ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – WILL THE EDD ENFORCE AB-5 IN LIGHT OF COVID -19?
By Robert S. Schriebman
I write this article at the beginning of a new era for the EDD. The first quarter of 2017, for standard audit purposes, has expired. Beginning April 1, 2020 regular EDD audits will begin on April 1, 2017 and terminate on March 31, 2020. The period beginning January 1, 2020 through March 31, 2020 and beyond involves worker status determinations under AB-5.
In this article I will discuss some background on AB-5 and give you the latest information I have gleamed in speaking with EDD auditors and management.
A Brief History of AB-5
AB-5 was signed into law in September 2019. It became effective on January 1, 2020. It is important to understand the history of this legislation. If you want more in-depth coverage, see the articles I have written on this new legislation.
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)
Current EDD Audit Policy in Light of COVID-19
This is what I know from speaking with auditors and management staff: The EDD is not currently conducting worker status audits. Most auditors have been reassigned to handle UI claims. For many auditors this will be a new experience. Some auditors have transitioned from being UI investigators to regular auditors. They will have more experience in handling the avalanche of new UI claims. Ongoing audits, that began before the COVID-19 pandemic will not be issued Notices of Assessment (NA) unless the employer requests that the final Notice be issued. The EDD will be issuing Proposed Notice of Assessment (PNA). PNAs do not have appeal rights to the CUIAB. So, for the time-being, if your business was under examination you may not see a final Notice of Assessment until May. These delays, however, do not mean that you will fly under the radar and not receive an assessment.
Caution – when you receive the final NA, look it over very carefully to see when it was formally issued. A late issuance may mean that one or more quarters are barred by the statute of limitations.
New audits are not scheduled until May 2020. These new audits may be continued depending upon COVID-19 developments.
Will the EDD Begin to Enforce AB-5?
This issue is still undecided as I write this article. There is speculation from management that the EDD may adopt up to a one year “Educational Program” to inform employers of the impact of AB-5. If this is implemented, audits occurring in 2020 will still follow the common law tests set forth in Borello. There are many articles on this website that discuss Borello. After this one-year respite, new audits will certainly involve AB-5 enforcement.
The higher-ups whom I have spoken with have received no directive from the Governor or EDD headquarters. There is a lot of sympathy for employers struggling in the COVID-19 environment. EDD audits that will penalize employers for AB-5 violations will just add to economic woes. Another reason for holding off AB-5 enforcement, is that past worker misclassification has not burdened the EDD or the Treasury with excessive UI claims. Therefore, there remains strong sentiment to continue following the Borello tests instead of feeding the Treasury with assessments and penalties under AB-5.
I look forward to the EDD’s top management to issue new policy guidelines in the near future. As soon as I learn them, I will pass them onto you.
Life After COVID-19
COVID-19 relief is going to be expensive for both California and the federal governments. A tremendous amount of money is going to be paid out in UI and DI benefits; perhaps more so than at any other time in our history. We are all fighting an invisible enemy and no one knows when that fight will end. Having said this, normalcy will bring with it a tremendous treasury thirst for funds. Someone has to repay the governments. We can anticipate aggressive worker status audits from the EDD. There will be assessments at the corporate and LLC levels but I fear there will also be an unprecedented number of personal levels CUIC Sec. 1735 assessments as never before due to business closures.
We are all in the same boat and we are all in new and dynamic situations. As of this writing, the EDD has not issued formal audit and collection guidelines. The EDD people in the field have not been instructed regarding the enforcement of AB-5 that will begin on April 1, 2020. I have asked Sacramento to keep me informed so that I may keep you informed.
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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