The EDD And The Issue Of Independent Contractor Control: Is Any Control Is Allowed?
By Robert S. Schriebman
The EDD is very concerned about the issue of control. How much control one has over a so-called independent contractor will be the key determining factor used by the EDD to reclassify that contractor as an employee. If the contractor is classified as an employee the employer will be responsible for back employment and withholding taxes for at least three preceding years. The EDD has over twenty factors it uses to reclassify contractors as employees. However, the most important factor is how much control is exercised by the perspective employer over the work function of the contractor. Most EDD auditors I encounter have zero tolerance for any control whatsoever. Is the EDD auditor correct? Is some control allowed over the contractor?
Let us look at the EDD’s audit manual in Chapter IX. That chapter lists twenty three factors that the EDD is suppose to take into consideration during an audit. The first element listed is entitled “Instructions.” In order to determine an employer-employee relationship the manual states the following:
“A worker who is required to comply with instructions about when, where, and how to work is ordinarily an employee. The instructions may be in the form of manuals or written procedures that show how the desired result is to be accomplished. Some employees may work without receiving instructions because they are highly proficient and conscientious workers. Even if no instructions are given, the control factor is present if the employer has the right to give instructions.”
The above sounds pretty tough and rigid. The EDD does not like any form of control in an independent contractor relationship. However, this is not how things function in the real world.
The California Unemployment Insurance Appeals Boards is the forum that hears cases decided by administrative law judges. Every once and awhile the Board will issue a Precedent Decision. As far as the EDD is concerned this is the equivalent to a US Supreme Court decision. Many years ago the Board issued decision P-T-2. This is the key decision that must be used by the EDD as a guideline when determining control. Some control is indeed allowed even in an independent contractor relationship.
P-T-2 is instructive because it has a thorough discussion on the issues of control and the right to control. What is important is the Board’s holding that some control of the worker is allowed; one can still be an independent contractor. According to this Precedent Decision, there is no single factor which determines the status of a worker. Great emphasis is placed upon the extent to which the principal has the right to control the manner, methods, and means of performing the details of one’s work. See also Isenberg v. California Employment Stabilization Commission (1947), Tomlin v. California Employment Commission (1947), 30 Cal. 2d 34 at page 39, Sparks v. L. D. Folsom Co. (1963), 217 Cal. App. 2d 279 at pages 284 to 287.
The Extent To Which The Right Of Control Exists Is Of Fundamental Importance.
A principal beneficially interested in work being performed has the right to retain limited controls over the manner and means of the performance of the work for limited purposes without thereby becoming an employer. See Western Indemnity Company v. Pillsbury (1916), 172 Cal. 807 at page 811; Bohannon v. McClatchy Publishing Co. (1936), 16 Cal. App. 2d 188 at page 199.
Like P-T-2, Precedent Decision, P-T-346 was also a case where salespersons were held to be independent contractors and not common law employees. The decision makes a very important point concerning the fact that complete absence of control is not required in order to find workers to be independent contractors. The decision stated the following:
“Complete abnegation of control is not essential to the establishment of a status of independent contractor. Where one person is performing work in which another is beneficially interested, the latter may exercise over the former a certain measure ofcontrol which looks to the results to be obtained without creating the relationship of employer-employee.” Bates v. Industrial Accident Commission (1958) 156 Cal. App. 2d 713, Tax Decisions Nos. 87, 115, 148, 260, 658, 1176, 1858, 1972 and 2167.
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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.