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ASK THE EDD ATTORNEY – HOW TO AVOID FATAL INDEPENDENT CONTRACTOR CONTROL AND BEAT AN EDD AUDIT – PART 2

By Robert S. Schriebman
November 17, 2016

Introduction

This is Part 2 of a series of articles that will look at the central issue of control in an EDD worker status audit. I have been representing clients before the EDD since the 1980s. While the faces of the auditors change, and management is replaced with very competent and experience former EDD auditors, the nature of an EDD audit has remained constant. The issue of control in a worker relationship is as relevant today as it was 30 years ago.

An EDD auditor is asked to examine the workings of many businesses. While the auditor may not be familiar with the intricacies of a specific business, the factors governing worker control have remained essentially unchanged.

The EDD manual has undergone several revisions since I have been practicing. However, the 23 factors are always present in every revision. Those 23 factors are used by auditors to determine the quantum of control. (The IRS continues to use its famous "20 factor" test.) These tests cannot be compared to a child’s game of marbles where the one who gathers the most marbles wins. I have seen many cases where an employer can have the majority of factors in its favor and the EDD will have only a handful of factors in its favor. Guess who wins? It’s not the employer. This is why I try to dissuade clients from feeling over confident when, after they read the 23 factors, they are empowered and believe they will automatically win. The client may not win the battle. While Administrative Law Judges of the CUIAB try to be objective, I have found that certain factors carry more weight than others, resulting in a victory for the EDD and a loss for the employer.

In this Part 2 we will look at the most important factors governing control that were established in the 1989 California Supreme Court Borello decision. S. G. Borello & Sons, Inc. v. Dept. of Industrial Relations, 48 Cal. 3d 341, 350 (1989)

The Borello Test

To the EDD, the control test is the most important factor and the most important consideration. But how do you define control? Many times control depends upon the skill levels of the workers and the degree of employer-supervision required. For example, farm workers and fruit pickers are relatively unskilled and require a great deal of supervision. It is clear that these types of workers should be classified as employees. On the other hand, physicians working in a hospital emergency room are highly educated, highly trained and licensed by the State of California. This is why a law was passed classifying them as independent contractors and not hospital employees. What about lawyers doing research for a law firm or who handle court appearances? They too are highly educated and licensed by the State. Yet they are treated by the EDD as employees of the law firm. As you can see from these examples logic has almost no place in an EDD audit. In the introduction of Part 1, I gave three examples of businesses that are essentially commercial matchmakers or third party logistics companies. Yet the EDD will usually conclude that these business relationships are, for the most part, that of employer-employee. What I’m saying is that logic and common sense are not so common in a typical EDD audit. They don’t win the day.

In the Borello case the California Supreme Court identified very important "secondary factors" that come into play when determining the nature and extent of control. Keep in mind that in virtually every business relationship there is lurking a certain amount of control. This control, by itself, is not necessarily fatal.

Here is a list of the major secondary factors that you must take into consideration when arguing your matter with an EDD auditor:

  • a. Whether the worker is engaged in a distinct occupation or business;
  • b. The kind of occupation, with reference to whether the work is usually done under the direction of the principal or by a specialist without supervision, in the locality;
  • c. The skill required in the occupation;
  • d. Whether the principal or the worker supplies the instrumentalities, tools, and place of work;
  • e. The length of time over which the services are to be performed;
  • f. The method of payment, whether by the time or by the job;
  • g. Whether the work is part of the regular business of the principal;
  • h. Whether the principal has the right to discharge at will, without cause; and
  • i. Whether the parties believe that are creating an employment relationship.

Conclusion

There is an element of control present in every business relationship. The presence of control is not ipso-facto fatal to the employer. In Part 3 we will explore these Borello factors and determine the relative weight of each of them.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures – A Manual for Practitioners" published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures – A Manual for Practitioners" published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

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