Worker Classification: Dealing with Current Rules and What ...

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Worker Classification: Dealing with Current Rules and What Might Lie Ahead

[webinar Title] 2©2021, CCH Incorporated. All Rights Reserved.

Worker Classification:

Dealing with Current Rules and What Might Lie Ahead

Professor Annette Nellen, CPA, CGMA, Esq.

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3Worker Classification:


Learning Objectives

• Recognize why worker classification is relevant under numerous tax and non‐tax laws

• Identify the tax rules for distinguishing between employees and contractors

• Differentiate special tax rules and remedies applicable when problems are discovered

• Recognize how related tax rules are relevant in the worker classification area

• Identify proposals for change and varied state classification law enacted in recent years



Topics

1. Why and when worker classification is relevant

2. Challenges in dealing with the tax classification rules

3. The federal tax rules and comparison to some states

4. Recent developments in work relationships (including gig economy) and federal and state tax laws

5. Dealing with the challenges

6. Practice tips

7. Proposals for change

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1. Why and When Worker Classification is Relevant



Worker Classification Relevant under Various Tax Rules

• Payroll taxes

Federal withholding – payroll or for contractors (backup withholding may be required)

FICA/HI

• Self‐employment tax (15.3% versus employee share at 7.65%)

FUTA

• Income tax rules

Treatment of worker expenses

Fringe and other benefits

Eligibility for retirement plans

Eligibility for new §199A (qualified business income) deduction

• Social Security Act

• Affordable Care Act (ACA) tax provisions

• State and local tax laws

Whether obligated to collect sales tax (or is employer so obligated)

Business license tax

Others

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Worker Classification Relevant under Numerous Non‐Tax Laws

• ERISA – pension and welfare benefit plans

• Workers’ compensation

• Immigration Reform and Control Act of 1986

Includes I‐9 compliance

• Family and Medical Leave Act

• Health Insurance Portability Act

• Affordable Care Act (ACA)

• Fair Labor Standards Act – minimum wage, overtime

• Advance notice of layoff

• Occupational Safety and Health Act

• Civil Rights Acts

• Age Discrimination in Employment Act

• Americans with Disabilities Act (ADA)

• National Labor Relations Act – organizing and bargaining

• Copyright & Patent laws – who owns IP created by a worker?

• Various state and local laws



Misclassification Can Lead to …

• Large tax liabilities, penalties, interest

• Owe back wages (such as because did not follow FLSA)

• Owe labor law penalties

• Be denied federal or state contracts

• Violate health and benefit plans

• Error in determining if employer is an “applicable large employer” for the §4980H responsibility payment and other health care compliance matters

Could owe large penalty under ACA

Could owe penalty for failure to file Form 1095‐C

• Disgruntled worker

• Possible penalty for any adviser who assisted employer

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Tax Relevance

• Employer

Paying proper amount of payroll taxes?

Properly filing W‐2s and 1099s?

Proper compliance with benefit plans including health care coverage?

• If not, possibility of disqualification of plans and penalties.

• Worker

Proper tax compliance – income tax, SE tax, treatment of work‐related costs and health insurance, new §199A deduction (2018 through 2025)

Eligibility for retirement plans

Proper tax filing – Schedule C?



Government Concerns ‐ 1

• Tax compliance

Payroll tax gap

• 1984 (year of last study):

─ 15% of employers misclassified 3.4 million workers with estimated tax loss of $1.6 billion

• Likely to be updated soon (last study was in 2017)

• Non‐compliance among some gig workers today.

Employees tend to be more compliant than contractors

• Form 1099‐NEC only required if payments total $600 or more for the calendar year (§6041)

Note: GAO reports on worker classification issues date back to 1977!

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Government Concerns ‐ 2

• Safety net

Only employees get unemployment compensation, minimum wage law, overtime pay, workers’ compensation, etc.

Observation: COVID‐19 legislation enacted in March 2020 did provide some safety net benefits to self‐employed/contractors though.

