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ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – EDD’S CURRENT POSITION REGARDING THE APPLICATION OF THE DYNAMEX DECISION IN WORKER STATUS AUDITS

By Robert S. Schriebman

2018

Introduction

At the end of April 2018 California Supreme Court published the decision in Dynamex Operations West, Inc. v The Superior Court of Los Angeles County. This case has changed the playing field and given new definitions to "employer," "employee," and "employed." The EDD’s famous 23 factor test may no longer be applicable and the leading Supreme Court case of Borello 48 Cal.3d 341 may have also been thrown out. The new test is known as the "Suffer or Permit to Work" Standard. This new standard has three parts, any one of which, if met, will change the relationship of independent contractor to employer-employee. It is not a new test that the Supreme Court created on its own. Rather it has been around since 1916, but has been hidden in a wage order issued by the California Industrial Welfare Commission, but never been applied or interpreted by the courts until 2010 when it was discussed in another California Supreme Court Case known as Martinez v Combs 49 Cal.4th 35. Wage Order No. 14, Cal. Code /regs., tit. 8, § 11140, subd. 2(C).

"To employ, under the IWC’s definition, has three alternative definitions. It means: (a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law employment relationship." (Martinez, supra, 49 Cal.4th at p.64)

In Dynamex the Supreme Court focused upon narrowing down and defining the "suffer or permit to work" standard. The goal was to adopt a simpler, more structured standard for distinguishing between employees and independent contractors. The Court adopted the "ABC standard" used in other states.

The ABC standard has 3 primary factors:

  • That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact;
  • That the worker performs work that is outside the usual course of the hiring entity’s business;
  • That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. (Dynamex page 64)

The Real Danger of Applying Dynamex in an EDD Audit

Professionals commenting on the application of Dynamex in a typical EDD worker status audit, almost unanimously agree that the deck is stacked against the employer. If the services performed by an independent contractor are an integral part of the business operation, the worker is going to be automatically classified as a common law employee. Those preparing elaborate legal arguments in rebuttal need only stuff the presentation back into the briefcase and raise their hands in surrender. Traditional independent contractors such as craftsman, plumbers, electricians, and those in the professions will continue to be acknowledged historically as independent contractors. However, the water may still be muddy here. For example, large companies maintain internal departments for maintenance, electrical work, and even plumbing. Suppose Sam Jones, an employee and an internal electrician is on vacation or is ill. An electrical problem comes up and the company is forced to call ACME Electricians. Since ACME is doing the same job as Sam Jones, are ACME’s workers going to be classified as employees? Seems silly, but these kinds of situations are going to happen.

Current EDD Field Position on the Application of Dynamex

Dynamex has now been the law of the land for over six months. That’s enough time for the EDD to implement a position that all auditors will now use Dynamex in determining worker status. But is this what is happening today?

I recently attended a well-known and respected tax controversy institute. It is rare that the institute discusses state tax matters. This year was an exception. On the panel was a high ranking EDD executive who made it very clear that the EDD is not currently applying Dynamex and has no intention to do so in the near future. However, while this is good news, as long as it will last, this EDD executive made it clear that ALJ judges in the CUIAB are currently applying Dynamex in reaching judicial determinations.

Conclusion

While field auditors across California are currently not resorting to Dynamex in making worker status determinations, there is great risk of being hit with Dynamex if you elect to have an ALJ hearing on the merits. This makes settlements even more attractive than before.

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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. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.

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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