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ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – AB-5 HAS BEEN REPEALED! – SAY HELLO TO NEW AB-2257 – PART 6 – NEW LABOR CODE SECTION 2780 – EXEMPTIONS FOR THE ENTERTAINMENT INDUSTRY

By Robert S. Schriebman

2020

Introduction

The California Legislature and Governor Newsom have taken a second look at AB-5, signed into law in September 2019 and have scrapped it. AB-5 was repealed on September 4, 2020. In its place we now have AB-2257. What’s the difference?

The new legislation favors the entertainment industry and has provided many more new exemptions. Gone are the laws that required domestic home workers such as live-in nannies and housekeepers to be treated as W-2 wage earners. Tutors are exempt even if they teach school curriculum so long as they are not hired by school districts. Freelance writers and photographers are not restricted by the number of articles they produce or engagements photographed.

This article will review new Labor Code § 2780, exemptions for the entertainment industry. Before discussing these exemptions, I want to point out that there are several subsections involving labor unions and collective bargaining agreements. I will not be discussing these areas and therefore I recommend that they be read and studied very carefully.

It is important for you to understand an overview of AB-2257, the Dynamex case, and the relevance of the Borello decision.

New Labor Code Sections

AB-2257 created new Labor Code § 2775-2787.  In a nutshell these new sections retain the ABC Standard set forth in AB-5.  Like AB-5, the new law basically states that all workers, unless exempt, are going to be considered employees unless the hiring entity can prove the following:

  1. The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  2. The person performs work that is outside the usual course of the hiring entity’s business.
  3. The person is customarily engaged in an independently established trade, occupation, or business or the same nature as that involved in the work performed.

In reading this series of articles it is important to keep in mind that “exemption” does not mean a complete escape from the old rules.   Those who are exempt under AB-2257 must still satisfy the test under the 1989 California Supreme Court decision in the Borello case. There are still hoops that one must jump through before one is home free.

Just because AB-5 has been repealed does not mean that the history behind the repealed act has also been repealed.  You need to know about the Dynamex case, the ABC Standard Test, and Borello.  This introduction will give you some background information that will be important in working with and understanding AB-2257.

Retroactive Impact of AB-2257

Does the new AB-2257 repeal AB-5 retroactively to January 1, 2020? It appears that it does.  New Labor Code § 2785(b) states that insofar as the application of the new series of exemptions would relieve an employer from liability, those exemptions will apply retroactively to existing claims and actions “to the maximum extent permitted by law.” §2785(d) states that if the employer can demonstrate that there has been compliance with the relevant exemption section under AB-2257, the holding in Dynamex will not apply to that employer.  The employer, however, must demonstrate compliance with the Borello decision.  What is unclear is what remedy an employer has for retroactive relief.  If payroll taxes were paid during 2020 for an occupation now exempt under the new law, will a claim for refund be allowed for the payment of 2020 payroll taxes that would not have been paid but for the new legislation?

One cannot truly understand and appreciate the impact of AB-2257 without a brief history lesson.  It is important to understand the impact of the Dynamex decision and perhaps most importantly, the lasting and ongoing impact of the Borello decision.

Dynamex Historical Background

At the end of April 2018, California Supreme Court published the 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 EDD’s famous 23 factor-test may no longer be applicable and the leading Supreme Court case of Borello 48 Cal.3d 341 may have also been thrown out. 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 hidden in a wage order issued by the California Industrial Welfare Commission, but never been applied or interpreted by the courts until 2010 when it was discussed in another California Supreme Court Case known as Martinez v Combs 49 Cal.4th 35.  Wage Order No. 14, Cal. Code /regs., tit. 8, § 11140, subd. 2(C).

The Impact of the Borello Decision

In 1989 the California Supreme Court decided in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello).  This case established a multi-factor test to determine whether or not an employer engaging an independent contractor has retained too much control over the relationship.  If so, the contractor is re-classified as an employee. We will examine these factors and how they impacted the Court’s Dynamex decision in our next article. It is still not clear in my mind whether the Supreme Court threw Borello under the buss.

The ultimate decision of the California Supreme Court was to uphold a Wage Order issued by the Industrial Welfare Commission (IWC) back in 1916 that established a test under the “suffer or permit to work” standard. In footnote 3 of the Decision, at page 3, the Court set forth the impact of an IWC Wage Order as follows: “In California, wage orders are constitutionally-authorized, quasi-legislative regulations that have the force of law. (Cal.Const., art.XIV, § 1; Lab.Code, §§ 1173, 1178, 1178.5, 1182, 1185; Industrial Welfare Com. v. Superior Court (1980) 27 Cal.3d 690, 700-703 (Industrial Wlf.Com.).)”

New Labor Code Section 2780

Labor Code § 2780(a) provides specific exemptions for eleven occupations set forth in subsections A – J.  In addition to these eleven occupations there are also exemptions for recording artists, musicians and musical groups.  The exemptions set forth in A – J are as follows:

  1. Recording artists.
  2. Songwriters, lyricists, composers, and proofers.
  3. Managers of recording artists.
  4. Record producers and directors.
  5. Musical engineers and mixers engaged in the creation of sound recordings.
  6. Musicians engaged in the creation of sound recordings.
  7. Photographers working on recording photo shoots, album covers, and other press and publicity purposes.
  8. Independent radio promoters.
  9. Any other individual engaged to render any creative, production, marketing, or independent music publicist services related primarily to the creation, marketing, promotion, or distribution of sound recordings or musical compositions.

With regard to recording artists, musicians, and vocalists, they will be allowed exemptions from AB-2257 and will not be precluded from organizing under applicable provisions of labor law or otherwise exercising rights granted to employees under the National Labor Relations Act.  Having said this, musicians and vocalists who are not royalty-based participants in the work created during any specific engagement, shall be treated as employees solely for purposes of receiving minimum and overtime wages for hours worked during an engagement.  There will also be other benefits accruing to these workers under the new law.  See Labor Code § 2780(a)(4)(B)(i).

Exemptions do not apply to film and television unit production crews working on live or recorded performances for audio visual works including still photographers and cinematographers.  The exemption does not apply to publicists who are not independent music publicists.

Under new Labor Code 2780(b) exemptions will also be allowed for musicians and musical groups for the purpose of single-engagement live performance events. There are special rules relating to a musical group performing with a symphony orchestra, theme park, or a musical theater production.  See Labor Code § 2780(b)(1)(A-C).

Under Labor Code § 2780(c) exemptions are also provided for an individual performance artist performing material that is their own work and creative in character.  The work will primarily depend on the individual’s invention, imagination or talent.  There are also conditions for the exemption that must be met as follows:

  • The individual is free from the control and direction of the hiring entity in connection with the performance of his/her work. This includes the right of the performer to exercise artistic control over all the elements of the performance.
  • The individual retains the rights to their intellectual property that were created in connection with the performance.
  • The individual sets their terms of work and has the ability to set or negotiate their rates.
  • The individual is free to accept or reject each individual performance engagement without being penalized in any way by the hiring entity.

The term “individual performance artist” shall include, but is not limited to, an individual performing comedy, improvisation, stage magic, illusion, mime, spoken word, story-telling or puppetry.

Conclusion

New Labor Code § 2780 virtually governs the entire entertainment industry. They say that AB-5 was repealed and new AB-2257 was created as a result of pressure from members of the industry.

Keep in mind that even if you comply with all of the conditions set forth above, you are not home free.  EDD auditors are free to apply the tests set forth in Borello when it comes to issuing an assessment.

***

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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