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ASK THE EDD ATTORNEY – THE EDD AND THE STATUTORY EMPLOYEE PART 2

By Robert S. Schriebman
September 15, 2016

Introduction

This is Part 2 of a two-part series that will discuss the classification and treatment of so-called "Statutory Employees" by the EDD. Here we will discuss the remaining categories of statutory employees under the EDD laws. We will also discuss the status of unlicensed subcontractors who perform services for licensed as well as unlicensed contractors.

The EDD has more categories of statutory employees than the IRS. In Part 1, we discussed drivers and distributors of food products, and full time salespersons. In Part 2 we will discuss piece-good workers, artists and authors.

  • At Home Piece-Good Workers Most likely statutory employee worker status came about as a result of the "Sweat Shops" prevalent in both New York and Los Angeles during the first quarter of the 20th century. A home worker performing work, according to specifications furnished by the person for whom the services are performed, and which are required, to be returned to that person or a person designated by him/her is a statutory employee. (See CUIC §621.)

    The statutory employee status is especially firm if the following conditions are found by the EDD auditor:

    • The services are ongoing; not just a single transaction.
    • The worker does not have a substantial investment in the facilities and equipment used to produce the product.
    • Substantially all of the work is to be performed personally by a specific worker.
  • Artists and Authors These rules specifically apply to the motion picture, television, and radio industries. However there must be the following conditions:

    • The employer has the right to control and direct the services performed, and
    • The workers are under a collective bargaining agreement which specifically designates them as employees.

    Authors have different criteria. An author is a statutory employee, if the author and the publisher agree that the work shall be considered a work-for-hire, and the publisher or the person commissioning the work, is the owner of the copyright.

The Unlicensed Subcontractor As A Statutory Employee

Another category of statutory employee is an unlicensed subcontractor who has been hired by a licensed or unlicensed contractor. The hiring contractor can be a general contractor or a specialty subcontractor.

The EDD takes the broad overall position that any individual not holding a valid contractors' license but performing services requiring a contractor's license will be considered an employee of the licensed or unlicensed contractor who has hired the worker (See CUIC § 621.5). But CUIC § 621.5 does not clearly establish an absolute employer-employee relationship. Rather CUIC § 621.5 must be read in conjunction with CUIC § 13004.5 and Labor Code § 2750.5.

Let's look at CUIC § 13004.5. Lo and behold the wording is identical to CUIC § 621.5. Not much help here.

Just about every EDD auditor I have worked with over these many years automatically concludes that an unlicensed subcontractor is an employee of the hiring contractor. It is a firm position; chiseled in stone. Many judges including ALJs and Superior Court judges also take this position. They believe that there is a conclusive presumption (as opposed to a rebuttable presumption) that the unlicensed subcontractor is an automatic employee. They site Labor Code § 2750.5 as their authority. But are they correct? Let's take a look at Labor Code § 2750.5.

Labor Code § 2750.5 is entitled "Contractors; presumption of employee status; proof of independent contractor status." The introduction to § 2750.5 says the following:

  • There is a rebuttable presumption affecting the burden of proof that a worker performing services for which a license is required pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code, or who is performing such services for a person who is required to obtain such a license is an employee rather than an independent contractor.

It is clear from this wording in the introduction that there is no conclusive presumption that an unlicensed contractor is automatically an employee. But does this mean that we can establish a legal independent contractor relationship with an unlicensed subcontractor? To solve this question we must look at the rest of labor Code § 2750.5.

Subsections a, b, and c of Labor Code § 2750.5 set forth the usual criteria for an independent contractor relationship such as the absence of control, the intention of the parties, and the custom of the industry. These are more fully explained in the 27 factors set forth in the EDD Audit Manual.

Having said the above, it would seem that the issue of the worker status of the unlicensed contractor turns on the facts and circumstances of each relationship. However, when it comes to unlicensed subcontractors the key to it all is set forth at the end of Labor Code § 2750.5. This states the following:

  • "In addition to the factors contained in subdivisions (a), (b), and (c), any person performing any function or activity for which a license is required pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code shall hold a valid contractors' license as a condition of having independent contractor status."

The riddle is solved: in order to establish a true and legal independent contractor relationship with a subcontractor, that subcontractor must be currently licensed and that license must be in good standing. The contractor bond must also be paid.

Is this the end of our inquiry? It is with regard to subcontractors. But what about laborers and those workers whose skills do not require a license? For those workers, Labor Code § 2750.5 and the 27 factors are alive and well.

It's complicated...

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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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