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ASK THE EDD ATTORNEY – HOW TO AVOID FATAL INDEPENDENT CONTRACTOR CONTROL AND BEAT AN EDD AUDIT – PART 4

By Robert S. Schriebman
November 22, 2016

Introduction

This is Part 4 and the final part of our series of articles dealing with rebutting the EDD's usual determination of fatal employer control in a worker status audit. If the typical EDD auditor determines the presence of even minimal control in a worker hiring, the auditor will rarely give the employer-principal the benefit of the doubt and conclude that the worker is a true independent contractor.

In this Part 4 we will look at the remaining 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)

We will review the following final factors considered by Borello and the cases that have followed this very important California Supreme Court decision:

· Who Supplied The Tools, Equipment, and Instrumentalities To Perform The Services?

· The Length Of Service Of The Relationship

· The Method Of Payment

· Is The Work Performed Part Of The Regular Business Of The Principal?

· The Right To Discharge At Will.

· Did The Parties Believe They were Entering Into An Independent Contractor-Principal Relationship?

Who Supplied The Tools, Equipment, and Instrumentalities To Perform The Services?

If the contractor is responsible for all costs associated with operations as well as costs associated with the payment of employees, subcontractors, or assistants, these facts weigh in favor of independent contractor status. There is a hidden trap in this factor, especially involving the construction industry. When a licensed contractor hirers an unlicensed subcontractor the law is very harsh. The unlicensed worker is presumed to be an employee. It is almost chiseled is stone! However, in punishing the general contractor, the EDD makes no allowance for the costs of materials, tools, and equipment used by that subcontractor. There is an average tool, etc. factor of 30% that should be subtracted from the EDD's wage determination. The EDD will never voluntarily make this concession. It must be raised in the same way that a lawyer makes an objection during a trial - promptly and vigorously.

The Length Of Service Of The Relationship

If a worker is required to maintain a continuous relationship with the employer, or the worker elects to work exclusively with one employer, there is a strong presumption that the worker is an employee. On the other hand, if the worker is free to work for others, and does so, that worker most likely is an independent contractor. If the worker is on-call, and can choose his or her work schedule, this factor weighs in favor of independent contractor status.

The Method Of Payment

How a worker is paid often determines worker status. If a worker is paid weekly and submits a timecard there is a presumption that the worker is an employee. If the worker paid by the job or paid piece-work, and submits an invoice, this factor weighs in favor of independent contractor status.

Is The Work Performed Part Of The Regular Business Of The Principal?

This may be the most difficult of all the factors to rebut. This is especially true if the company has a large number of employees or is engaged in a labor-extensive business such as manufacturing. The three examples of businesses discussed in Parts 1 and 2 were essentially third party logistics coordinators. Ask the question, "Is the service in issue a regular part of the business operation?" It is clear that a business engaged in manufacturing that occasionally calls in a plumber or hires a gardener, does not depend upon these services for its day-to-day business operations. How about a machine shop that retains machinists to work on heavy equipment and pays them by the job or piece-work, and treats them as independent contractors? Are these machinists a regular part of the machine shop operation? On the other hand, what about a nurses' registry that refers an RN to a hospital for a temporary assignment? Most likely the registry is nothing more than a commercial matchmaker.

The Right To Discharge At-Will

If a worker can be terminated at the whim of an employer that worker most likely is an employee. On the other hand, if a written contract demonstrates notice requirements and reciprocal contractual obligations relating to the termination upon 7 days written notice, there is no right to terminate at-will. However, the EDD rarely gets this right. The typical EDD auditor will find the worker to be a common law employee if there is any language in the contract relating to termination. The EDD likes to argue that any provision in a written contract dealing with termination automatically means that the contract can be terminated without economic consequence. And this means common law employee status. The EDD gets it wrong!

Did The Parties Believe They were Entering Into An Independent Contractor-Principal Relationship?

I have rarely seen an audit report where the auditor mentioned or discussed the intention of the parties. It does not matter if a written contract exists. A well drawn written contract will clearly state the intention of the parties, i.e. to create an independent contractor relationship. It is very common for a worker, who has signed a written agreement, to file for UI benefits and get them because, despite the language in the written contract, the worker believed he or she was an employee. In other words, to paraphrase Samuel Goldwyn, "A written contract is not worth the paper it's written on." It's just not right! People should be accountable and responsible for their actions.

The intention of the parties in a business relationship, should govern that relationship. If a worker signs a contract that clearly states the worker to be an independent contractor, that's what the worker is. The worker should not be rewarded by the EDD by being given employee benefits at the principal's cost.

Conclusion

These four articles have discussed the most important factors used by the courts, as well as administrative law judges of the CUIAB to determine true worker status. If these points are in your favor as an employer-principal, you should insist that the EDD auditor follow the law set forth by the California Supreme Court. I wish you much success in your dealings with the EDD.

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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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