ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – HOW WILL THE DYNAMEX LEGISLATION (AB 5) IMPACT YOUR BUSINESS – PART 5
By Robert S. Schriebman
This is Part 5 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 5, we will discuss AB 5’s subsection 2(g) dealing with the relationship between a referral agency and a service provider. This is a narrow area and is limited to very specific industries excluding referral agencies such as a domestic agency, a nursing registry, and the “gig” giants Uber and Lyft. I will also discuss specific changes in CUIC provisions defining “employee,” as well as the prohibition for attempting to reclassify an employee as an independent contractor to avoid the impact of 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.
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:
A. “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;
B. The person performs work that is outside the usual course of the hiring entity’s business;
C. 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 2(g) – The Relationship Between Certain Referral Agencies and Their Respective Service Providers
Subsection 2(g) of AB 5 discusses the treatment of certain defined referral agencies and the individual worker referred to a “service provider.” The term “Referral Agency” is a business that connects service providers with clients that provide the following services only:
- Graphic design
- Event planning
- Minor Home repair
- Home cleaning
- Furniture assembly
- Animal services
- Dog walking
- Web design
- Picture hanging
- Pool cleaning
- Yard cleanup
If the service provider can prove that they are a business entity, such as a sole proprietor, LLC, partnership or a corporation, providing services to clients through a referral agency, the determination of whether or not the service provider is an independent contractor or an employee of the referral agency, shall be governed by the test set forth in Borello.
In addition to the tests set forth in Borello, AB5 2(g) also adds several additional requirements as follows:
- The service provider must be free from the control and direction of the referral agency;
- If the service provider performs work in a jurisdiction that requires the service provider to have a business license or a business tax registration, the service provider must have one or both, as required by that jurisdiction;
- If a CSLB license is required for the work, the service provider must hold a current CSLB license.
- The service provider delivers services to the client under the service provider’s name, rather than under the name of the referral agency.
- The service provider provides his/her own tools and supplies necessary to do the job.
- The service provider is customarily engaged in an independently established business of the same nature as that involved in the work preformed for the client.
- The service provider maintains his/her own clientele and is free to work elsewhere, including through a competing referral agency.
- The service provider is free to accept or reject potential clients. The service provider is not penalized for rejecting any potential assignments.
- The service provider sets his/her own rates (and hours) for the services performed without deduction by the referral agency.
This new statute does not apply to domestic workers. They are governed by CUIC § 687.2. It also does not apply to a “temporary services employer” or a “leasing employer.” Those rules are still governed by CUIC § 606.5(b). Therefore, a tutoring referral agency or nursing referral agency is still governed by these rules. AB 5 2(g) only refers to the specific occupations listed above.
Miscellaneous Changes in AB 5
AB 5 closes out with section 3, 4, 5, 6 and 7 by changing the definition of “employee” in CUIC §§ 606.5 (a) and 621 by eliminating the common law rules relating to the definition of employee and substituting new labor Code § 2750.3 discussed in this series of articles. It also amends Labor Code § 3351 by putting in a new definition of employee that will not be discussed here. Section 6 specifically prohibits any employer from reclassifying a worker as an independent contractor in order to avoid the new rules under Labor Code § 2750.3.
Having now written five articles dealing with the new rules under AB 5, as it currently exists, you might expect me to be able to accurately predict the future. From where I sit, at this point in time, I see many years of uncertainly when it comes to worker status. I do believe that the EDD, armed with new Labor Code § 2750.3, is going to be harder on those engaging independent contractors than they may have been in the past. It is going to be much easier for judges at the CUIAB to rule in favor of the worker being an employee under the new rules. We are all going to have to unlearn the words “common law employee” because this fellow has become a Neanderthal. I do see more disputes turning to settlement resolutions as opposed to litigation. The hazards of litigation are going to be very great.
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.
Web Site Article 405