ASK THE EDD ATTORNEY – HOW TO AVOID FATAL INDEPENDENT CONTRACTOR CONTROL AND BEAT AN EDD AUDIT – PART 3
By Robert S. Schriebman
November 22, 2016
In this Part 3 we will look at the first of several important factors governing control that were established in the 1989 California Supreme Court Borello decision. S. G. Borello & Sons, Inc. v. Dept. of Industrial Relations, 48 Cal. 3d 341, 350 (1989)
We will review the following factors considered by Borello and the cases that have followed this very important California Supreme Court decision:
· Right to Control the Manner and Means of Performance
· Are The Independent Contractors Truly Engaged In a Distinct Business Or Occupation?
· Is The Work Usually Performed By An Independent Contractor, Without Supervision From The Principal?
· The Nature of The Skill And Specialized Knowledge Required To Do The Job
Right to Control the Manner and Means of Performance
To the EDD, the control test is the most important factor and the most important consideration. But how do you define control? When evaluating the right to control, you have to look at the type of control involved in the relationship. According to the Tieberg case, discussed in Parts 1 and 2, the right to control the manner and means of accomplishing the desired result is sufficient to establish an employment relationship. If control may be exercised only as to the end result of the work and not the means by which it is accomplished, the relationship is more likely to be one of principal and independent contractor. There is usually an element of control present in just about every business relationship. The “fatal” right of control may be measured by asking the key question: “whether or not, if instructions were given, they would have to be obeyed on pain of at-will discharge for disobedience.” If you answered in the negative, you probably have a true principal- independent contractor relationship.
In another California Supreme Court case, Ayala v. Antelope Valley Newspapers, Inc., 59 Cal 4th 522 (2014), a written contract played a very important part as it specified the terms of the relationship in assessing the principal’s right to control the contractor’s work. However, even with a written contract, actions speak louder than words. Unfortunately, the EDD pays little attention to the terms of a written contract. In contrast the IRS considers a written contract to be one of its 20 key factors. The EDD has 23 factors none of which makes reference to a written contract.
The bottom line to the control test depends upon the factual evidence presented to the auditor. If in reality the principal neither had the right to control, nor did control, the manner and means of performance, a true independent contractor relationship may be established.
Is The Independent Contractor Truly Engaged In a Distinct Business Or Occupation?
While we live in the electronic and computer age, I have found that old fashioned paper is the key to success in this factor. Documentary evidence such as, a business license, fictitious name certificate, business cards, invoices, and even a website help determine independent contractor status. Is the contractor responsible for all costs associated with his or her business operation, including the purchase of computer-related equipment, vehicle costs, including fuel, insurance, repairs and maintenance? Did the contractor submit an IRS Form W-9 designating the contractor as self-employed individual, sole proprietor, LLC or corporation? Does the contractor have employees? If the contractor uses a vehicle, does the vehicle display a business name or logo? Lastly, is the contractor free to perform services for other customers?
Is The Work Usually Performed By An Independent Contractor, Without Supervision From The Principal?
Here it is important to be familiar with the customs and standard practices in the industry. Is the work in this industry typically performed by independent contractors? The EDD will never believe a statement to this effect by the employer. This is why it is important to be able to obtain opinion or testimony of experts. On the other hand, the employer may belong to a trade association or other organization that assists employers and provides guidance, literature, as well as form contracts that have been written by association attorneys. For example, the domestic worker/caregiver industry has an association that provides this type of guidance and protection. I am referring to the California Coalition of Domestic Referral Agencies, Inc. located in San Diego, CA.
The Nature Of The Skill And Specialized Knowledge Required To Do The Job
The higher the skill levels of the workers and the requirements for licenses and permits, the greater the chances for establishing an independent contractor relationship. For example, physicians working in a hospital emergency room are by law given independent contractor status. The same applies to licensed real estate agents working under a licensed real estate broker. Attorneys doing research in a law firm, or making court appearances do not have the same legal protection as emergency room physicians. They are often challenged by the EDD. Licensed hair stylists, estheticians, massage therapists, are usually challenged by the EDD and found to be common-law employees.
If independent contractor status is not sanctioned under the law, with a specific statute, a battle with the EDD will depend upon hazards of litigation.
There is an element of control present in every business relationship. The presence of control is not ipso-facto fatal to the employer. In Part 4 we will explore more Borello factors and determine the relative weight of each of them.
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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