” It’s going to be the taxes that they’re going to start flagging and then disgruntled employees is the second way you find out. I mean, I worked for the U.S. attorney’s office during law school, I worked in the tax division, and most of the cases we saw came to us … everything came by the IRS, but most of the cases we saw came from disgruntled employees or ex-spouses.

Rachel: Spouses? Ooh.

Emily: Ex-spouses. So I got divorced, I’m bitter, and I’m going to call the IRS and be like, “You know, I think my ex-husband’s company is avoiding paying taxes.” So it’s other people reporting on you. I see that in the online space where people are trying to bing each other and report each other’s Instagram accounts and things like that. It’s not necessarily the state that’s going to come find it, it’s going to be someone else. So everybody is probably sitting there going, “But what’s the thing?”

Rachel: [crosstalk 00:14:20] … driven this fear into them.

Emily: We just made everybody crazy. What’s the thing? So I’m just going to break down the test for you and then I think maybe we talk about some of the ways to work with this and some of the things you can do to set your business up right so that as states change … because this is now four states, this is California, New Jersey, Massachusetts, and Connecticut … this is going to start changing state by state, especially if larger states see California making money and being able to more easily regulate their employees and their payroll tax system. I also think there are some companies that do abuse the independent contractor rule. If somebody is working for you 40 hours a week in your office doing what your business does, they should have healthcare, they should be paid as employees. So when big companies do this wrong, that’s where we end up with tests like this.

So the ABC test. A, the person is free from the control and direction of the hiring entity in connection with the performance of the work. So I don’t tell somebody how to do it. I don’t tell a web developer how to do it, I’m not a web developer. Just make the thing happen and make it work and I’ll tell you if I like the colors. Free from control. They can do it how they want, you have an agreement, they do it.

B, the person performs the work that is outside the usual course of the hiring entity’s business. This is where this prong is the problematic prong. Outside the usual course of the hiring entity’s business. So if I am doing legal work and I hire a paralegal or a lawyer … but lawyers are an exception in California, because lawyers are special. but [crosstalk 00:16:03] … if I am a photographer and I hire a second shooter, that person is doing what I do. So that is not outside the usual course of business. I would extend that to someone doing photo editing. Still within the course of my business. A podcast editor for a photographer that runs a podcast is still outside the usual course of the business. So hopefully that makes sense.

Then the third prong is the person is customarily engaged in an independently established trade, occupation, or business of the same nature as the work involved. So California doesn’t word things in a way that makes sense, but generally what that … generally. What that means is that the person you’re hiring, if they’re a social media manager, that they’re doing social media for your business and that’s what they do for other businesses, too. So you’re not hiring a graphic designer and you’re a graphic designer and you’re saying that they’re doing something else, but they’re actually doing graphic design. So you have to bring in a contractor that does something different than what you do and that is the thing that they do and that is what they do for other people as well.

There are exceptions to this, there are industries that are exempt from this, and there are other considerations, but the way to get around … not around, but the way to work within this is to have business to business relationships. We’ll get into that.

Rachel: Yeah, let’s be clear, when we say work around, we’re not saying to skate the law. We’re trying to help you navigate and be compliant, but also what’s best for your situation, because there might be alternatives.

Emily: Absolutely.

Rachel: You may think, “I’m screwed,” by reading the ABC test, but we might be able to have a conversation. This goes back to what we talked about at the beginning of the episode, we might be able to sit and work with you … or your attorney, hopefully you have a good one. There’s bad ones and [inaudible 00:17:59] … but they can help you find, quote unquote, “find a work around,” does not mean to skate the law and be [crosstalk 00:18:04] …

Emily: No, it doesn’t, because there is … I mean, it was a Supreme Court ruling that’s now been written into law, it’s part of the labor code. This is like minimum wage, this is just the law of the land. If you work with people in California, remember that the rules of California apply to the person who’s butt is sitting in California. So even if you’re hiring them and you’re in Wyoming, these rules apply to that person sitting in California. So even if you aren’t in the state of California but work with somebody who is, you need to have this conversation with them. You as a business owner need to make sure that the person that you’re working with is running their business legit, they need to be running their business right, because if it’s going to be a business to business agreement, you have to show that it’s a business to business agreement.