• Taxpayer perceptions

Some businesses gaining unfair advantage over compliant employers due to incorrect classification (whether willful, due to honest mistake, or legally per “Section 530”)

• Leads to disrespect for the tax system


2. Challenges in Dealing with the Tax Classification Rules

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Challenges Law Not Clear or Easy to Apply

• Different tests for different laws

Might not be clear which test to use or how to use it

Classification answer might vary among different laws or between state and federal classification schemes

• Worker might be employee for one law and contractor for another

• Subjective nature of applying and weighing factors

• IRS prohibited from issuing guidance

• States looking at new classification primarily in light of growing gig workforce



Possible Tests

• Applicable test usually depends on the particular law involved.

• Formulations include:

Common law test – federal tax

• Does employer have the right to control both the result of the services and the means by which the result is accomplished?

─ Yes – employee (subject to will and control of Employer)

─ No – contractor

─ See 20 factors in Rev. Rul. 87‐41 (IRS groups into 3 broad factors today)

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Economic Realities Test

• Fair Labor Standards Act

Independent entrepreneur vs. being economically dependent on the employer.

Is worker dependent on someone else’s business or in business for self?

1) Extent to which work performed is integral part of employer’s business

2) Whether worker’s managerial skills affect his opportunity for profit or loss

3) Relative investments in facilities and equipment by worker and employer

4) Worker’s skill and initiative

5) Permanency of relationship

6) Nature and degree of control by employer

• References

Fact Sheet 13 ‐ http://www.dol.gov/whd/regs/compliance/whdfs13.htm



ABC Test

• ABC Test – worker is contractor if meets A, B & C

A. “The worker is free from control or direction in the performance of the work

B. The work is done outside the usual course of the company's business and is done off the premises of the business*

C. The worker is customarily engaged in an independent trade, occupation, profession, or business”

http://www.twc.state.tx.us/news/efte/independent_contractor_tests.html

• At this website, the Commission explains several tests used by different agencies and laws.

• Is a fairly strict test + starts with presumption that worker is an employee

• Used by many states for unemployment tax purposes

*B wording not consistent among laws

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Workforce Realities

• Short term needs – contractor status likely easier. But this is not a classification criteria.

• Small or struggling employer may be unable to afford payroll taxes, welfare benefits, application of other laws.

• Sometimes, desire to make a partner an employee Not allowed per Rev. Rul. 69‐184


3. Federal Tax Rules and Comparison to Some States

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IRS 20 Common Law Factors / Right to Control Test Revenue Ruling 87‐41

1. Instructions

2. Training

3. Integration

4. Services rendered personally

5. Hiring, supervising, and paying assistants

6. Continuing relationship

7. Set hours of work

8. Full time required

9. Doing work on employer’s premises

10. Order or sequence set

11. Oral or written reports

12. Payment by hour, week, month

13. Payment of business and/or traveling expenses

14. Furnishing of tools and materials

15. Significant investment

16. Realization of profit or loss

17. Working for more than one firm at a time

18. Making service available to general public

19. Right to discharge

20. Right to terminate



IRS Approach Today

• Replace 20 common law factors with three key areas of “evidence” of control:

Behavioral

Financial

Type of relationship

• “The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.”

Ties to the 20 common law factors

IRS Training Materials (10/96) and website information

• Internal Revenue Service, Independent Contractor or Employee? Training Materials, Training 3320‐102 (10‐96), page 2‐7; http://www.sjsu.edu/people/annette.nellen/website/IRS_TrainingMaterials_ECorEmployee_1996.pdf

• IRS summary ‐ https://www.irs.gov/newsroom/understanding‐employee‐vs‐contractor‐designation

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Behavioral Control

• Instructions

The more detailed they are, the more control exercised

Distinguish instructions from suggestions

Formal evaluation system likely indicates control

• Training

Help to show if employer has right to direct or control how the worker performs his specific task



Financial Control

• Significant investment

• Unreimbursed expenses

• Services available to the relevant market

• Method of payment

• Opportunity for profit or loss

Factors that can indicate if there is a right to direct or control how the business aspects of the worker’s activities are conducted

Can’t consider worker’s economic status

Contractors more likely to have unreimbursed expenses

Contractor likely to advertise services

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Relationship of the Parties

• Intent of parties/written contracts

• Employee benefits

• Discharge/termination

• Permanency of the relationships

• Regular business activity

How do the parties perceive their relationship?

