ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – HOW WILL THE DYNAMEX LEGISLATION (AB 5) IMPACT YOUR BUSINESS – PART 2
By Robert S. Schriebman
This is Part 2 of a 5-Part Series that will discuss the impact of the California Supreme Court’s Dynamex decision and Assembly Bill 5 that passed the California Senate Appropriations Committee and will head to a final vote before the full State Senate before it is signed into law by Governor Gavin Newsom.
In this Part 2, I will discuss the public policies behind the new legislation. I will also give you the essence of new Labor Code § 2750.3 as well as discuss exemptions under the statutes and the impact of the Borello case on AB 5.
Enter the Dynamex Case
At the end of April 2018 the California Supreme Court published its 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 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 buried in a wage order issued by the California Industrial Welfare Commission (IWC).
“To employ, under the IWC’s definition, has three alternative definitions. It means: (a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law employment relationship.” (Martinez, supra, 49 Cal.4th at p.64)
In Dynamex the Supreme Court focused upon narrowing down and defining the “suffer or permit to work” standard. The goal was to adopt a simpler, more structured standard for distinguishing between employees and independent contractors. The Court adopted the “ABC standard” used in other states.
The ABC standard has 3 primary factors:
(a) That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact;
(b) That the worker performs work that is outside the usual course of the hiring entity’s business;
(c) That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. (Dynamex page 64)
The Dynamex Decision Did Not Overrule Borello
For purposes of the CUIC, a worker’s status as either an employee or independent contractor is determined using the common law standard set forth in CUIC § 621(b). Under the common law ” ‘…[t]he principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired…’ ” S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341, 350 (1989) (“Borello“), quoting Tieberg v. Unemployment Ins. App. Bd., 2 Cal. 3d 943 (1970
While the “control test” is the ‘most important’ or ‘most significant’ consideration, the Borello Court identified several ‘secondary factors’ that must also be considered. Borello, 48 Cal. 3d at 351. These secondary factors include: (a) whether the worker is engaged in a distinct occupation or business (b) the kind of occupation, with reference to whether the work is usually done under the direction of the principal of time over which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether the work is part of the regular business of the principal or by a specialist without supervision, in the locality; (c) the skill required in the occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and place of work; (e) the length; (h) whether the principal has the right to discharge at will, without cause; and (i) whether the parties believe they are creating an employment relationship. Ayala, 59 Cal. 4th at 532; Borello, 48 Cal. 3d at 350-351.
AB 5: An Overview
AB 5 is the brainchild of San Diego Assemblywoman Lorena Gonzalez. The effective date of the legislation is set for January 1, 2020. The Bill seeks to codify the decision in the Dynamex case and clarify and limit its application. The Bill would add new provisions to the Labor Code and the Unemployment Insurance Code.
Public Policy Behind AB 5
The California Senate Appropriations Committee, explaining the reasoning behind the Dynamex decision, stated that, “…the harm to misclassified workers who lose significant workplace protections, the unfairness to employers who must compete with companies that misclassify, and the loss to the state of needed revenue from companies that use misclassification to avoid obligations such as payment of payroll taxes, payment of premiums for workers’ compensation, Social Security, unemployment, and disability insurance.” (AB 5 § 1(b))
“The misclassification of workers as independent contractors has been a significant factor in the erosion of the middle class and the rise in income inequality.” (AB 5 § 1(c))
While all of these social objectives and the obtaining of income equality are indeed noble goals, in my opinion, the primary objective of AB 5 is to channel literally future untold billions of dollars into the State Treasury.
The Borello Case is Alive and Well
If you read AB 5 in its entirety, one point becomes very clear. If the EDD is not able to prove all three elements of new the Labor Code § 2750.3, the EDD’s fallback position will be the tests established in Borello. If the company engaging independent contractors can prove an absence of control, supervision, and management, the workers may be presumed to be independent contractors.
AB 5 does not cover every occupation under the sun. In fact there are many exemptions under AB 5 that will be discussed in this series of articles. But even these exemptions must pass under the watchful eye of Borello.
New Labor Code § 2750.3
Labor Code § 2750.3 incorporates by reference The Unemployment Insurance Code and the Wage Orders of the Industrial Welfare Commission. The section gives us a new definition of employee. This Labor Code section also impacts CUIC §§ 606.5 and 621 by eliminating any reference to common law rules applicable in determining the employer-employee relationship. In other words, CUIC §§ 606.5 and 621 will incorporate by implication the definition of employee as set forth in new Labor Code § 2750.3. The old common law definition of employee is gone. Just what impact this new Labor Code section will have on the EDD’s 23 point test remains and regulations under Title 22 remain to be seen.
The new definition of “employee” incorporates the ABC test set forth in the Dynamex (page 64) as follows:
- “The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The person performs work that is outside the usual course of the hiring entity’s business;
- The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”
There Are Really Two Tests
In reality there are two tests that must be passed before a worker can be classified as a true independent contractor. The first test is new Labor Code § 2750.3. If the company engaging independent contractors not exempt under the statute can run the gauntlet of section 2750.3, they also have to pass the tests set forth in Borello. Things are going to get a lot tougher and the risks of attempting to litigate worker status before the CUIAB a lot more problematic. (Labor Code § 2750.3(C)(3))
Exemptions Under Labor Code § 2750.3
There are several exemptions set forth in Labor Code § 2750.3(b) and (c)(2)(B)(vii) as follows:
- A person or organization that is licensed by the Department of Insurance.
- A physician and surgeon, dentist, Podiatrist, or Psychologist license by the State of California. This includes a practitioner practicing as a sole proprietorship, partnership, or professional corporation.
- A lawyer
- An architect
- An engineer
- A veterinarian
- A private investigator
- An accountant
- An Enrolled Agent (c)(2)(B)(vii)
- A securities broker-dealer or investment advisor registered with the Securities and Exchange Commission or the Financial Industry Regulatory Authority.
- A direct salesperson as described in CUIC § 650.
- A commercial fisherman working on an American vessel. (There is additional legislation regarding fishermen that will not be set forth here.)
In Part 3, I will discuss additional exempt occupations such as a contract for “professional services,” beauticians, and real estate agents.
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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