Rachel: Let’s flesh that out a little bit for them. When we’re looking business to business, this is really where we start talking … if you guys look at my checklist and Emily has resources and we talk about this all the time on the interwebs, having proper business formation, creating an entity outside of yourself … Explain that a bit, what you mean by business to business and the context of that.

Emily: Absolutely. So if it is a business to business contract in California, there are now tests for what is business to business. One of the things in that test is has a written contract, has all the required business licenses and business tax registration. Which means if you live in an area where you’re required to have an at-home business license, you have that. Generally, that’s also going to be that you are some kind of formal entity, you are an LLC or a corporation, that you are completely free and independent from the hiring firm’s control, that you maintain a business location separate from the business that’s hiring you, which means that you don’t go into their office and work, you have your own business location. Honestly, that can be your garage, that can be a Starbucks or WeWork, but you work somewhere separate, you don’t go into their office and work on a regular basis. You are engaged in that independent business from their business.

So if you are a designer and they are a design firm and you’re doing contract work, that’s still not necessarily going to fly, because it’s going to have to go through all of the prongs. However, if you’re a graphic designer working with an attorney or working with anyone in a business separate from that and you’re doing design work for them and you have your contracts, then you can still work business to business, but you have to make sure your business is set up and you have to make sure the person you’re hiring, their business is set up. Generally, it helps if the person that is the independent contractor has other clients. There’s three prongs to talk about having other clients, so it can’t be that you only work for the person that’s hiring you, you have other clients as the contractor who is now a business owner with a proper business.

Rachel: Would that be simultaneous clients? Because let’s say that I hire … as an attorney, I’m hiring a graphic designer to come in and overhaul my whole visual brand, but it’s going to take a lot of hours, because I want to get it done tomorrow or yesterday. They’re not going to be able to physically fit in work for other clients at that time. So when you say other clients, do they have to be actually simultaneously contracted with other clients or just [crosstalk 00:21:39] …

Emily: That’s a great question. It has to be that they’re allowed to maintain clientele without restrictions. So it can’t be an exclusive agreement. It could be limited time exclusive, because when you get into influencers that are doing brand deals, you’re going to see this limited exclusivity, but you generally have to be free to work with other clients. So it can’t be that you’re bringing somebody on for a year to be your in-house designer. However, I would argue that if that person is a business, they’re working elsewhere, and you’re not restricting them, you’re not saying, “You can’t work with anybody else,” but they are choosing as a business not to take on other client work because they’re so busy with your work, I would argue that that would fit so long as all the other prongs are met, I don’t think that’s the prong that’s going to bing you.

The biggest one that’s going to be a problem for people is the different type of work. So that is going to be the most controlling prong. So I mentioned photographers earlier, because they do frequently bring on second shooters as contractors for an event as a one-off or they work with that person regularly but only a few times over the year, that is going to now be considered an employee relationship unless it is two business entities with contracts with other clients and all of the prongs of that met. So for creatives particularly, it’s going to get very nitpicky on how they run their business.

Rachel: Actually, when we first started discussing this in pre-show, I was thinking, “Man, this is just going to cripple photography businesses,” but then at the same time, think about it. Let’s go with the wedding photographer, because that’s the whole classic second shooter. If you’re having somebody, a second shooter, I always recommend they require all their, quote unquote, “contractors,” or team members, if they’re not true employees to carry their own insurance licenses, all that kind of stuff. Anyways, now this is even more important. If you’re going to have a second shooter who’s going to shoot with you for an entire season, even under the old test, that’s still going to be an employee. If you’re having someone that’s doing one-offs here, within the space of photography most people that second shoot have their own wedding photography business anyways. Those that don’t are probably going to fall into that, “I’m going to photograph with you for the whole season as your second shooter,” not taking on other clients, well, you’re going to be an employee anyways under the old test anyhow.

Emily: Absolutely. So it really does set parameters around … not so dissimilar, it’s just it really becomes that B prong that becomes so controlling. But if you set up a business properly, you’re not going to run into as many problems if somebody is doing different types of work. If somebody is doing the exact same type of work as you and you’re hiring them, they’re probably an employee.

Rachel: Unless we can have them go through and say, “Are you an LLC? What’s our contract say?” And going through all of those points that you’ve already listed out. One thing that I want to say about the whole employee thing is I think a lot of times … you mentioned this earlier, business owners are concerned about having true employees because they don’t understand how to do it. They automatically think, “Oh, I’ve got to do a 401k, health insurance, sick days, this and that.” Some of it is state regulated, but it’s also based on how many employees you have in your business.