Substance controls over form/labels or incorporation

Ability to fire likely indicates employee

Doing same work as the service recipient likely indicates employee, such as CPA hired by CPA firm



Classification Rules in the IRC

• Employee per §3121(d): Corporate officer [+ Reg. 31.3121(d)‐1(b)]

Common law employee [+ Reg. 31.3121(d)‐1(c)]

“Statutory employee” – if per agreement, substantially all of the services are to be performed personally by the worker and is: [+ Reg. 31.3121(d)‐1(d)(3)]

• agent‐driver or commission‐driver engaged in distributing meat products, vegetable products, fruit products, bakery products, beverages (other than milk), or laundry or dry‐cleaning services, for his principal;

• full‐time life insurance salesman;

• home worker performing work, according to specifications furnished by the person for whom the services are performed, on materials or goods furnished by such person which are required to be returned to such person or a person designated by him; or

• traveling or city salesman, other than as an agent‐driver or commission‐driver, engaged upon a full‐time basis in the solicitation on behalf of, and the transmission to, his principal (except for side‐line sales activities on behalf of some other person) of orders from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments for merchandise for resale or supplies for use in their business operations

https://www.irs.gov/businesses/small‐businesses‐self‐employed/statutory‐employees

Covered by agreement under Section 218 of the Social Security Act

• Statutory non‐employee (a contractor or self‐employed person) §3508: qualified real estate agents and direct sellers

§3506: companion sitters

• §3401(c) + regs – “For purposes of this chapter, the term “employee” includes an officer, employee, or elected official of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing. The term “employee” also includes an officer of a corporation.”

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Section 530 of the Revenue Act of 1978

• To provide temporary relief to employers while Congress resolved classification issues.

• Made permanent by Tax Equity and Fiscal Responsibility Act of 1982.

• Allows certain employers to misclassify workers as contractors if have reasonable reliance on: Relying on past IRS audit. Published guidance allows contractor status. Longstanding industry practice. Have reasonable basis for treating workers as contractors (added by

courts).

• Get relief only if: Have consistently treating similar workers as contractors. File 1099s.

• Example: Nelly Home Care, Inc. and Nelly LLC, Nos. 15‐439, 15‐444 (ED PA, 5/10/16)

─ https://www.paed.uscourts.gov/documents/opinions/16D0374P.pdf



“Section 530” ‐more

• Prohibits Treasury and IRS from issuing regulations and revenue rulings on worker classification for employment tax purposes.

• Only relevant for federal employment tax for employer and if employer meets the “Section 530” requirements (more later).

Not relevant in counting employees to see if subject to ACA employer mandate (§4980H).

• Allows some employers to treat employees as contractors for employment tax purposes (but not for income tax purposes).

• IRS Pub 1976 ‐ http://www.irs.gov/pub/irs‐pdf/p1976.pdf

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Inconsistencies Among Various Laws

• State tax classification might not follow federal tax classification ABC test in California is an example (more later)

• Classification criteria or approach can vary from law to law, agency to agency (and perhaps court to court).

• Example – Connecticut: “Are there any guidelines to help employers classify workers correctly? Yes, although determination of a worker’s status is often complex.

Connecticut agencies use different rules and tests to determine employment status as different agencies are responsible for separate aspects of law.”

http://www.ctdol.state.ct.us/wgwkstnd/JEC/WorkerMisClassFAQs.pdf



Review Questions 1 & 2

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4. Recent Developments in Work Relationships and Federal and State Laws

Including Gig Economy Considerations



21st Century Changes in Work

• Technology

Readily allows 24/7 activities (interactions with customers, emails, online work)

More algorithms and AI w/o much human involvement

Consumers can do more on own (order goods, banking, etc.)

• Generational

Many in Gen Z (and older) doesn’t want 9 – 5 if not really needed

• Outdated laws

FLSA and other laws tend to focus on 8 hour day + OT

• What about when employee checks email after hours?

