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ASK THE EDD LAWYER – THE CALIFORNIA SUPREME COURT’S DYNAMEX DECISION – THE TIMES REALLY ARE A’CHANGIN’ – PART 1

By Robert S. Schriebman

2018

Introduction

In this world the only real certainty is change. If you studied your Bible you may remember the Book of Ecclesiastes, wherein King Solomon stated, "…there is nothing new under the sun." At the end of April 2018 California Supreme Court published the decision in Dynamex Operations West, Inc. v The Superior Court of Los Angeles CountyThis 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 1913, 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.

To read the Dynamex case is an undertaking in itself – all 82 pages of it. However, a careful reader can figure out where the Supreme Court is going by just reviewing portions of the first 2 pages. Here is what the Court had to say:

"Under both California and federal law, the question whether an individual worker should properly be classified as an employee or, instead, as an independent contractor has considerable significance for workers, businesses, and the public generally. On the one hand, if a worker should properly be classified as an employee, the hiring business bears the responsibility of paying federal Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing worker’s compensation insurance, and, most relevant for the present case, complying with numerous state and federal statutes and regulations governing the wages, hours, and working conditions of employees. The worker then obtains the protection of the applicable labor laws and regulations. On the other hand, if a worker should properly be classified as an independent contractor, the business does not bear any of those costs or responsibilities, the worker obtains none of the numerous labor law benefits, and the public may be required under applicable laws to assume additional financial burdens with respect to such workers and their families. Although in some circumstances classification as an independent contractor may be advantageous to workers as well as to businesses, the risk that workers who should be treated as employees may be improperly misclassified as independent contractors is significant in light of the potentially substantial economic incentives that a business may have in mischaracterizing some workers as independent contractors. Such incentives include the unfair competitive advantage the business may obtain over competitors that properly classify similar workers as employees and that thereby assume the fiscal and other responsibilities and burdens that an employer owes to its employees. In recent years, the relevant regulatory agencies of both the federal and state governments have declared that the misclassification of workers as independent contractors rather than employees is a very serious problem, depriving federal and state governments of billions of dollars in tax revenue and millions of workers of the labor law protections to which they are entitled."

The Supreme Court is not happy with employers who try to side-step laws, relating to the protection of the worker, and making certain that he/she is provided with a decent living wage and safe working conditions. The Court is also concerned with the welfare and protection of children and women who have historically been taken advantage of by those seeking a competitive advantage by avoiding payroll taxes, workers’ compensation benefits, and other protections in which California has taken a nationwide leadership role.

In this series of articles, I will discuss in-depth the Dynamex case and its impact upon the Borello and Martinez cases.

It is interesting to note when reading Dynamex case, that it does not involve any issues of taxation. The EDD is not mentioned at all, nor is the IRS. The EDD’s 23 factors are not discussed. It is an employment law case, but you can be assured that the EDD will use Dynamex and become more aggressive and less tolerant of employers who try to avoid taxes by improperly treating workers as independent contractors.

Conclusion

Dynamex is not a case involving payroll taxes or the filing of tax returns. When taxation is mentioned, especially in the above quote, it is only in passing. Having said this, I will be commenting on Dynamex through the eyes of a tax lawyer because the tax consequences of Dynamex will be significant for a long time to come.

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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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