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EDD WORKER STATUS: Employee vs Independent Contractor WHAT YOU NEED TO KNOW, Part 2

Introduction:

This is the second part of a series of articles that dealing with the issue of who is an employee and who is an independent contractor in the eyes of the EDD. In Part 1, we presented definitions based upon California statutes, specifically the California Unemployment Insurance Code (CUIC) Sections 621(a),(b) and 13004. We also reviewed regulation Section 4304-1 that lists ten guidelines, or factors, used by the EDD. These definitions were vague and referred to common law rules used by an Administrative Law Judge (ALJ) in reaching a decision on who is an employee and who is an independent contractor. Before tackling this area we should take a moment to define who is an employer.

Who Is An Employer:

An official EDD publication, specifically DE 231 “Information Sheet – Employment”, provides the definition of an employer that is used by the EDD in determining an employer–employee relationship. An “employer” can be any employing unit such as a sole proprietor, partnership, joint venture, LLC or corporation. The term can also include associations, trusts, non profit organizations and public entities such as the city, county, state or federal government. Generally, a business becomes an employer when the total wages paid to one or more workers are in excess of $100 in any calendar quarter. The term wages is defined as remuneration for services performed, including cash payments, commissions, bonuses, and the reasonable cash value of non monetary payments for services.

Who Is An Employee – An Administrative Law Judge’s Point of View:

California employment and withholding taxes accrue only on amounts paid as remuneration for services rendered by employees as opposed to independent contractors. The relationships of employer and employee and of principal and independent contractor have long been recognized to be mutually exclusive. That is to say they can not exist at the same time with regard to the same transaction. The proof of the one status automatically precludes the existence of the other. Accordingly, the services of an independent contractor are not “employment” within the meaning of the CUIC or the regulations (See Precedent Decision P-T-2).

The burden of proof in a hearing before an ALJ is on the party attacking the employment relationship. This means that the EDD is presumed to be correct during a hearing and it is up to the “contractor” to chip away and destroy the EDD’s position. ALJs will tell you there is no single factor which determines the status of the worker. However, great emphasis is usually placed on the extent to which the principal has the right to control the worker’s manner and means of performing the details of his/her work. This is commonly referred to as the “Principal Test” or “The Most Important Factor” test. If the worker believes that he/she will be terminated or not rehired if he/she fails to follow instructions, this is relevant to show submission to control (Isenberg v Calif. Emp. Stabilization Comm. (1947) 30 Cal. 2d 34.).

In reaching a decision on who is an employee versus independent contractor, administrative law judges (ALJs) will first look to determine if the California Supreme Court has ever decided this issue. They do not have to look very far.

The Empire Star Mines Case – The 600 Pound Gorilla

When an Administrative Law Judge (ALJ) looks for judicial decisions concerning who is an employee and who is an independent contractor, the judge will see if the California Supreme Court has ever decided a similar case. It is safe to say that any ALJ deciding a worker status case will discuss the Empire Star Mines decision in his or her opinion. This is a very important case.

The leading California case setting forth criteria for determining whether an employment relationship exists is Empire Star Mines C., Ltd v. California Employment Commission (1946), 28 Cal. 2d 33, 168 P. 2d 686. The Supreme Court said:

“In determining whether one who performs services for another is an employee or an independent contractor, the most important factor is the right to control the manner and means of accomplishing the result desired. If the employer has the authority to exercise complete control whether or not that right is exercised with respect to all details, an employer-employee relationship exists. Strong evidence in support of an employment relationship is the right to discharge at will, without cause. Other factors to be taken into consideration are:

(a) Whether or not the one performing services is engaged in a distinct occupation or business;

(b) The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;

(c) The skill required in the particular occupation;

(d) Whether the principal or the workman supplies the instrumentalities, tools and the place of work for the person doing the work;

(e) The length of time for which the services are to be performed;

(f) The method of payment, whether by the time or by the job;

(g) Whether or not the work is a part of the regular business of the principal;

(h) Whether or not the parties believe they are creating the relationship of employer-employee.

There are two other major decisions that ALJs use in determining a workers status. These cases are Tieberg, S. G. Borello and Sons, Inc., and Section 220 of the Restatement of the Law of Agency. These will be discussed in Part 3. In Part 3 we will also discuss who is an employee by specific statues and services of employees who are exempt from employment and withholding taxes.

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.