Emily: Yes, it doesn’t have to be that deep. But once you start taking on employees, to do it right you still need to consider how payroll is going to be run, which is great. You need to be an entity at that point, in my opinion, if you’re going to bring on employees. I really like my business owners to be employees of their own entity for tax purposes.

Rachel: Oh, 100%.

Emily: That’s just my preference, and yours as well. Then you need to have some HR procedures, you need to have job descriptions, you really need to flesh out the structure of your business well as you’re bringing on an employee so that it’s a successful relationship. Because I think what a lot of entrepreneurs are afraid of is, “Well, what if that employee leaves or needs to be fired? How do I fire an employee? Am I going to get hit for unemployment? What does that look like?” But if you set up the procedures right in the first place to protect yourself as a business owner and have open and clear communication, generally that’s the outlier where things go wrong. If you don’t have clear communication and your employee doesn’t know what’s expected of them, you’re going to have more problems. That said, I wanted to mention the exceptions in California before everybody’s head pops off. [crosstalk 00:26:41] … licensed professionals. So insurance agents, doctors of all sorts, lawyers, architects, engineers, accountants. And interestingly enough, direct sales is exempt. So the Direct Selling Association, the DSA, actually lobbied pretty hard in California to exclude direct sellers or people in multi-level marketing companies from this law. So Uber is included, direct sales is not included, which I thought was very, very interesting.

Rachel: Hmm.

Emily: Isn’t that interesting? I thought it was interesting.

Rachel: Well, also … I don’t want to go down a whole rabbit trail of talking about politics and government and their whole agendas and everything, but when I first heard about the crackdown and the tightening of the noose on all this kind of stuff, I thought, “Well, you know, first this is just the state wanting to get a piece.” Then I was like, “Well, let me try to give them the benefit of the doubt. Are they really, truly trying to protect contractors from being abused and public policy protection and stuff.” The more that I listen to this, though, I actually think … Let’s take the second shooter example. Well, maybe that’s not a good one. But the designers. I’m just thinking about all the people that I would want to hire for different things out of California that now I’m going to be completely gun shy and I’m not even going to want to bother to have to go through the ABC.

Emily: Right, and I think that’s a huge concern for the freelancer market is that now if they’re living in California, it becomes a, “Oh, do I hire that person?” I mean, I use YouTubers all the time, it’s an example, because they all seem to live within a 10 mile radius of where I live. I live in a YouTube creator heavy community. So a lot of them hire a friend to be their camera person depending on what they’re filming. They hire people to do editing. Those are all going to need to be employees where that’s not how they were operating beforehand. I think when it comes to editors, you maybe have some wiggle room if everybody’s running their company properly, but that means if you are running a company, you need to be a company. In California, people shy away from being an LLC because of the $800 flat tax that you’re going to pay no matter what.

Rachel: Okay, but here, I’m going to get on my high horse real quick-

Emily: Get it, get it.

Rachel: … because I see clients all the time who come to me after the doggone fact and then they’re like, “I’m being sued personally. I didn’t set up an LLC because … ” Texas is $300, California it’s $800, I think Illinois is like $900. So those are kind of some ranges. But let’s divide that by month. You guys are paying more for your coffee or your chicken nuggets or whatever per month than having your liability protection entity set up and also doing the right doggone thing. I get so frustrated. I get it, I’m not sitting here from an ivory tower as a lawyer going, “Ah, why don’t you have that?” I’m saying this as an entrepreneur myself who, if a problem ever happens, I want to make sure that I have liability protection and that I’m doing it right. That’s why if you guys download … shameless plug … my free business checklist with Rachel Brenke, it walks through these steps. The entity is one of the first things after picking a name. Then it goes through insurance and contracts. It may not necessarily be legally required. Well, until now, in certain circumstances. But it aggravates me, because don’t give me that $800 argument. I get it, it sucks. I built my businesses from the ground up. I didn’t have two nickels to rub together. When I did, one went to feed family, the other went right back into the business.

