ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – HOW WILL THE DYNAMEX LEGISLATION (AB 5) IMPACT YOUR BUSINESS – PART 4
By Robert S. Schriebman
This is Part 4 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 4, I will discuss the impact of AB 5 on licensed general construction contractors and the construction trucking industry. We will see that new Labor Code § 2750.3 has no impact and that the existing labor Code § 2750.5 still applies with certain additions set forth in § 2(f) of AB 5. The Borello case is alive and well when it comes to general construction contractors engaging licensed and unlicensed subcontractors. There are however seven (7) new criteria under AB 5 that will directly impact the tests under Borello and make it more difficult for general contractors to treat even licensed subcontractors as independent contractors. The rules related to the construction trucking industry apply only until December 31, 2021.
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.”
AB 5’s Impact on Licensed General Contractors
AB 5 Section 2(f) and the holding in Dynamex do not apply to the relationship between a licensed general construction contractor and an individual performing work pursuant to a subcontract in the construction industry. The determination of whether the individual is an employee of the general contractor is still governed by Labor Code § 2750.5 and the Borello case. Subsection 2(f) adds the following criteria that must be satisfied if that individual is going to be acknowledged by the EDD as an independent contractor. These new criteria may muddy the existing tests under Borello.
- There must be a written subcontract.
- The individual subcontractor must be licensed by the CSLB if the work performed is within the license requirement.
- If the work performed must also require a local business license, or business tax registration, the individual must meet these requirements as well.
- The subcontractor maintains a business location that is separate from the business of work location of the general contractor.
- The subcontractor has the authority to hire and fire other persons to provide or to assist the subcontractor in providing services.
- The subcontractor assumes financial responsibility for errors or omissions in labor or services as evidence by insurance legally authorized indemnity obligations, performance bonds, or warranties relating to the labor or services being provided.
- The subcontractor is customarily engaged in an independently established business of the same nature as that involved in the work performed.
What Is the Impact of AB 5 § 2(f), Labor Code § 2750.5 and Borello?
All of the above 7 criteria under 2(f) is new. Labor Code § 2750.5 establishes a strong conclusive presumption that any unlicensed subcontractor is automatically an employee of the general contractor. I have yet to see the EDD apply any Borello test where the subcontractor is not licensed. The EDD has a difficult time distinguishing a common laborer from an unlicensed subcontractor. The combination of new laws and pre-existing laws is going to be a 1-2-3 punch to any general contractor working with subcontractors. We may see situations where even hiring a licensed subcontractor is going to be problematic especially when applying Borello.
Construction Trucking Industry
AB 5 § 2(f) shall not apply to a subcontractor providing construction trucking services for which a CSLB license is not required, providing that all of the following criteria are satisfied.
- The subcontractor is in business for himself/herself as a sole proprietor, partnership, LLC or corporation.
- After January 1, 2020, the subcontractor is registered with the Department of Industrial Relations as a public works contractor regardless of whether the subcontract involves public work.
- The subcontractor utilizes his/her own employees to perform the construction trucking services, unless the subcontractor is a sole proprietor who operates his/her own truck and holds a valid motor carrier permit issued by the DMV.
- The subcontractor negotiates and contracts with, and is compensated by, the licensed contractor.
“Construction Trucking Services” means hauling and trucking services provided in the construction industry pursuant to a written contract with a licensed contractor utilizing vehicles that require a commercial driver’s license to operate or has a gross vehicle weight rating of over 26,000 pounds.
The above rules are good until December 31, 2021. After that who knows.
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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