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 5
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 Parts 2, 3 and 4, I discussed some exemptions and exceptions.
This Part 5 will discuss the changes in the construction industry which have been indirectly brought about by AB 5. I say this because the Legislature attempted to make clear that AB 5 does not specifically apply to the construction industry in general. However, the Legislature added additional criteria not found in the traditional definition set forth in Labor Code § 2750.5. There are also portions of AB 5 that impact the construction trucking industry. 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(f) – Construction Contractors and Construction Trucking Services.
Construction Contractors: Subsection (f) of § 2750.3 states that the new definition of employee and the decision in Dynamex do not apply to the relationship between a general contractor and a subcontractor. Instead, the relationship is to be governed by the long-standing Labor Code § 2750.5 and by Borello. Having said this however, the Legislature further stated that specific criteria must be satisfied under § 2750.3. So in addition to AB 5 and Borello, ALL OF THE FOLLOWING CONDITIONS MUST BE ALSO BE SATISFIED:
- The subcontract must be in writing.
- The subcontractor must be licensed by the CSLB and the work performed is within the scope of that license.
- If a local business license is required of the subcontractor, the subcontractor must obtain the local business license or business tax registration.
- The subcontractor maintains a business location that is separate from the business or work location of the general contractor.
- The subcontractor is free to hire and fire other persons in the performance of the work.
- The subcontractor has errors or omissions insurance policy and any other required performance bonds or warranties relating to the labor or service provided.
- The subcontractor is customarily engaged in an independently established business relating to the services performed.
Construction Trucking Services
For purposes of this exception, “construction trucking services” means hauling and trucking services provided in the construction industry pursuant to a contract with a licensed contractor utilizing vehicles that require a commercial driver’s license to operate or have a gross vehicle weight rating of 26,001 or more pounds.
In order for the exemption to apply ALL OF THE FOLLOWING CRITERIA MUST BE SATISFIED:
- After January 1, 2020 the subcontractor must be registered with The Department of Industrial Relations.
- A CSLB license is not required.
- The trucking subcontractor must be able to show that it is operating as a legitimate business and may operate as a sole proprietor, partnership, LLC, LLP or a corporation.
- The trucking subcontractor utilizes its own employees to perform the construction trucking services. Hiring employees is not required. The trucking contractor is permitted to operate as a sole proprietor.
- The trucking subcontractor must hold a valid motor carrier permit issued by the DMV.
- The trucking subcontractor negotiates and contracts with, and is compensated directly by, the licensed contractor.
- If the trucking subcontractor utilizes more than one truck, all drivers are deemed to be the trucking subcontractor’s employees.
Although AB 5 states that neither the statute nor Dynamex applies to the construction industry, AB 5 added additional tests that must be satisfied in addition to Labor Code § 2750.5 and Borello.
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. So while the Legislature is telling us that AB 5 and Dynamex do not apply to the construction industry, they do.
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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