Emily: Absolutely. A lot of business owners, myself included, spend the first year as a business putting money back into the business. In the online space, I think there’s this … I’m also going to soap box a little bit. But I think there’s this perception on social media that you become an entrepreneur and all of a sudden Teslas are falling out of the sky and you have crap tons of money and it’s going to be great. You set up the right funnel and all of a sudden you’re going to make shit tons of cash. But that’s not how starting a business looks. For brick and mortar businesses, there’s this mindset that it might take five years to be profitable. For a lot of brick and mortars, they go into it knowing that reinvesting in the business is part of the business. You’re also paying rent and insurance and all of these things, but your bank is going to say, “Okay, well, where are all the proper documents in place? Show me.” When you go to rent a commercial space, it’s like, “Show me all of your business documents.”

When you start an online business, you spend a dollar on 1&1 to get your website for the first year. [crosstalk 00:31:41] … Right, if anything. Then you’re like, “Okay, I’m in business. I’m going to start taking money.” And people start taking money through Venmo. Don’t do that. People start just getting paid and they start putting that money into their same personal bank account, and they don’t have the same triggers to go, “Oh, I should do this differently.”

These laws are going to start triggering online businesses to do it right. Your audience, Rachel, that’s listening to this are going to be the ones that rise to the top in online business, because they’re already doing it right. So for those of you that are frustrated, realize that you doing it right is going to pay off as these other businesses either can’t figure it out or just say, “It’s not worth my time.” I think that’s going to keep happening in the online space. I think the online space is going to become more regulated. I mean, in Europe, online sales are taxed now. So if you sell an online product, you’re paying sales tax. That’s not happening [crosstalk 00:32:39] …

Rachel: I was actually going to mention a bit about GDPR. A lot of U.S. based businesses aren’t really so concerned about it, but I really encourage you guys … we’ll link in show notes … to read the episodes that I have talking about that. GDPR is a … little crash course here is General Data Protection … what is? Regulation-

Emily: Regulation.

Rachel: … or something like that. It is governing and helping to protect consumers and their private information that they’re putting on the web, the tracking of their activities when they’re giving you their email, because they’re opting in. When GDPR came out, everyone was running around like a chicken with their head cut off. My clients were like, “I feel good.” You want to know why? We already wrote privacy policies, we already instituted things, because GDPR is pretty restrictive, is pretty well laid out. You guys can see it on the site and do further research, especially if you’re an EU country or marketing into EU. But this goes back to what we mentioned earlier, in some things I’m not willing to take a risk. So if I can be way more upfront with my audience what I’m going to do with their private info, I’m collecting emails through opt-ins or I have my privacy policy, every large company has this on their site, the more transparent I can be, I’m going to build more credibility and confidence for my audience, but then also when stuff hits the fan like GDPR … and many states are starting to crack down on requirements-

Emily: California.

Rachel: … of management. Mm-hmm (affirmative). [crosstalk 00:34:05] …

Emily: California Consumer Privacy Act goes into effect January 1. So if-

Rachel: Right, let’s get into that, let’s talk that.

Emily: We’re going to talk … it’s so much. The thing is, it’s still not all the way done yet, because California. So they’re still finalizing it, which is so frustrating, but-

Rachel: You realize it’s been like six weeks, right?

Emily: Yeah, it’s freaking bananas. So businesses in California, you know, Google, Facebook, are starting to change their policies to get ahead of what they think is going to be required. But if you guys follow me on Instagram, you will see me ranting about this as it’s breaking down, because I’m doing a lot of continuing education on it, because California Consumer Privacy Act is similar to GDPR. So if you’re GDPR compliant, there’s not going to be a ton more for you to do. If you blew off GDPR and you have a website where people from California can visit, you’re going to have to have some things in place, including [crosstalk 00:35:06] …

Rachel: Okay, hold on. I want you to say that again, because I don’t want people to think, “Oh, I’m not a Cali business.” So if your site is accessible by a California potential customer, you need to be compliant to this.

Emily: You need to be compliant. There are factors of compliance. Your base level compliance is a privacy policy which is legally required anyway. You have to have the California consumer privacy statement telling California consumers how they can get in touch with you to find out what information your site has about them. Those are your basics. So the basics are very much like GDPR. The more in-depth stuff depend on if your company is selling private information. The problem is California defines selling as passing onto third parties. So what we’re still parsing out is that if you are running Facebook ads and you are using Pixel to pass information to pass information about people that visit your site onto Facebook, is that considered selling information? Right now, it looks like it is. As I said, this is a dynamic situation, so stay tuned.

