Ask The EDD Attorney – How To Avoid Fatal Independent Contractor Control And Beat An EDD Audit – Part 1

By Robert S. Schriebman
November 16, 2016

Introduction

How much control can an employer have over an independent contractor and prevail against the EDD in the event of a worker status audit? This question goes to the heart of most EDD worker status audits. The typical EDD auditor, when asked this question, will most likely reply that any control whatsoever is fatal to an employer- independent contractor relationship. If any control at all is discovered in the audit, the status of the so-called independent contractor is automatically changed to an employer-employee relationship; it’s almost a knee-jerk reaction. The result of this reclassification always results in the EDD’s issuance of a Notice of Assessment. The employer is considered lucky if there are no penalties assessed. In the worst case scenario there will be the usual UI, DI, ETT and PIT assessments together with one or more penalties including the dreaded Worker Information Return Penalties.

In this series of articles we will discuss a few sample case studies and discuss the common law and major cases that try to measure the degree of control that is both fatal and acceptable.

Sample Case Studies

• 1) There are many types of businesses that are, in reality, nothing more than “commercial matchmakers,” or third party logistic companies. Take for example an entertainment production company. The company is given a contract to produce an entertainment event at a major venue. There are many talents required to accomplish the end result such as, lighting, sound, animation, set design, etc. Each skill is provided by a separate business. When the production company engages these skills, but requires periodic status meetings and reports, is this control? Does that turn the production company into an employer and the businesses into employees?
• 2) A general contractor is hired to erect a skyscraper and will require many highly skilled subcontractors, such as, architects, excavators, crane operators, structural steel construction, electrical, plumbing, heat and air conditioning, as well as interior design and construction. Each subcontractor operates a business. However, this massive project requires many meetings and status reports. The general contractor, like a motion picture director, controls and coordinates each skill level to produce a finish structure by a specific deadline. Does the reality of the industry turn these experienced subcontractors into employees?
• 3) A small package delivery company, operating like a mini-“FedEx,” hires the services of many small truckers and van operators to deliver packages for its clientele. Each owner/operator operates as a sole proprietor, LLC or corporation. The delivery company tells each owner/operator when to pick up the parcels and where to deliver them. It sets the hours of operation. However, each owner/operator has the expenses of vehicle ownership and operation including insuring its vehicles. There is a schedule that must be adhered to. Each operator must report in and report out. Are these small owner/operators the employees of the delivery company because they must adhere to the company’s rules?

Do the companies in the above examples really have an employer-employee relationship? Have they crossed the line and exerted a degree of fatal control? Or are they, in reality, commercial matchmakers or third party logistic company? In this Part 1 we will begin to explore the statutes and case law that determine a true employer-employee relationship as opposed to an independent contractor relationship.

In my law practice I can tell you that the typical EDD auditor that I have worked with will conclude that there is an employer-employee relationship in each of the above case studies. But is the auditor correct? Hopefully this series of articles will give you the ammunition you need to fight back.

Legal Analysis and Discussion – Part 1

The EDD auditor will first look to the California Unemployment Insurance Code (CUIC) for the laws relating to the effect of control on the employer-employee relationship. The primary CUIC sections are 621(b) and sections 13004 through 13005. CUIC § 621 (b) provides the common law test “The 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.” CUIC §13004 defines the term employee to include officers of corporations. CUIC §13004.1 provides certain exclusions to the definition of employee that is not relevant to our discussion.

The primary court cases used by EDD auditors as well as the CUIAB Administrative Law Judges are “Borello, Tieberg, and Empire.” S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Call. 3d 341, 350 (1989); Tieberg v. Unemployment Ins. App. Bd., 2 Cal.3d 943 (1970); Empire Star Mines Co v. Cal. Emp. Co. 28 Cal.2d 33, 43 (1946).

The Supreme Court recently 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.”

Conclusion

There is an element of control present in every business relationship. In Part 2 we will discuss the many factors set forth in the Borello, Tieberg, Empire and Ayala cases as well as discussing the right to control the manner and means of performance.

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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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