ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – HOW WILL THE DYNAMEX LEGISLATION (AB 5) IMPACT YOUR BUSINESS – PART 3
By Robert S. Schriebman
This is Part 3 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 3, I will discuss “contracts for professional services.” This is a term of art meaning that it has unique features under the law. Contracts for professional services were not discussed in the Dynamex decision and will be exempt under new Labor Code § 2750.3. I will also discuss the exemptions for cosmetologist and professionals in the beauty industry. Finally, I will discuss the exemption for real estate agents. First however, you must have an understanding of the Dynamex and the Borello decisions.
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.
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.”
Exemption for Contracts for “Professional Services”
The test under Labor Code § 2750.3 and the Dynamex case do not apply to a contract for “professional services.” Instead, the determination of whether the individual is an employee or independent contractor shall be governed by the tests under Borello.
In order to be exempt under Section 2750.3(c), all of the following factors must be met:
- The individual maintains a business location which may include the individual’s residence. This must be separate from the hiring entity.
- The individual must have a business license as well as all required professional licenses and permits to practice in their profession.
- The individual has the ability to set or negotiate his or her own rates for the services performed.
- The individual has the ability to set his or her own hours. It is understood that certain engagements will have predetermined completion dates and reasonable business hours.
- The individual holds himself or herself out to the general public for hire.
- The individual customarily and regularly exercises discretion and independent judgment in the performance of services.
What occupations constitute “professional services?”
- Administrator of Human Services
- Travel agent (under specific provisions of Business and Professions Code)
- Graphic designer
- Grant writer
- Fine artist
- Enrolled Agent
- Payment processing agent through and independent sales organization
- Still photographer or photojournalist
- Freelance writer, editor or newspaper cartoonist
- A repossession agency licensed under the Business and Professions Code.
Exemption for Beauty Industry Professionals
Certain occupations in the beauty industry are also exempt under certain conditions discussed below. They include a licensed barber, licensed cosmetologist, licensed electrologist, and a licensed esthetician.
The exemption does not apply to a manicurist unless the manicurist is also a licensed cosmetologist under the following conditions:
- They set their own rates and are paid directly by clients.
- They set their own hours.
- They have sole discretion to decide the number of clients and which clients they will service.
- They have their own book of business and schedule their own appointments.
- They have their own business license.
Exemption for Real Estate Agents
Labor Code § 2750.3 will not apply to a licensed real estate agent. Instead, they will be governed by provisions of the Business and Professions Code and CUIC § 650.
The Borello Tests Are Very Important
While those classifications under “professional services,” real estate agents, and members of the beauty industry may be exempt under Labor Code § 2750.3, they are not getting a free ride. Whether or not they will be treated as true independent contractors will depend upon 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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