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ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – AB-5 HAS BEEN REPEALED! – SAY HELLO TO NEW AB-2257 – PART 5 – NEW LABOR CODE SECTIONS 2778 AND 2779 – THE PROFESSIONAL SERVICES AND SINGLE ENGAGEMENT EXEMPTIONS

By Robert S. Schriebman

2020

Introduction

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 AB-5 was repealed on September 4, 2020.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. 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.

This article will review new Labor Codes §§ 2778 and 2779, exemptions for enumerated professional services and single engagements. Before discussing this exemption, it is important for you to understand an overview of AB-2257, the Dynamex case, and the relevance of the Borello decision.

New Labor Code Sections

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:

  1. A. 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.
  2. B. The person performs work that is outside the usual course of the hiring entity’s business.
  3. C. The person is customarily engaged in an independently established trade, occupation, or business or the same nature as that involved in the work performed.

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 one must jump through before one is 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Just because AB-5 has been repealed does not mean that the history behind the repealed act has also been repealed.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.

Retroactive Impact of AB-2257

Does the new AB-2257 repeal AB-5 retroactively to January 1, 2020? It appears that it does. New Labor Code § 2785(b) states that insofar as the application of the new series of exemptions would relieve an employer from liability, those exemptions will apply retroactively to existing claims and actions “to the maximum extent permitted by law.” §2785(d) states that if the employer can demonstrate that there has been compliance with the relevant exemption section under AB-2257, the holding in Dynamex will not apply to that employer. The employer, however, must demonstrate compliance with the Borello decision. What is unclear is what remedy an employer has for retroactive relief. If payroll taxes were paid during 2020 for an occupation now exempt under the new law, will a claim for refund be allowed for the payment of 2020 payroll taxes that would not have been paid but for the new legislation?

One cannot truly understand and appreciate the impact of AB-2257 without a brief history lesson. It is important to understand the impact of the Dynamex decision and perhaps most importantly, the lasting and ongoing impact of the Borello decision

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 the 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 2778

Labor Code § 2778 provides an exemption for a broad category labeled “Professional Services.” Normally, we think that long-standing professions such as medical, legal, and accounting should come under this exemption, but that is not the case. The list of occupations now labeled as exempt under this new section is very long and extensive. Here is a partial list of new exempt occupations:

  • Marketing
  • Administrator of Human Resources
  • Travel agent services
  • Graphic Design
  • Fine artists – this is broadly defined to include drawings, paintings, sculptures, mosaics, works of calligraphy, works of graphic art, crafts, or mixed media
  • Enrolled Agent
  • Payment processing agent
  • Digital content aggregator
  • Freelance writer
  • Translator
  • Editor and copy editor
  • Illustrator
  • Newspaper cartoonist
  • Appraiser
  • Real estate agent
  • Home inspector
  • Repossession agency
  • Registered professional foresters

For occupations such as a still photographer, photo journalist, videographer or photo editor, all of the previous restrictions under AB-5 have been repealed. These exemptions do require a written contract that specifies the rate of pay and obligation to pay by a defined time so long as the individual providing these services did not replace an employee who performed the same work. There are other restrictions for exemption that require the careful reading of Labor Code § 2778(b)(2)(I)(i).

For the above occupations to be exempt under new Labor Code § 2778, the following conditions apply:

  • Some service providers must have a written contract that specifies the payment amount, including the applicable rate of pay, for services to be performed, as well as, the due date of payment for such services. In this respect, new section 2778 is one of few exemptions requiring a written contract.
  • The service provider can negotiate its own rates, and must have the ability to set his/her own hours.
  • If the work is performed where a service provider must have a business license or business tax registration, those requirements must be met.
  • The service provider maintains a business location. This location may include the service provider’s residence. However, the service provider is not prohibited from performing services at the location of the hiring entity.
  • The service provider advertises and holds itself out to the public as available to provide the same or similar services.
  • The service provider must have its own tools, vehicles, and equipment to perform the services.
  • The determination of whether an individual worker who is not acting as a sole proprietor, or a business entity, is an employee or independent contractor will be governed by the ABC test set forth in new Labor Code § 2775. This is the primary section that will determine the status of any non-exempt worker.

Service Providers in the Beauty Industry

Labor Code § 2778(a)(b)(L) sets forth exemptions for services provided by an esthetician, licensed electrologist, licensed manicurist, licensed barber, and licensed cosmetologist. However, the exemption for manicurist is set to expire on January 1, 2022, unless the exemption is extended.

To be exempt under Labor Code § 2778 members of the beauty industry are subjected to the following conditions:

  • Set their own rates, process their own payments, and be paid directly by the client
  • Set their own hours of work and have the discretion to decide the number of clients and which clients for whom they will provide services
  • Have their own book of business and schedule their own appointments
  • Maintain their own business license for the services offered to clients
  • If services are performed on the location of the hiring entity, a Form 1099 must be given to the salon or business owner from which providers rent their business space.

New Labor Code Section 2779

Labor Code § 2779 provides an exemption for single engagement events. This is defined under § 2779(b) as a stand-alone, non-recurring event in a single location or a series of events in the same location no more than once a week. Most likely the intention of the new law is to provide a safe harbor for gig workers such as security guards or event staff personnel. The law is not intended to provide an exemption for ongoing gig services such as Uber or Lyft. To qualify for this exemption, the following conditions must be met:

Here are the major conditions for exemption:

  • The service provider is free from the direction and control of the other contracting business. It is important to understand that the element of control is present in most business relationships. But the “control” that requires a worker to be treated as a W2 wage earner, is control over the details of the job as opposed to the control of the outcome.
  • The service provider must have a written contract that specifies the payment amount, including the applicable rate of pay, for services to be performed, as well as, the due date of payment for such services. In this respect, new section 2779 is one of few exemptions requiring a written contract.
  • The service provider can negotiate its own rates.
  • If the work is performed where a service provider must have a business license or business tax registration, those requirements must be met.
  • The service provider maintains a business location. This location may include the service provider’s residence.
  • The service provider advertises and holds itself out to the public as available to provide the same or similar services.
  • The service provider must have its own tools, vehicles, and equipment to perform the services.
  • The determination of whether an individual worker who is not acting as a sole proprietor, or a business entity, is an employee or independent contractor will be governed by the ABC test set forth in new Labor Code § 2775. This is the primary section that will determine the status of any non-exempt worker.

Conclusion

New Labor Codes §§ 2778 and 2779 governing professional services and single engagement exemptions cover many occupations that were restricted under AB-5. Keep in mind that even if you comply with all of the conditions set forth above, you are not home free. EDD auditors are free to apply the tests set forth in Borello when it comes to issuing an assessment.

***

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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