The California Franchise Tax Board (FTB) recently updated its list of individual and corporate tax rates, exemption credits, and other fees and requirements for 2018, based upon the state rate of inflation. The current California tax rate for corporations (not banks or financials) is 8.84%, and the maximum rate for individuals is 12.3%.
On December 3, 2018, California Assembly Member Lorena Gonzales (AD 80) introduced Assembly Bill AB 5, and California Assembly Member Melissa Melendez (AD 87) introduced Assembly Bill AB 71, seeking to legislate on opposite sides of the issue decided in the recent California Supreme Court decision, Dynamex Operations W., Inc. v. Superior Court, 4 Cal. 5th 903 (2018).
Dynamex dealt with whether delivery drivers classified as independent contractors were misclassified as such under California Industrial Wage Commission Wage Order No. 9-2001. We previously discussed the effects of this case here. In sum, the Dynamex court held that both the ABC Test for worker classification, as well as the seminal case, S. G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 48 Cal. 3d 341 (1989), are applicable in determining employment status under California Wage Orders. Following Dynamex, all independent contractor relationships in California will be subject to the ABC standard, in addition to Borello, for purposes of wage and hour litigation and administrative wage claims.
The ABC Test provides a much narrower definition of an independent contractor than we have previously seen in California. Under the ABC Test, the hiring entity must establish all three of the following in order to classify a worker as an independent contractor: (A) the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) the worker performs work that is outside the usual course of the hiring entity’s business; and (C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
Prong (B) is the hardest to overcome if the contractor is performing work that is the same as that of the hiring entry, for example, where the principal is in the business of performing janitorial services, and the contractors are janitors.
However, Dynamex was isolated to interpretation of IWC Wage Orders and does not apply to EDD payroll taxes at this time. Nor does it currently apply to workers’ compensation insurance matters.
AB 5 – The Gonzalez Bill
The Gonzalez bill, AB 5, seeks to codify Dynamex and “clarify the decision’s application in state law.” In addition, the preamble states: “In its decision, [Dynamex] cited the harm to misclassified workers who lose significant workplace protections, the unfairness to employers who must compete with companies that misclassify, and the loss to the state of needed revenue from companies that use misclassification to avoid obligations such as payment of payroll taxes, payment of premiums for workers compensation, Social Security, unemployment, and disability insurance.”
The most troubling part of the preamble to AB 5 states, “The misclassification of workers as independent contractors has been a significant factor in the erosion of the middle class and the rise in income inequality.” This is an extremely broad and vague statement, and arguably false. Having worked on worker classification issues over the past 12 years, I can assure you that independent contracting is actually the way in to the middle class for many individuals. AB 5 appears to be straight from the union playbook, or at least significantly unfriendly to independent contractor business models.
No legislative committees have yet provided any analysis of the bill, but I suspect AB 5 is merely a placeholder bill, waiting on forthcoming language which would seek to apply Dynamex to the “payment of payroll taxes, payment of premiums for workers compensation, Social Security, unemployment, and disability insurance.” The result of this would be considerable exodus by certain industries from California, as well as those same businesses simply folding.
AB 71 – The Melendez Bill
Assembly Bill 71, on the other hand, seeks to statutorily supersede the narrow holding in Dynamex, by codifying the widely accepted factors in another California Supreme Court case, Borello. According to AB 71, those factors include, but are not limited to, the following:
(b) (1) Whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired, which is the principal factor.
(2) Whether the one performing services is engaged in a distinct occupation or business.
(3) The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision.
(4) The skill required in the particular occupation.
(5) Whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work.
(6) The length of time for which the services are to be performed.
(7) The method of payment, whether by the time or by the job.
(8) The right to discharge at will, without cause.
(9) Whether or not the work is part of the regular business of the principal.
(10) Whether or not the parties believe they are creating the relationship of employer-employee.
(c) The individual factors set forth in subdivision (b) above shall not be applied mechanically as separate tests, but shall be intertwined.
(d) The test set forth in this section shall apply to any determinations before an administrative agency or court.
While there is more to Borello than the above factors, AB 71 essentially states them correctly and would be a better approach to worker classification issues than both Dynamex and AB 5. Borello, while considerably restrictive to independent contractor relationships, aligns better with the greater body of law in this area. Dynamex has essentially threatened to wipe out an entire labor/service sector, namely, small business owners who seek to provide services under their own terms, and through their own innovation and entrepreneurship, rather than by choosing to be employed (like the truck driver witness from my first-year EDD case).
Independent contractors are dynamic, ambitious individuals who understand the risk for loss and opportunity for greater income, and are also attracted to the greater freedoms inherent in running their own businesses. There may be individuals for whom contracting is not the best way to provide services, true. However, it would be misguided and paternalistic for California to eliminate this opportunity altogether.
To follow the progress of these two Assembly Bills, click here: AB 5 and AB 71.
If your business relies on independent contractors, you may want to consider having your practices reviewed in light of the recent changes to worker classification in California. Contact our firm today to talk to an attorney.