Worker classification – is a third category needed?

• Example: Dependent worker

─ Result of Prop 22 in California

─ Used in Canada and some other countries

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Ways of Working

• U.S. Census Bureau – 75% sole proprietors have no employees ‐https://www.census.gov/library/stories/2018/09/three‐fourths‐nations‐businesses‐do‐not‐have‐paid‐employees.html

• More specialized work & easy to find contractors to provide assistance when needed rather than have employees

• Gig platforms continue to expand into more kinds of labor

• What does a self‐employed entrepreneur look like in 21st

century?

Ok to not have employees?

Ok not to have all details about customers such as those found via platforms?



Gig Economy Considerations

• New model aided by technology to help people monetize their time and assets and for businesses to find more customers.

• Changing workforce – employees might set hours, knowledge workers, gig economy (web platform companies), freelancers, easily accessible labor pool for short specialized projects, opportunities to obtain funds if needed short‐term.

Is there an employer?

Who is the employer?

• Person receiving the services (the ride to the airport, for example)?

• Person running the web platform?

Once identify the employer, how much control are they exercising?

Is there need for a third category of worker?

• Is term “gig worker” point of confusion?

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Terminology Challenges – Old And New

What is an independent business?

• California AG petition in Uber/Lyft‐AB 5 litigation: Drivers fail “C” test (“independently established trade, occupation, or business”)

• “Driving itself is not a distinct trade, occupation, or business.”

• “When driving for each Defendant, Drivers are not engaged in their own transportation business, but are instead driving Passengers and generating income for the respective Defendant.”

• “There are no specialized skills or training necessary to drive passengers on a ride‐hailing service.”

• “Each Defendant's Drivers generally invest little to no capital to drive for each Defendant. To offer ride‐hailing services on each Defendant's App, Drivers only need a smartphone and a car.”

• https://oag.ca.gov/system/files/attachments/press‐docs/2020.05.05%20‐%20Uber%20Lyft%20File‐Stamped%20Complaint%5B1%5D.pdf

Observations: A car and smartphone are significant investments. Drivers pay a fee (part of each passenger ride) for use of the Defendants’ app. AG perhaps goes overboard for litigation position rather than reality (likely knows car and phone are big investments).



Terminology Challenges – Not Just In The Platform World

• Paycheck Protection Program (PPP) Observations Terminology for sole proprietors:

• small businesses and sole proprietorships could apply 4/3/20

• independent contractors and self‐employed individuals could apply 4/10/20

• Platform work – what are appropriate names for the parties? Isn’t the passenger the customer and the driver the service provider?

Is the platform company a service provider to both?

• How significant is it that driver doesn’t have all of the customer data?

• Arguably significant if platform sets the fares and won’t let driver reject a ride w/o penalty.

─ Some changes may occur and have been made starting 1/1/20 – enough?

Is the arrangement other than employer/contractor?

• Is “business owner” for the driver more appropriate?

─ This term is showing up in platform/gig “terms of service” where “business owner” is not an employee or contractor of the platform.

What about “self‐employed entrepreneur”?

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AB 5AB 2257 Prop 22Litigation throughout and continuingAdditional legislative proposals to modify AB 5Confusion



California Enacted AB 5 To Broaden Use of ABC Worker Classification Test – Effective 1/1/20

• Signed into law 9/18/19

• Effective 1/1/20

• Adopts the 2018 California Supreme Court ABC worker classification scheme in Dynamex beyond wage orders (rather than the longstanding Borello approach (common law/economic realities test)).

To apply under the California:

• Labor Code,

─ Workers’ Compensation starting 7/1/20 [Sec. 3 of AB 5; Sec. 3351 of Labor Code]

• Unemployment Insurance Code, and

• Wage orders of Industrial Welfare Commission (at issue in the Dynamex case)

• Worker presumed to be employee unless “hiring entity demonstrates” A, B & C ‐‐‐‐‐‐‐

https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB5

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ABC Classification Test

Worker is employee unless “hiring entity” shows A,B & C met:

A. 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.

B. The person performs work that is outside the usual course of the hiring entity’s business.

C. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.