But if you are baseline compliant, you always can say, “Look, we’re doing our best to be compliant, you guys keep changing it.” Where this affects most online business owners is it’s going to change the way Facebook’s allowed to serve ads and it’s going to change the way Google is allowed to serve ads. So more than just having your own website compliant, having a solid business strategy and a solid business that is not 100% reliant on throwing $5000 into Facebook ads to get $6000 in returns to throw $5000 back into Facebook ads, because the behavior tracking on ads is going to change dramatically.

Rachel: Oh, man.

Emily: Yay California. Whoo.

Rachel: Yeah, and the interesting thing is I knew of this, that’s why I brought you on, but I didn’t really until sitting here contemplate the gravity of the fact that if my site is accessible by someone in California … I mean, I’m not worried, because I’m going to update mine obviously to reflect, but it’s just like, “Damn, that’s one more thing I’ve got to worry about.”

Emily: It’s one more thing. Well, and this is why your audience is here listening to this. Everyone on Facebook is going to crap themselves in about three weeks when they figure out that this is going to … it’s like the waves of GDPR [crosstalk can we have a watch party together?] … Whenever they figured it out.

Rachel: … and just watch everyone freak out [crosstalk 00:37:39] … listen to this.

Emily: Yes, everyone’s going to freak out. If you want, I have a quick California privacy statement that I can put in the show notes for your audience if you want, Rachel, so they can update it.

Rachel: Oh, that’s awesome, because I was going to tell them that both of us have website templates. Mine’s going to be updated, obviously, to reflect … it’s already GDPR compliant, but I assume yours is going to be the same fashion.

Emily: Mine is the same thing. We’re GDPR compliant. Right now, we’re California Consumer Privacy Compliant. However, that keeps changing. So it will be updated and I will update if people purchase it before the changes. Back six months, I’m going to be updating it for them. So it’s just a dynamic situation in the online space. The things California are doing are going to happen in other states. You’re going to see states like New York doing the same thing, you’re going to see states like Connecticut doing the same thing. So you’re going to see the bigger market doing this as there’s more push. But the reason the California Consumer Privacy Act is so important to keep an eye on is that it’s going to affect the big businesses in California. If you’re an online business serving up ads through Facebook and Google, it’s going to change that.

So you’re seeing … some of you might already be seeing the algorithms shifting in Instagram, on Facebook, on Google ads. This is why. On the backend, they are trying to figure out how to be compliant, because they’re not allowed to do behavior tracking. You have to have these opt-out buttons. So Google is going to have to have an opt-out. So if they’re serving a Google ad, you’re going to need to be able to click opt-out. So you’re going to see that your customers are not going to be tracked as cleanly.

So we’re getting back into old school days of advertising where you just kind of put an ad up during the Superbowl and hope that the right customers see it, because you’re not going to be able to behavior track down to, “I want to target women this age to this age who like these four podcasts, who do this on the weekend.” That type of behavior tracking is going to shift as consumers on a mass scale are allowed to opt out of it.

Rachel: You know, that just sucks, because I just think about when I first started doing ads, I didn’t really … Well, it was also when ads just came out and targeting was very minimal on Facebook. I just think about how I threw away so much money because I didn’t target. I get better results for ad spend now. And now we’re about to go back and it’s like, “Well, there goes my marketing budget.”

Emily: You’ve created a really authentic and stable presence on social media as well without ads. I mean, you have a really stable, loyal audience. When people connect authentically, sharing in your Instagram stories is going to start becoming more powerful than buying Facebook ads. So creating that authentic audience is going to become more and more valuable, and I think getting people off of social, onto your email list. I mean, everybody was like, “Oh, email is dead. I hate this double opt-in. ” I know, you and I are going, “No, stop it. Things are going to keep changing.” But as Facebook and Google keep changing, as the way we’re allowed to advertise online keeps changing, the way that you can send emails can’t change that much. You already have a double opt-in, you already disclose if there’s affiliate links you’re already [crosstalk 00:41:05] …

Rachel: Well, hopefully.

Emily: Well, if you’re listening, you’re disclosing.

Rachel: Hopefully. Everything Emily is touching on is stuff that her and I hammer home on our platforms all the time. So if you’re sitting here going, “I have no idea what you’re talking about,” there’s resources for to hear about [crosstalk 00:41:22] …

Emily: Tons and tons. So when I talk about this, and we can talk about California Consumer Privacy another day when it’s done being [crosstalk 00:41:32] … It matters to me that the final version of this still hasn’t been signed. So it just makes my head hurt. By the time this comes out, maybe it has and you will see content from me and I will share links back to Rachel on that, because when you sit in California, you get subsumed into what California is doing, but for everybody else, you’re like, “Wait, California is doing stuff with privacy? What?”

