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 3
On September 18, 2019, AB 5 was finalized and signed into law by Governor Newsom. The new law is effective beginning January 1, 2020.
In Part 1, I discussed the legislative intent of AB 5, the basic structure of new Labor Code § 2750.3 and the modifications to §§ 606.5 and 621 of the CUIC. In Part 2, I discussed the first of a list of many exemptions and exceptions.
This article will discuss the exemptions set forth in Labor Code § 2750.3(c). 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 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.).)”
Additional Exceptions Pursuant to Labor Code § 2750.3(c) – Contracts for “Professional Services”
Not every person who renders professional services comes under this exemption. “Professional Services” means services that meet any of the following:
- Marketing services, providing that these services are original and creative in character, 2750.3(c)(1)(B)(i)
- Administrator of Human Resources, 2750.3(c)(1)(B)(ii)
- Travel Agent Services 2750.3(c)(1)(B)(iii)
- Graphic Designer 2750.3(c)(1)(B)(iv)
- Grant Writer 2750.3(c)(1)(B)(v)
- Fine Artist 2750.3(c)(1)(B)(vi)
- Enrolled Agent licensed by the Department of the Treasury to practice before the Internal Revenue Service 2750.3(c)(1)(B)(vii)
- Payment Processing Agent through an Independent Sales Organization 2750.3(c)(1)(B)(viii)
- Services provided by a Still Photographer or Photo-Journalist who do not license content submissions more than 35 times per year. This exemption does not apply to an individual who works on motion pictures, including theatrical, television, broadcast news, music videos, or internet streaming. 2750.3(c)(1)(B)(ix)
- Freelance Writer, Editor, or Newspaper Cartoonist who does not provide content submissions more than 35 times per year 2750.3(c)(1)(B)(x)
In order for the above ten exemptions to apply, ALL of the following factors must be satisfied.
- The Professional must maintain a business location which may include a personal residence that is separate from the hiring entity. That being said, it is permissible that the services may be performed at the location of the hiring entity.
- For any services rendered commencing July 1, 2020, and thereafter, if the business is located in a municipal jurisdiction requiring a business license, the professional must have a business license.
- The professional has the ability to set or negotiate his/her own rates for the services performed.
- The professional has the ability to set his/her own hours taking into consideration project completion dates.
- The professional must hold himself/herself out to work for others.
- The professional has the right to exercise discretion and independent judgment in the performance of services.
Additional Exceptions Pursuant to Labor Code § 2750.3(c)(1)(B)(xi) – “The Beauty Industry”
The following categories of beauty industry workers are also exempt providing they meet a 5-part test as well as the tests set forth under Borello.
- Licensed Esthetician
- Licensed Electrologist
- Licensed Manicurist
- Licensed Barber
- Licensed Cosmetologist
Apparently there is no specific exemption for a hair stylist or related fields, but the barber exemption may apply.
In the order for the above 5 exemptions to apply, the following test must also be met under this specific Labor Code subsection.
- The licensed individual sets their own rates, processes their own payments, and is paid directly by clients
- The licensed individual sets their own hours of work and has sole discretion to decide the number of clients and which clients for whom they will provide services.
- The licensed individual has their own book of business and schedules their own appointments.
- In addition to having any state required license, the individual must also possess a local business license where required.
- If the licensed individual is renting space at a salon, an annual 1099 must be timely issued to the salon or business owner.
The above exemptions and requirements have a limited life span. If not extended by the Legislature, they are set to expire on January 1, 2022.
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.
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