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 6
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, 4, and 5, I discussed some exemptions and exceptions.
This is the 6th and final part of this series setting forth the final version of AB 5 and how it will impact your business. I will review new rules relating to a new category of referral agency. The new referral agency rules appear to be the first attempt at dealing with workers in the “gig” economy. Finally, I will review new changes to the definition of “employee” to apply to individuals performing domestic residential services.
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(g) – Referral Agency
AB 5 has exempted many small businesses under the heading of Referral Agency. This is AB 5’s attempt to begin the regulation of the gig economy. The new laws do not apply to long-standing provisions of the CUIC specifically §606.5(b) dealing with such things as nurses’ registries, and §687.2 that specifically deals with domestic workers. The new “referral agency” laws do not appear to apply to app-based services such as Uber or Lyft.
The new category of referral agency is a business that connects clients with limited categories of occupations as follows:
- Graphic Design
- Event planning
- Minor home repair
- Home cleaning
- Furniture assembly
- Animal services
– dog walking
– dog grooming
- Web design
- Picture hanging
- Pool cleaning
- Yard cleanup
The above occupations must use the referral agency to hook them up with clientele. There are several conditions ALL OF WHICH MUST BE MET in order for the service provider to be deemed an independent contractor. In other words, neither Dynamex nor new Labor Code § 2750.3(a) will apply if all of the below conditions are met. However, the tests in Borello will apply.
- The service provider is free from the control and direction of the referral agency.
- If a local business license is required, the service provider must have the required business license or business tax registration.
- If a CSLB license is required, the service provider must have that license.
- All services must be rendered in the name of the service provider and not the referral agency.
- The service provider must provide his/her own tools and supplies to perform the services.
- The service provider is customarily engaged in an independently established business. This may be conducted as a sole proprietor, partnership, LLC, LLP or corporation
- The service provider must hold himself/herself out to the public to be in business for themselves.
- The service provider sets his/her own hours and terms of work and is free to accept or reject any assignment. The referral agency cannot penalize the service provider is any assignment is refused.
- The service provider sets his/her own rates without deduction by the referral agency.
Changes Made to CUIC § 3351, Definition of an Employee
AB 5 adds a new subsection to the already existing definition of “employee” set forth in CUIC § 3351. Now any person employed by the owner or occupant of a residential dwelling, whose duties are incidental to the ownership, maintenance, or use of the dwelling will be treated as a common law employee. This means these people must be issued W2s and there must be withholdings. It also means quarterly payroll tax returns, state and federal, must be filed together with required annual payroll-tax related returns. This clearly will include persons hired for the care and supervision of child or whose duties are personal to the owner or occupant of the dwelling. It is clear that this new law applies to live-in nannies, maids, butlers, and those who maintain and clean the residence. This provision should not apply to cleaning or janitorial services that clearly have their own business and work for others.
Is there a conclusion to all of this? Is there any more clarity than there was prior to AB 5? – perhaps a little. However, don’t expect California businesses to start issuing massive amounts of W2s. Don’t’ expect AB 5 to go unchallenged in the federal courts. It is going to be a long time before the dust settles.
There are no grandfather exemptions in AB 5.
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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