Rachel: That’s interesting, because I had heard some grumblings about it, especially since I try to stay on top of a lot of that stuff, but even then it wasn’t until I saw you talking about it in a group that I was like, “All right, we’ve got to get you on the podcast.” And if I’m someone that is monitoring this sort of stuff, imagine entrepreneurs that had no idea. This is, I think, a good time to say ignorance of the law is not a defense. So maybe you come and stumble upon this later after you’ve already been pinged by California because you’ve been doing business with someone there or you are a business there. Guess what? Just because you didn’t know about it doesn’t mean that you’re excluded from it.

Emily: Absolutely. The laws in California … I mean, January 1st is when both AB5 and CCPA go into effect. There’s not really a grace period. So just like GDPR, it went into effect when it went into effect. They weren’t doing strict enforcing in the first few months with smaller companies, but just hearing this and going, “I don’t want to deal with it,” start looking at your own business now. Make sure you have a privacy policy, make sure it has a way for people to contact you. Know how you’re tracking your customers. If you’re not tracking customers at all, then you’re going to have less to deal with than if you’re using Google AdSense and Facebook Pixel and those kinds of things. But [crosstalk 00:43:23] …

Rachel: … for a minute, because I feel like you run into this all the time. It’s easy as entrepreneurs when we’re so overwhelmed to think, “Oh, it’ll never happen to me, so I’m not going to worry about it,” because you’re like, “Oh, I’m a small fish. State of California is not going to care.” This is actually really relevant. I was having this conversation on a conference yesterday when it comes to disclosure of affiliate links, sponsored posts, and all that sort of stuff, yes, FDC for that is trolling, yes, the government will be looking, you were talking about taxes and all that, the reality is that’s not the only way you’re going to get caught. Imagine if you have a dispute. We talked about this a little bit earlier. Ex-husbands, or spouses rather, ex-spouses or partners, a best friend, it could be anything. But it also can be what if you end up having a client who’s upset with you and they have a really savvy attorney like Emily or I on the other side, I always look for things that I can utilize in negotiations to get to a settlement. I mean, not that I’m going to run to report you, but …

Emily: But. I mean, when I was in criminal practice, I was a prosecutor, so I was putting people in jail. I worked in Long Beach, California for quite a long time. Not everyone in Long Beach was a legal resident. A lot of our victims of crime weren’t legal residents of the U.S. They’re still victims of crime, they’re still coming to court and sharing their stories, but I saw more than once where defendants families would call immigration on our victims. It became a large part of what we dealt with with protecting our victims. This is why a lot of them were afraid to come to court, because they knew that they would be retaliated against in that way. So imagine you have somebody who gets a bug up their ass about you on something you said on social media or because they didn’t like the program that they bought from 1995, and they are reporting you [crosstalk 00:45:24] … for their competitor. Disgruntled individuals are a big part of discovery. In California when people reach out to me about stuff when a blogger is like, “This person’s telling me I need to pay them because I linked back to their post,” the first thing I do is go and look at the other person’s website and see if it’s legally protected.

Rachel: 100%. [crosstalk 00:45:44] …

Emily: A lot of times, the other person doesn’t know what their privacy policy and terms of use says, and their terms of use says you can share our content as long as it’s linked in its entirety. I’m like, “This is stupid.” But it’s not just other attorneys, it’s other people checking, it’s the state checking. When you run your business right, you can grow your business. None of us are in business to be broke. I mean, I don’t want to be broke, I want Teslas falling from the sky. But if my business isn’t protected, I can’t utilize all of that.

On one of my favorite soap boxes, the way that our tax system … because I was a nerd in law school and took a lot of tax … but the way that our tax system is set up … Right? Nerd. Nerd. The way that our system is set up is that businesses can really thrive to build wealth and build generational wealth. If you are operating your business right, there is so much opportunity for you to build wealth. So even though it might feel overwhelming and expensive to start up a formal entity, not only are you protecting yourself, you’re giving yourself the gift of feeling like your business is legit so you can charge what you’re actually worth, because you know that your business is set up right. And you get all the tax benefits of being a business as well, and there are a lot of them and some of them are really awesome. So take advantage of all of that. The benefits so out weight the outlay of cost.

