Ask The EDD Attorney – Are The EDD And The IRS Moving Away From Their Respective Multifactor Tests To Determine Worker Status?
By Robert S. Schriebman
For decades the IRS has used its famous “20-Factor” test to determine whether a worker is truly an independent contractor as opposed to an employee. The EDD has used a “23-Factor” test. Each criterion in these tests does not have equal weight. In other words, if you are in an IRS audit and you prove that you have 15 factors in your factor tending to prove the worker is an independent contractor, while the IRS has only 5 factors going to employee status, you do not win. You lose. It’s not like a game of marbles where he who has the most marbles wins the game. If you think this is unfair, you are not alone. It works the same way with the EDD. As far as the EDD is concerned, if the smallest element of control is found to exist, you can be sure you will be on the receiving end of an EDD assessment.
The IRS has been seeking a way to replace the common law factors. They are now looking at only three elements as evidence of control:
- The behavioral element
- The financial element
- An overall look at the realities of the relationship.
The degree and extent of the element of control, real control, will be of primary importance.
In this article we will take a “Cliff Notes” look at these new factors.
The Behavioral Element
The devil will be in the details. The more terms and conditions dictated by the employer the greater the risk that independent contractor status will not be upheld. In other words, the more detail the more control. If training is required for the job, the chances are that the worker will be an employee. The same is true if the employer has any type of formal evaluation procedures. The real test may come down to this: if the worker is left completely alone to do the job as he or she deems it to be done, the greater the chances are the worker will be a true independent contractor. For example, if you happen to be unfortunate enough to find yourself in a hospital emergency room you are not going to tell the doctor or staff what to do and how to do it.
The Financial Element
Does the worker have his or her own business? A website? Advertising? These are all signs of independent contractor status. Is the employer able to fire the worker at will? Are there employee benefits? Will the worker be entitled to reimbursed employee business expenses?
It’s generally ignored by the EDD, but the key issue can come down to how the parties view their relationship. What does the contract say? With the EDD, even though the contract clearly states the worker is an independent contractor, the EDD will look the other way and award the worker unemployment benefits, then turn around and find the worker is a common law employee. An EDD audit is likely to follow. In other words the EDD pays little or no attention to the agreed upon status of the worker. This has to change!
An Overall Look at the Realities of the Relationship
What is the intention of the parties when they began the business relationship? Is there a written contract? Is the job function of the worker an integral element of the employer’s business? If the business cannot be a business without the worker’s talent and experience, that worker most likely is an employee. A couple of examples: a pet-sitting business must depend upon pet sitters and dog walkers in order to have a business. If the lights go out and I call an electrician, even though I need light to conduct my business, the electrician is not my employee. The true realities of how I conduct my business become the real factors determining the worker relationship.
The IRS seems to be looking for and implementing a more streamlined approach to worker status issues. The EDD has not publically indicated whether they will follow the lead of the IRS. With IRS audits you will still be able to take advantage of the “safe harbor” rules under section 530 of the Revenue Act of 1978. This is not a provision of the current Internal Revenue Code. The EDD has no rules relating to “safe harbor” relief.
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.
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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