Ask The California Employment Tax And Payroll Tax Attorney – Ab 5 Has Been Signed Into Law – How Will The New Law Impact Your Business? – Part 1
By Robert S. Schriebman
2019
Introduction
There are several articles on this website that have discussed and set forth AB 5 as it was moving through the legislature in draft form. On September 18, 2019, AB 5 was finalized and signed into law by Governor Newsome. The new law is effective beginning January 1, 2020.
This series of articles will discuss all of the facets of the final version of AB 5. First let’s review the historic background and then its legislative intent. Thereafter, I will set forth new Labor Code and CUIAB Code changes. Finally, I will discuss the many exceptions to new Labor Code § 2750.3 and amendments to CUIC §§ 606.5 and 621. Before doing so however, it is important that we take a brief historical overview of the Dynamex case that led to the enactment of AB 5. We must also be familiar with the 1989 California Supreme Court Borello decision. It is important for you to understand that any exemptions from the impact of AB 5 do not automatically mean that the exempt worker is a ‘slam-dunk’ independent contractor. His/Her status as an independent contractor will be governed by Borello.
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.).)”
Legislative Intent
After briefly discussing the Dynamex decision, the legislature stated that the current definition of “Employee” includes any individual who, under the usual common law rules governing the employer-employee relationship, has the status of an employee. Admittedly, it is never good practice to define a term such as employee by using the same word. Under Dynamex there will now be a very strong presumption that a worker is an employee unless and until the employer can convince a judge or the EDD that the worker is free from the control and direction of a hiring entity. Further, the employer must prove that the worker performs work that is outside the usual course of the hiring entity’s business. Finally, the employer must also prove that the worker is customarily engaged in an independently established trade, occupation or a business. Any exception to this presumption will now have to undergo the Borello test. In other words, there are now at least four hoops the hiring entity must clear in order for the worker to be considered and independent contractor.
Section 1 of AB 5 goes on to state the legislative objectives in enacting AB 5. Here are the primary concerns:
- 1. Misclassified workers lose significant work place protections, such as unemployment benefits, and other traditional protections.
- 2. Misclassified workers have lost basic rights and protections including a minimum wage, workers compensation benefits, sick pay leave and paid family leave.
- 3. The misclassification of workers has been a significant factor in the erosion of the middle class and the rise in income in inequality.
- 4. Companies that misclassify workers for the purpose of increasing bottom line profits, do not compete fairly in the market place.
- 5. The State Treasury is losing big bucks in its failure to capture potential employment taxes.
New Labor Code Section and Revised CUIC Sections
AB 5 created new Labor Code § 2750.3. In a nutshell this new section codifies the ABC Standard set forth in Dynamex. The new law basically states that all workers, unless exempt, are going to be considered employees unless the hiring entity can prove the following:
- 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.
- B. The person performs work that is outside the usual course of the hiring entity’s business.
- 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.
CUIC §§ 606.5 and 621 have been modified to eliminate the common law tests for establishing an employer-employee relationship.
Exceptions
The remaining provisions of AB 5 deal with the many exemptions under the ABC Standard and these exemptions will be discussed the following articles.
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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. 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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