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 4
By Robert S. Schriebman
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. In Part 3, I discussed additional exceptions and exemptions.
This Part 4 will discuss additional exceptions and exemptions set forth in Labor Code § 2750.3(d) and (e). 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(d) and (e) – Real Estate Agents, Repossession Agency, and Business-to-Business Contracting Relationship
Licensed Real Estate Agent: There is nothing really new here. Licensed real estate agents, working under the direction and control of a licensed real estate broker are traditionally treated as independent contractors. Despite this long-standing practice, I have seen cases where EDD auditors and even administrative law judges have concluded real estate agents are employees. I have had to appeal these cases but I have been successful every time. § 2750.3(d)
Licensed Repossession Agency: The independent contractor status is governed by section 7500.2 of the Business and Professions Code. § 2750.3(d)
Business-to-Business Contracting Relationship: If a business entity formed as a sole proprietorship, partnership, LLC, LLP, or corporation contracts to provide services to another such business, the determination of employee or independent contractor status of the business services provider shall be governed by Borello. There are several conditions are set forth in the new legislation, ALL OF WHICH MUST BE MET. § 2750.3(e)
A. The type of work performed and the services rendered must not be the type for which a CSLB contractor license is required.
B. The business service provider (BSP) is free of direction and control by the other contracting party.
C. The BSP is providing services directly to a contracting business entity rather than to customers of the contracting business.
D. There must be a written contract.
E. If a local business license is required, the BSP must have that license or business tax registration.
F. The BSP maintains a business location that is separate from the business or work location of the contracting business.
G. The BSP is customarily engaged in an independently established business of the same nature as that involved in the work performed.
H. The BSP contracts with other businesses to provide the same or similar services.
I. The BSP advertizes and holds itself out to the public as available to provide the same or similar services.
J. The BSP provides its own tools, vehicles, and equipment.
K. The BSP can negotiate its own rates.
L. The BSP can set its own hours and location of work.
In other words, in addition to meeting all of the tests in Borello, the business contractor must also satisfy all of the above requirements.
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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