ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – NEW EDD AUDIT GUIDELINES FOR 2022 AND BEYOND – PART 2 – LOOKING AT THE “A” ELEMENT OF THE ABC TEST
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. In this Part 2 we will look at Part A of the ABC Test, the element of control. There is no more important factor in determining a working relationship than the element of control.
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.
How the EDD Will Look at the Element of Control for Future Audits
The EDD will be focusing on the Dynamex case as its primary guideline. This is how the EDD views control in light of Dynamex (DE 231 Rev. 13, (3-20)):
- A worker who is subject, either as a matter of contractual right or in actual practice, to the type and degree of control a business typically exercises over employees would be considered an employee.
- Depending on the nature of the work and overall arrangement between the parties, a business need not control the precise manner or details of the work in order to be found to have maintained the necessary control that an employer ordinarily possesses over its employees.
The EDD sees the element of control as the boogie-man in every audit. Dynamex has not really changed the EDD’s historical perspective. Any control found by the auditor is deemed to be fatal, and that is not reality and not the way things are done in the real world.
The EDD’s historical definition of employment is set forth in CUIC § 612(b), “Any individual who, under the usual common law rules applicable in the determining the employer-employee relationship, has the status of an employee.” There is not a lot of information and guidance in this code section. The rest of § 621 describes various categories of statutory employees. These rules were put into the Code in 1971 and were last updated in 2020 when the Legislature added subsections (b)1-3, reflecting the ABC Test set forth in Dynamex.
The Realties of Control in Business Relations
There is an element of control present in most business relationships. But the “control” that requires a worker to be treated as an employee under CUIC § 621(b) is control over the details of the job as opposed to the control of the outcome.
A principal beneficially interested in work being performed has the right to retain limited controls over the manner and means of the performance of the work for limited purposes without thereby becoming an employer. See Western Indemnity Company v. Pillsbury (1916), 172 Cal. 807 at page 811; Bohannon v. McClatchy Publishing Co. (1936), 16 Cal. App. 2d 188 at page 199.
“Complete abnegation of control is not essential to the establishment of a status of independent contractor. Where one person is performing work in which another is beneficially interested, the latter may exercise over the former a certain measure of control which looks to the results to be obtained without creating the relationship of employer-employee.” Bates v. Industrial Accident Commission (1958) 156 Cal. App. 2d 713, Tax Decisions Nos. 87, 115, 148, 260, 658, 1176, 1858, 1972 and 2167.
The EDD Goes to Vermont for Guidelines
In its publication, DE 231, the EDD takes a couple of examples from courts in Vermont in order to illustrate how it will apply the element of control to determine worker status.
- The first example set forth is the case of Fleece on Earth v. Dept. of Employment & Training. This is a 2007 case involving work-at-home-piece-workers in the clothing industry. The Vermont court held that even though these workers worked from home, and made their own hours and production quotas, they were not free from the employer’s control and direction over production. The court reasoned that there is no difference in a garment made at home or in a factory working 9-5. I respectfully disagree that this the Vermont case should be used as a guideline by the EDD.
My own experience involved piece workers making leather goods for a well-known Rodeo Drive designer. In my client’s case the judge ruled that these workers were not under any control other than to produce a quota of goods. The end result was the primary concern and not control over working conditions.
- The second example is the case of Great N. Construction, Inc. v. Dept of Labor, 2016). This case involved a construction company retaining the services of a worker who specialized in historic reconstruction. The worker set his own schedule, worked without supervision, and purchased all materials using his own business credit card. He had previously declined to be an employee of the construction company. The Vermont Court ruled him to be an independent contractor.
When it comes to the element of control, as much as things appear to have changed with Dynamex, AB-5 and AB-2257, they have remained essentially the same. The battle will be joined by the EDD always trying to find fatal control in the business relationship versus the employer trying to convince the auditor that a certain element of control is always present with the employer in most business relationships. It is a see-saw conflict that goes on and on.
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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