By Robert S. Schriebman
This is Part 4 and final part of a 4-part series of articles discussing the California Supreme Court's Dynamex decision.
At the end of April 2018 the California Supreme Court published its 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 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 buried in a wage order issued by the California Industrial Welfare Commission, but never 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).
The old - new way of determining worker status has, in my opinion, become more complex and resembles a three-layer cake where the foundation layer is still the EDD's 23-factor. The second layer is the Borello case, discussed in Part 3, is still viable (with a little bit of Ayala thrown in for measure). However, at the top of the cake will be the new ABC standard resurrected by Martinez. The EDD will be free to use whatever test or combination of factors works in its favor. Employers are going to have a more difficult time challenging EDD auditor determinations because any working relationship that has not been a time-tested traditional independent contractor relationship is going to be reclassified as an employer-employee relationship. The end result of the decision looks like big bucks for the State's Treasury and misery coupled with uncertainty for the small and medium size business.
In this article we will look at the Martinez decision and how it influenced the California's Supreme Court's Dynamex decision.
The Martinez case never directly involved worker status issues. It did address the definitions of "employ" and "employer" as used in California wage orders issued by the Industrial Welfare Commission (IWC). The Court in Dynamex held that these definitions went to the heart of the worker-status issue.
Martinez involved strawberry harvesters who were not paid required minimum wage or overtime. The growers (owners) argued that these workers were independent contractors. The harvesters tried to use the standard of "suffer or permit to work" against vendors and suppliers as joint employers with the growers. The workers lost. The Court was not willing to attribute an employer-employee relationship to the end purchasers of the produce. The case involved legislation enacted in 1913 to create the IWC as well as a 1916 wage order defining "employee" and "employer." The wage order was designed to protect women and children in the labor force by creating the "suffer or permit to work" test. "To employ" means suffer or permit to work and an "employer" includes a person or entity who "employs or exercises control over the wages, hours, or working conditions of any person." (Martinez, supra, 49 Cal. 4th at p.59). Things became a bit confusing when the Martinez court concluded that there were two standards - the traditional common law world view and the test under the 1916 "suffer or permit" wage order.
"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)
Arguments Against the ABC Standard
The attorneys for Dynamex argued that the literal application of the 3-part standard would characterize all individual workers as employees including those engaged in traditional independent businesses such as plumbers, electricians, CPAs and Attorneys. They argued that the 6-factor test in Borello should apply. The Court admitted that when applied literally they were right - everybody is an employee! However, a true "economic reality test" coupled with an historical perspective would treat traditionally independent businesses consistently. Instead the economic reality test would focus upon how workers were traditionally used in the hiring entity's business. Therefore, traditional independent economic occupations such as plumbers, etc., will continue to be recognized as independent.
How will economic reality be determined? Here is where nothing traditional has been thrown under the bus. The EDD's 23-factor test and the Borello 6-factor test are still viable. In other words, everything old is new again.
The Burden of Proof Will Be on the Employer - The Deck Is Stacked!
In establishing that a worker is an independent contractor as opposed to an employee, the employer has always had the burden of proof. In the real world of EDD audits, this must be established, not by a preponderance of the evidence standard, but by the tough standard of clear and convincing evidence. The Supreme Court has affirmed this long established practice by the following words:
"It bears emphasis that in order to establish that a worker is an independent contractor under the ABC standard, the hiring entity is required to establish the existence of each of the three parts of the ABC standard. Furthermore, inasmuch as a hiring entity's failure to satisfy any one of the three parts itself establishes that the worker should be treated as an employee..., a court is free to consider the separate parts of the ABC standard in whatever order it chooses." (Dynamex page 76).
The employer must establish all three elements in order for the worker to be treated as an independent contractor. If the employer fails to establish any one element of the A-B-C- standard, the employer loses and the EDD wins - so does the State Treasury. Perhaps the words of the Court said it best:
"In sum, we conclude that unless the hiring entity establishes (A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact, (B) that the worker performs work that is outside the usual course of the hiring entity's business, and (C) that the worker is customarily engaged in an independently established trade, occupation, or business, the worker should be considered an employee and the hiring business an employer under the suffer and permit to work standard in wage orders. The hiring entity's failure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is an included employee, rather than an excluded independent contractor..." (Dynamex page 77)
Dynamex is not a tax case. It is essentially social welfare reform. It establishes the 1916 wage order standard as the proper measurement to determine if a business relationship is truly one involving an independent contractor as opposed to an employee. The new test standard is "Suffer or Permit to Work." To implement this standard there is going to be an ABC standard that will treat most working relationships as employer-employee.
The waters have become murkier. As through a glass darkly, everything is on the table - nothing is off the table. The emphasis on the working relationship has been shifted from Borello and Ayala, through Martinez and now Dynamex. Of course, the application of Dynamex is just beginning. It will be interesting to revisit Dynamex in the next year or so to see if the waters have gotten any clearer.
Of course it is only a matter of time before we learn how and when the EDD will use the ABC standard to conclude that an independent contractor is really an employee. It's not going to get easier on the employer. Audits will become more intrusive and assessments are likely to increase both in frequency and dollar amount.
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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