I tell business owners, “If you don’t have $1000 to start your business, then we need to reevaluate how you’re going to run your business.” You need to really look at what am I selling, how am I selling it, and what is my longterm goal on this? If you just want to make some money on Poshmark, go ahead, but that’s not a business, that’s [crosstalk 00:47:39] …

Rachel: … not selling, buying.

Emily: I love Poshmark, too, but if you want Poshmark to be a business, set it up as a business. If you want it to be a hobby, go ahead, resell some stuff like a yard sale and account for it. But though this can feel overwhelming and I know how it feels especially to online entrepreneurs that did not run other types of businesses before they became online entrepreneurs, this can feel overwhelming, but find the people you trust like Rachel, hopefully like myself, and we’re here to tell you about this stuff. It’s literally what I do. [crosstalk 00:48:15] … It’s what Rachel does.

Rachel: … love to talk.

Emily: Same.

Rachel: So let’s rewrap then for them real quick. We’ll work backwards. So the privacy law stuff we are advising that A, if you don’t have a privacy policy, get one. At least make sure it’s GDPR compliant, because that’ll put you ahead of the game. Then if you are in California and/or are going to have a website at least accessible by someone in California, as of January 1, and Emily’s going to get us resources and I’ll link up to all her [inaudible 00:48:44] … in the show notes to make sure that’s compliant. That’s pretty easy, that’s straight to the point.

So moving backwards into the ABC test of the employee vs independent contractor, if you are a business that’s not in California but going into business, what is your two line tip for them?

Emily: So if you’re not in California and going into business and you’re going to bring on independent contractors, the question I would ask yourself is does this person do something different than what I do for my business. Then make sure that you have an agreement in place with that person, an agreement that says, “This is the relationship of an independent contractor.” So you make sure the person you’re bringing in is truly an independent contractor even if you’re not in California, because it’s going to protect you in your state as well.

Rachel: Mm-hmm (affirmative), mm-hmm (affirmative). We’re going to bullet point this, by the way, in the show notes. So if you’re a freelancer in California, what are your …

Emily: If you’re a freelancer in California, it is time to run your business the right way. There is an article on my website emilydbaker.com that has … the title of it is AB5 is Screwing Content Creators. There is a little bit of a checklist on there about how to run your business right. It’s probably the same stuff that Rachel, in your checklist, of make sure you have the insurance. But mine breaks down what the law says. I just took it directly out of the labor code and said, “This is what you need.” It’s time to be a business. If you’re a freelancer in California, it’s time to be an LLC, it’s time to have proper business contracts. Don’t hope that the person that’s hiring you is going to have a contract for you. It’s time to run a business, it’s time to have your business licenses, and it’s time to have your contracts. You’ve got to get your paperwork legit if you are a freelancer in California. It’s time. It’s time. It’s time. If you were waiting for an invitation, the time is now.

Rachel: This is like throwing you into a pit. This isn’t even an invitation to come in, they’re just doing it for you. That’s the thing … I’m going to wrap up here as we try to keep this as quick as possible. This was a [inaudible 00:50:49] … topic. Yeah, I’m actually kind of glad … This is going to sound weird, don’t take the sound bite out of context, but I’m actually kind of glad that it’s going to put entrepreneurs feet to the fire, because there’s so many more benefits to being an LLC or a corporation to having the right contracts than just checking the box for this law. I mean, there’s a vast variety of benefits to it. Emily touched on some of the tax stuff. I talk about it until I’m blue in the face, so I’m actually kind of glad that the government is forcing the hands a little bit.

Emily: You know and I know, and now everyone knows, that this is not just happening in California, this is what’s coming. California is the first state that’s … not the first, one of the first four states that’s implementing this ABC test, but it is going to rollout. It might be a year, it might be two or three, but if you are running your business right, you’re ahead of the curve, and other businesses aren’t going to withstand all of the changes that are coming in the online space.

So when people are like, “Oh, it feels so crowded online,” it’s going to get less crowded. If you run it right, you are in a position to thrive as a business. So I think it’s an opportunity. The beginning of the year is always a great opportunity evaluate your business structure anyway, so it’s just a great invitation. If you’re getting your tax stuff together and you’re going, “Why am I paying so much in taxes?” it’s time to be a business and act like a business.

