ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – AB-5 HAS BEEN REPEALED! – SAY HELLO TO NEW AB-2257 – PART 1
By Robert S. Schriebman
It happens to the best of us, we do things that we later regret and wish we could start anew. Legislative bodies from Congress to state legislatures sometimes regret the laws they pass and want to start over again. The California Legislature and Governor Newsom have taken a second look at AB-5, signed into law in September 2019 and have scrapped it. AB-5 was repealed on September 4, 2020. In its place we now have AB-2257. What’s the difference? The new legislation favors the entertainment industry and has provided many more new exemptions. Certain classifications such as tutors, and creative artists, now have no restrictions or conditions on their exempt status. This series of articles will discuss the new legislation and the exemptions, both old and new.
Gone are the laws that required domestic home workers such as live-in nannies and housekeepers to be treated as W-2 wage earners. Tutors are exempt even if they teach school curriculum so long as they are not hired by school districts. Freelance writers and photographers are not restricted by the number of articles they produce or engagements photographed. We will get into all of the major categories of exemption in this series of articles.
In reading this series of articles it is important to keep in mind that “exemption” does not mean a complete escape from the old rules. Those who are exempt under AB-2257 must still satisfy the test under the 1989 California Supreme Court decision in the Borello case. There are still hoops that you have to jump through before you are home free.
Just because AB-5 has been repealed does not mean that the history behind the repealed act has also been repealed. You need to know about the Dynamex case, the ABC Standard Test, and Borello. This introduction will give you some background information that will be important in working with and understanding AB-2257.
Dynamex Historical Background
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).
The Impact of the Borello Decision
In 1989 the California Supreme Court decided in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello). This case established a multi-factor test to determine whether or not an employer engaging an independent contractor has retained too much control over the relationship. If so, the contractor is re-classified as an employee. We will examine these factors and how they impacted the Court’s Dynamex decision in our next article. It is still not clear in my mind whether the Supreme Court threw Borello under the buss.
The ultimate decision of the California Supreme Court was to uphold a Wage Order issued by the Industrial Welfare Commission (IWC) back in 1916 that established a test under the “suffer or permit to work” standard. In footnote 3 of t he Decision, at page 3, the Court set forth the impact of an IWC Wage Order as follows: “In California, wage orders are constitutionally-authorized, quasi-legislative regulations that have the force of law. (Cal.Const., art.XIV, § 1; Lab.Code, §§ 1173, 1178, 1178.5, 1182, 1185; Industrial Welfare Com. v. Superior Court (1980) 27 Cal.3d 690, 700-703 (Industrial Wlf.Com.).)”
New Labor Code Section
AB-2257 created new Labor Code §§ 2775-2787. In a nutshell these new sections retain the ABC Standard set forth in AB-5. Like AB-5, the new law basically states that all workers, unless exempt, are going to be considered employees unless the hiring entity can prove the following:
- The person 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.
- The person performs work that is outside the usual course of the hiring entity’s business.
- The person is customarily engaged in an independently established trade, occupation, or business or the same nature as that involved in the work performed.
The remaining provisions of AB-2257 deal with the many exemptions under the ABC Standard and these exemptions will be discussed in the following articles. There are new exemptions and the lifting of exemption restrictions that made AB-5 so unpopular.
AB-2257 was enacted as urgent legislation primarily due to pressures from the entertainment industry. Large categories of exemptions are devoted to “the industry.” Having said this, we all find ourselves in a shadow land concerning enforcement of AB-5 with its many restricted exemptions. The new legislation liberates many prior restrictions. The real question is enforcement of the 8 months AB-5 was alive. At this point in time it is uncertain what the EDD is going to do in its audit program when it comes to whether or not it will enforce the short life of AB-5 or ignore AB-5 and conduct audits under standards and guidelines that preceded AB-2257. It will be interesting times when EDD auditors return to their desks.
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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