AB 5 ‐more

• Several exceptions included. Generally, if exception applies, use the Borello factors (common law) rather than ABC

classification test.

• Read exceptions carefully and completely! Most have specific factors that must be met for exception to apply.

• Wording and intent not always clear; few definitions provided.

• Example: Enrolled Agents excepted, but several conditions must be satisfied for the exception to apply.

• Employers likely need to check with labor law attorney for: Assistance understanding and applying ABC test.

Interpreting and applying exceptions.

Relevance of employee classification under California Labor Code, Unemployment Insurance Code, and wage orders of Industrial Welfare Commission.

New documentation procedures to confirm any classification as contractor.

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AB 5 has about 50 exemptions + AB 2257 adds even more

• Many variations in how each is worded. Many terms not defined.

• Query: Which agency(ies), if any, will provide guidance.

• Litigation possible.

• Will more exceptions be added? More added by AB 2257 (Chapter 38; 9/4/20)

• About 100 exceptions now.

• Per Sec. 8, is an “urgency statute” so effective immediately.─ Rationale: “In order to ensure businesses and workers have immediate clarity on the specific

standards used to determine an individual’s employment classification working in the professions impacted by this legislation, including musicians, various professionals in the music recording industry, writers, photographers, videographers, photo editors, and illustrators, and others, it is necessary for this act to take effect immediately.”

Likely to see more requests for exceptions.



Decision Tree Approach Under AB 5

1. Identify individuals treated as contractor in California under pre‐AB 5 law (Borellofactors – generally common law approach)

2. At 1/1/20, that worker is presumed to be an employee for California Labor Code, Unemployment Insurance Code and wage orders* of Industrial Welfare Commission.

3. Apply the ABC test.

4. Met?

Yes – Contractor

• Be sure to document this.

No – Do any of the exceptions apply?

• No – Employee

• Yes – now apply the Borello factors to determine classification for California

5. Any change for federal tax purposes?

Generally no change unless employer decides that it now wants to and can and does exercise more control over the worker.

*ABC test applicable to wage orders since Dynamex case.

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Outline of AB 5 as modified by AB 2257Sections1. Purpose [see next slide for summary]

2. Addition of Section 2750.3 to Labor Code [see following slides for details]

ABC test and exceptions

NOTE: AB 2257 (Sept 2020) repealed 2750.3 and replaced it with Article 1.5 (Section 2775 …) of the Labor Code. Modifies some AB 5 exceptions, reorders some and adds more.

3. Amendment to Section 3351 of Labor Code

4. Amendment to Section 606.5 of Unemployment Insurance Code

5. Amendment to Section 621 of Unemployment Insurance Code

6. “No provision of this measure shall permit an employer to reclassify an individual who was an employee on January 1, 2019, to an independent contractor due to this measure’s enactment.”

7. “No reimbursement is required by this act pursuant to Section 6 of Article XIII B of the California Constitution because the only costs that may be incurred by a local agency or school district will be incurred because this act creates a new crime or infraction, eliminates a crime or infraction, or changes the penalty for a crime or infraction, within the meaning of Section 17556 of the Government Code, or changes the definition of a crime within the meaning of Section 6 of Article XIII B of the California Constitution.”

http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB5



Purpose of AB 5 (Section 1 of AB 5)

• Address misclassification of workers.

• “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.”

• Codify the California Supreme Court’s decision in Dynamex (that used the ABC test rather than longstanding Borello factors).

• “to ensure workers who are currently exploited by being misclassified as independent contractors instead of recognized as employees have the basic rights and protections they deserve under the law, including a minimum wage, workers’ compensation if they are injured on the job, unemployment insurance, paid sick leave, and paid family leave. By codifying the California Supreme Court’s landmark, unanimous Dynamex decision, this act restores these important protections to potentially several million workers who have been denied these basic workplace rights that all employees are entitled to under the law.”

• “Nothing in this act is intended to diminish the flexibility of employees to work part‐time or intermittent schedules or to work for multiple employers.”

https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB5

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Borello v ABC Tests Per CA Dept. of Industrial Relations –FAQ 6

• “Both the Borello test and the ABC test assume that the worker is an employee and the hiring entity must prove that the worker is an independent contractor.