Though I’m frustrated with parts of this and I wish that this law was written a bit better, I wish they had taken the implementation and done it better. There are ways for businesses to work business to business within this law. I think that that is the biggest takeaway is that this businesses to business contracting really just checklists what you and I always talk about of this is what a business relationship looks like.

Rachel: Here’s the thing, if you’re overwhelmed right now, we’re going to have all these resources on the show notes, if you’re overwhelmed right now even with all the great resources, we strongly recommend you find an attorney that is versed in this. Which kind of few and far between, I think, sometimes for online entrepreneurs, but invest in an hour, two hour sit down and have a conversation, because guess what? When you get screwed because you didn’t do this right, who are the ones that win? Me and Emily. The lawyers are the ones that win.

I honestly don’t like making my money cleaning up messes, because it’s not even just your money, it’s your time, your attention, your energy from your family, from your home, from your business trying to fix an issue later on. It honestly breaks my heart. I hate sending bills for that. I still need to be compensated for my time, but it’s especially frustrating when I’m like, “You know what? If you had come to me, then … ” I think that’s one of the hard things. I can reach out to my clients that I know are doing business in California and all this kind of stuff and educate them, but if you’re not already an existing client, it’s upon you to reach out to an attorney to get the information or hit subscribe on the podcast to get it straight to your phone.

Emily: Absolutely. It was, I think, the hardest thing. I dealt with hard stuff in criminal law, but one of the hardest conversations I have with entrepreneurs when they come after the fact, there’s been a couple that my recommendation has been personal bankruptcy, looking at everything that they’ve had. They’re like, “But I had this entity.” I’m like, “But it wasn’t done right.” If it’s not done right, it doesn’t protect you. That’s soap box 12 for this episode. If you’re going to set up an LLC, you have to use it the right way, which is why taking an hour to sit down with an attorney who can tell you, “This is how you sign contracts through your LLC so you’re not still accidentally signing them personally. This is how you keep your banking separate so it’s actually a legit LLC. It will save you down the road. The phrase I use with my clients and with my family is you can’t put the shit back in the horse, friends. Once it’s out, it’s out.

Rachel: It’s true.

Emily: It’s true. Once it’s out, it’s out. So if you do it right before that happens, it’s a lot less mess to clean up. I would rather consult with businesses on strategy and structure than trying to clean up the disaster that can happen when it’s not done right.

Rachel: 100%. Yeah, no. We need a hashtag for all of this so far. Because Emily and I are passionate to get you guys on board and focused on this. Emily, this was a lot of info. Do you have any last thoughts? Then we’ll wrap it up and send them on their probably extremely overwhelmed ways right now.

Emily: Don’t be overwhelmed, just bookmark this and go back and listen again. [crosstalk 00:55:48] …

Rachel: Yeah, for sure. Then you guys can head over to rachelbrenke.com/epi102, because this is episode 102. I’m going to link all of Emily’s stuff, it’s emilydbaker.com, I’ll have her Facebook, Instagram, Twitter, a good little photo of her, and also the information on the laws that we talked about here. I’ll have my checklist, her checklist, everything. More than enough info that you guys need. If you guys have any questions, please feel free to jump into the Business Bites podcast Facebook group. I think this thread, we try to do a thread per episode, I think this thread is going to be pretty hopping. So dive right in, ask questions, we can clarify things that we talked about here, get you more resources. Because we just want you guys to stay legally protected as much as possible.

Emily: Absolutely.

Tool and Resources:

 

Note: You may have seen an email from Google about their updated policies regarding CCPA. You can view their updated policies here: https://privacy.google.com/businesses/.

Featured Guest & Resources

Emily D. Baker is a badass lawyer for online entrepreneurs, she keeps it real while helping businesses Get Legit. With over 15 years of experience, Emily has seen it all and that’s why she is able to help her clients create common-sense legal protection in their businesses. After serving as a Deputy District Attorney in Los Angeles for ten years, and getting ever so slightly burnt out (please note sarcasm), Emily left her career behind to pursue the glittery badassery that’s all her own. She has run a multi seven-figure brick and mortar business with her husband for over 15 years and has built companies that equal that for her clients. She runs on coffee and curse words and she is committed to arming entrepreneurs with the legal knowledge they need in order to build their companies like a boss!

You can find Emily here:
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About the author

Hi, I’m Rachel Brenke

Rachel Brenke

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