ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – NEW EDD AUDIT GUIDELINES FOR 2022 AND BEYOND – PART 1
By Robert S. Schriebman
A wise person once observed that the only thing certain is this life is change. We see change in virtually everything and everywhere we look. This maxim has never been more accurate when applied to matters of taxation. The treasuries of both the Federal government and the State of California have taken heavy hits since the pandemic began. Governments are looking for money and are directing their taxing agencies to be more aggressive in both the assessment and collection processes.
We will be seeing a more aggressive EDD when it comes to reclassifying independent contractors as common law employees. A big factor in this effort will be the applications of both AB-5 and AB-2257 for the audit years 2021 and beyond. The EDD, due to the pandemic, did not conduct audits in 2020, however, audits that began in 2021 have included the tax year 2020 when issuing assessments. EDD auditors have returned to their desks and their primary jobs as auditors. They have to deal with changes brought about by the Dynamex case and the focus of the new ABC Test that will be used to determine worker status for the future.
This series of articles will review the current and future impact of the ABC Test which grew out of the Dynamex case and was codified in both AB-5 and AB-2257. This Part 1 will review the basics of the ABC Test. In Part 2, I will give you examples provided by the EDD so you will gain some insight into how the EDD will use the ABC Test in 2022 and beyond.
In order to understand where the EDD will be emphasizing the focus of its audits now and in the future, it is important for you to have a basic understanding of the Dynamex decision, decided in 2018, as well as the interplay of the Borello decision that was decided in 1989 by the California Supreme Court. Both cases are relevant and one case did not overrule the other. After reviewing both Dynamex and Borello, we will review the basics of the ABC Test.
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.).)”
The ABC Test in a Nutshell
In a nutshell the ABC Test can be explained as follows:
A worker may be treated as an independent contractor when all of the ABC Test is met.
- 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 or the same nature as that involved in the work performed.
In Part 2 of this series, we will look at how the EDD looks at the ABC Test. This tells us how the EDD will be looking at worker status audits in the future. There is pressure on all taxing agencies in California to be more aggressive when it comes to both assessments and collections. The ABC Test, for the EDD, has not come at a better time. This test is going to be applied strictly to reevaluate the relationship between the employer and the independent contractor in virtually every walk of life.
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 50 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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