EDD Worker Status: Employee vs Independent Contractor WHAT YOU NEED TO KNOW – Part 3
This is the third part on a series of articles dealing with the question of who is an employee and who is an independent contractor under California law. In Part 2 we began a discussion of looking at this area through the eyes of an administrative law judge (ALJ). If you file a petition before the California Unemployment Insurance Appeals Board (CUIAB), your case will be assigned to an administrative law judge (ALJ).
In Part 2 we reviewed the leading California Supreme Court case setting forth the primary factors used by ALJs in deciding whether the worker is an employee or independent contractor. That leading case is Empire Star Mines C., Ltd v. California Employment Commission (1946), 28 Cal. 2d 33, 168 P. 2d 686. ALJs usually begin their written decision with a discussion of the factors set forth in Empire Star Mines.
In this Part 3, we will review the California Supreme Court rulings in the Tieberg, Isenberg, and the Borello cases. Because these are very important authorities, we must be familiar with them in order to properly advise our clients. We will also review whether written contracts make a significant impact on worker classification. Is the existence of a written contract stating that the worker is an independent contractor the decisive factor in establishing an independent contractor relationship?
THE TIEBERG CASE:
In Tieberg v California Employment Insurance Appeals Board (1970) 2 Cal. 3d 943,950, the California Supreme Court used the following factors in considering its determination of whether or not an employment relationship exists:
1. Which party has the right to control the manner and means of accomplishing the result desired;
2. Whether there is a right to discharge at will, without cause;
3. Whether or not the one performing services is engaged in a distinct occupation or business;
4. Whether the work is usually done under the direction of an employer, or by a specialist without supervision;
5. The skill required;
6. Who supplies the instrumentalities, tools, and place or work of the one performing services.
7. The length of time for which the services are to be performed;
8. The method of payment, whether by time or by the job;
9. Whether or not the work is part of the regular business of the beneficiary of the services.
10. Whether or not the parties believe they are creating a relationship of employer – employee.
THE ISENBERG AND BORELLO CASES:
There is no one single factor which determines the status of a worker. However, great emphasis usually is placed on the extent to which the principal has the right to control the workman’s manner, mode, methods, and means of performing the details of his work. This is commonly referred to as the “principal” or the “most important factor” tests (Isenberg v California Employment Stabilization Commission (1947) 30 Cal. 2d 34).
According to the California Supreme Court, the principal’s supervisory power is critical in determining employee status because the extent to which the employer has a right to control the details of the work done is highly relevant. The “control of detail” test is the principal measure of the worker’s status for common law purposes (S.G. Borello & Sons, Inc. v Dept of Indust. Rel. (1989) 48 Cal. 3d 341, 350).
My experience in dealing with both the EDD and the CUIAB has shown that the right to control, and even the possibility that the employer may exercise control, is sufficient to tilt the doubt in favor of an employer-employee relationship. This is especially true in today’s economic climate in California where the benefit of the doubt will be resolved in assessing the employer for unpaid payroll taxes. This is why the majority of EDD “status” audits result in the issuance of a Notice of Assessment requiring your client to file a petition before the CUIAB.
DO WRITTEN CONTRACTS WORK IN THE EMPLOYER’S FAVOR?
I am often asked by both clients and tax professionals whether the existence of a written contract is a decisive factor in establishing an employer-independent contractor relationship. I have reviewed many well drafted contracts wherein the worker acknowledges that he or she is an independent contractor and totally agrees that the employer is not responsible for withholding and employment taxes. These contracts unfortunately provide a false sense of security. They are usually disregarded by the EDD auditor. An ALJ may or may not uphold the contract depending upon all the facts presented. However, the written and signed contract standing alone is not going to make or break the worker classification.
The leading case regarding the nature of independent contractor written agreements is S.G. Borello and Sons discussed above. In Borello, a grower designed the business of its cucumber “sharefarmers” in order to give the impression that they were separate business owners. The court rejected the grower’s “subterfuge.” Likewise, in Santa Cruz Transportation Inc. v. Unemp. Ins. Appeals Bd., supra, 235 Cal.App.3d 1363, a taxicab company converted its employee drivers to lease drivers by requiring them to sign leasing agreements. The court of appeals found that the cab drivers were not independent. The court observed that “attempts to conceal employment by formal documents purporting to create other relationships have led the courts to disregard such terms whenever the acts and declarations of the parties are inconsistent. An employer cannot change the status of an employee to one of independent contractor by illegally requiring him to assume burdens which the law imposes directly on the employer.
An EDD auditor, conducting an audit, will determine whether a possibility of control of the worker by the employer exists. If he or she concludes that the answer is “yes,” the auditor most likely will resolve the issue against the employer and issue an assessment. A petition will have to be filed before the CUIAB. Written contracts purporting to establish an independent contractor relationship all to often create a false sense of security – but they are better than having no written agreement at all.
In Part 4 we will review who is and who is not an employee under specific statutes and EDD guidelines.
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.