However, the ABC test is designed to make it easier for both businesses and workers to determine in advance whether a worker is an independent contractor or an employee. In other words, it is aimed at being more predictable than the multifactor approach used under Borello.

Unlike the ABC test — in which the inability of the hiring entity to demonstrate any part of the three‐part test means that the worker is not an independent contractor — under the Borello test, no single factor determines whether a worker is an employee or an independent contractor. As described above in Question 5, courts consider all potentially relevant factors on a case‐by‐case basis in light of the nature of the work, the overall arrangement between the parties and the purpose of the law.”

https://www.dir.ca.gov/dlse/faq_independentcontractor.htm



https://www.gov.ca.gov/2019/09/18/governor‐newsom‐signs‐legislation‐9‐18‐19/

Governor’s statement upon signing AB 5.

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Safety Net for Employees versus Contractors

• AB 5 states it aims to ensure minimum wage, workers’ compensation if they are injured on the job, unemployment insurance, paid sick leave, and paid family leave.

• Observations: Will AB address this?

Maybe.

But many platform workers work < 10 hours per week and for only a few months.

• Will an employer hire such a worker as an employee?

• Will these workers lose opportunity for monetizing labor for short‐term cash flow needs?

Will wages be higher than minimum wage?

• Employer payment of employee expenses will help overall cash flow for workers though.

• Worker still owes SE tax if remains a contractor under federal law.

─ Federal government and worker will benefit from the larger SE tax paid as SE income will be larger when employer pays the worker’s expenses.

Federal law seems to be only requirement for offering health insurance and that is only relevant to an “applicable large employer” required to offer it to a full‐time employee (who works on average 30 or more hours per week). [IRC §4980H]

What about protections for low‐paid employees including government employees who work part‐time and even with long unpaid breaks (for example, school crossing guards)? Where are the new laws to help these workers?



Queries as to Purpose of AB 5

• Why not fund additional resources to address the misclassification issues noted by sponsors/supporters?

How does a new classification scheme help address this concern?

If “help” is in ABC test’s presumption that worker is employee, then isn’t the true purpose to make more workers be employees?

• Why increase complexity in an already complex worker classification area (ABC test and exceptions where some are complex or not fully defined)? Why not seek simpler approaches?

Plus, the new complexity of some workers classified differently for California and federal purposes.

• Why not add safety net and other protections for contractors?

For example, have contractors pay SDI (State Disability Insurance) as do California employees?

• What is impact on ability of some individuals to create their own business as self‐employed entrepreneurs?

• What is impact to gig/platform work designed to enable people to more readily monetize their time, including for short‐term needs?

• What about low‐paid, part‐time workers with limited benefits – why not help them?

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Outline of AB 5’s Addition of ABC Test & Exceptions Sec. 2750.3 to Labor Code (Section 2 of AB 5)

Article 1.5 (commencing with Section 2775) is added to Chapter 2 of Division 3 of the Labor Code

Article 1.5. Worker Status: Employees

2775. [defines terms such as Dynamex and Borello + provides ABC test]

• For purposes of this code and the Unemployment Insurance Code, and for the purposes of wage orders of the Industrial Welfare Commission, aperson providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiringentity demonstrates that all of the following conditions are satisfied:

• (A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under thecontract for the performance of the work and in fact.

• (B) The person performs work that is outside the usual course of the hiring entity’s business.

• (C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in thework performed.

2776. [business to business exception]

• Section 2775 and the holding in Dynamex do not apply to a bona fide business‐to‐business contracting relationship, as definedbelow, under the following conditions: …

• If 12 stated factors are met, the Borello factors will apply to the worker for classification purposes.

2777. [referral agency exception]

• Section 2775 and the holding in Dynamex do not apply to the relationship between a referral agency and a service provider, asdefined below, under the following conditions: …

• If the referral agency shows that 11 stated factors are met, the Borello factors will apply to the worker for classification purposes.

• Numerous definitions involved and provided at 2777.

