ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – NEW EDD AUDIT GUIDELINES FOR 2022 AND BEYOND – PART 4 – THE IMPACT OF THE 1989 BORELLO CASE ON THE NEW 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.
In Parts 1 – 3, I discussed how the EDD will be applying the new ABC Test for the audit years 2020 and forward. The ABC Test was enacted into law by AB-5 in September 2019 to become effective January 1, 2020. There was a lot of unhappiness primarily in the entertainment industry and a few other occupations. They wanted exemptions from the new law. As a result, AB-5 was modified by AB-2257 to create many exemptions for different industries. These exemptions, however, all have one major built-in hurdle – the Borello case. If you are exempt under AB-2257, you do not have a “get-out-of-jail-free” card. The EDD will apply the old tests under Borello and the employer will have the burden of proof to convince the auditor that workers are independent contractors under both the common law standard set forth in CUIC § 621(b) and Borello.
Let’s take a look at 621(b) and Borello in a nutshell.
The 621(b) and the Borello Tests
For purposes of the CUIC, a worker’s status as either an employee or independent contractor is determined using the common law standard. 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 Call. 3d 341, 350 (1989) (“Borello”), quoting Tieberg v. Unemployment Ins. App. Bd., 2 Cal. 3d 943, 946 (1970). The Supreme Court has reaffirmed the importance of the “right of control” test in Ayala v. Antelope Valley Newspapers, Inc., 59 Cal. 4th 522 (2014), where it emphasized that “what matters most under the common law is not how much control a hirer exercises, but how much control the hirer retains the right to exercise.” Id. At 533.
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 641. 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.
Under both the statutory common law test and Borello, an EDD auditor will presume that the worker receiving a 1099 should have been reclassified as a W2 wage earner. The hiring entity’s job is to convince the auditor that the service provider is a true independent contractor. The Borello case, like the EDD’s 23-factor test has many parts and no single factor is going to determine whether the recipient of the 1099 is an independent contractor. Rather, the auditor is free to choose any one factor to determine worker status.
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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