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 2
By Robert S. Schriebman
On September 18, 2019, AB 5 was finalized and signed into law by Governor Newsome. The new law is effective beginning January 1, 2020.
In Part 1 I discussed the legislative intent of AB 5 and the basic structure of new Labor Code § 2750.3 and the modifications to §§ 606.5 and 621 of the CUIC.
This next series of articles will discuss the many exemptions and exceptions to AB 5. Before doing so however, it is important that you understand the historical background of the Dynamex case and its influence on the creation of AB 5.
You must also be familiar with the 1989 California Supreme Court Borello decision. It is important for you to understand that any exemptions or exceptions 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.).)”
The Exemptions and Exceptions Pursuant to Labor Code § 2750.3(b)
License Insurance Agents: 2750.3(b)(1) A person or organization who is licensed by the Department of Insurance.
Physician and Surgeon: 2750.3(b)(2) Must be licensed by the State of California and comply with Section 500 et seq of the Business and Professions Code This applies to a sole proprietorship, professional partnership or professional corporation.
Dentist: 2750.3(b)(2) Same rules as apply to a physician and surgeon
Podiatrist2750.3(b)(2) Same rules as apply to a physician and surgeon
Psychologist2750.3(b)(2) Same rules as apply to a physician and surgeon
Veterinarian2750.3(b)(2) Same rules as apply to a physician and surgeon
There are no provisions for the exemption of Chiropractors – may come under the physician and surgeon exemption.
Lawyer: 2750.3(b)(3) Must be actively licensed.
Architect: 2750.3(b)(3) Must be actively licensed.
Accountant: 2750.3(b)(3) Must be actively licensed.
There are no provisions for the exemption of tax return preparers.
Engineer: 2750.3(b)(3) Must be actively licensed.
Private Investigator: 2750.3(b) (3) Must be actively licensed.
Enrolled Agent: 2750.3(c) Must be actively licensed.
Securities Broker: 2750.3(b)(4) Must be registered with the SEC or the Financial Industry Regulatory Authority or licensed by the State of California.
Direct Salesperson: 2750.3(b)(5) The specific rules for a direct salesperson are set forth in CUIC § 650 which has not been modified by AB 5.
Commercial Fisherman: 2750.3(b)(6) Must work on an American vessel as set forth in subsection (6)(A)(iii). This is a limited exemption that will expire on January 1, 2023 unless extended by the Legislature.
More Exemptions and Exceptions to Follow
The remainder of this series of articles will discuss additional exemptions and exceptions as well as exceptions to the exceptions. Several exemptions have subsections that must be strictly observed and followed before the worker can be considered an independent contractor and pass the tests set forth in Borello.
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.
Web Site Article 415