NOTE: Following is AB 2257 outline as it replaces Labor Code 2750.3 added by AB 5.



AB 2257 outline – more exceptions

2778. [professional services exception]

• (a) Section 2775 and the holding in Dynamex do not apply to a contract for “professional services” as defined below, and insteadthe determination of whether the individual is an employee or independent contractor shall be governed by Borello if the hiring entity demonstrates that all of the following factors are satisfied: …

• If 6 specified factors met, Borello factors are applied to classify the worker.

• Defines “professional services” such as “Marketing, provided that the contracted work is original and creative in character and the result of which depends primarily on the invention, imagination, or talent of the individual or work that is an essential part of or necessarily incident to any of the contracted work.”

• (b) Section 2775 and the holding in Dynamex do not apply to the following, which are subject to the Business and Professions Code: …

2779. [single engagement exception]

• (a) Section 2775 and the holding in Dynamex do not apply to the relationship between two individuals wherein each individual isacting as a sole proprietor or separate business entity formed as a partnership, limited liability company, limited liabilitypartnership, or corporation performing work pursuant to a contract for purposes of providing services at the location of a single‐engagement event, as defined below, under the following conditions: …

2780.

• (a) (1) Section 2775 and the holding in Dynamex do not apply to the following occupations in connection with creating, marketing, promoting, or distributing sound recordings or musical compositions, and instead the holding in Borello shall apply to all of the following: …

• (b) (1) Section 2775 and the holding in Dynamex do not apply to a musician or musical group for the purpose of a single‐engagement live performance event, and instead the determination of employee or independent contractor status shall be governed by Borello, unless one of the following conditions is met: …

• (c) Section 2775 and the holding in Dynamex do not apply to the following, and instead, the determination of employee or independent contractor status shall be governed by Borello: …

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AB 2257 outline – and more exceptions

2781. [some construction industry exceptions]

• Section 2775 and the holding in Dynamex do not apply to the relationship between a contractor and an individual performing workpursuant to a subcontract in the construction industry, and instead the determination of whether the individual is an employee of the contractor shall be governed by Section 2750.5 and by Borello, if the contractor demonstrates that all the following [8] criteria are satisfied: …

2782. [data aggregator exception]

• (a) (1) Section 2775 and the holding in Dynamex do not apply to the relationship between a data aggregator and an individual providing feedback to the data aggregator, and instead the holding in Borello shall apply, under the following [4] conditions: …

2783. [select occupations, generally requiring a license (but not all in this list need a license)]

• Section 2775 and the holding in Dynamex do not apply to the following occupations as defined in the paragraphs below, and instead, the determination of employee or independent contractor status for individuals in those occupations shall be governed by Borello: …

• (c) An individual who holds an active license from the State of California and is practicing one of the following recognized professions: lawyer, architect, landscape architect, engineer, private investigator, or accountant.

• (h) A newspaper distributor working under contract with a newspaper publisher, as defined in subparagraph (A), and a newspaper carrier working under contract either with a newspaper publisher or newspaper distributor.

Note: AB 323 (Chapter 323, 9/30/20) extended the effective date of this exception (h) through 2021.

2784. [motor club exception]

• Section 2775 and the holding in Dynamex do not apply to the relationship between a motor club holding a certificate of authority issued pursuant to Chapter 2 (commencing with Section 12160) of Part 5 of Division 2 of the Insurance Code and an individual performing services pursuant to a contract between the motor club and a third party to provide motor club services utilizing the employees and vehicles of the third party and, instead, the determination of whether such an individual is an employee of the motor club shall be governed by Borello, if the motor club demonstrates that the third party is a separate and independent business from the motor club.



AB 2257 outline – remainder of article 1.5 (commencing with Section 2775) is added to Chapter 2 of Division 3 of the Labor Code

• 2785. (a) Section 2775 does not constitute a change in, but is declaratory of, existing law with regard to wageorders of the Industrial Welfare Commission and violations of this code relating to wage orders.

• (b) Insofar as the application of Sections 2776 to Section 2784 would relieve an employer from liability, thosesections shall apply retroactively to existing claims and actions to the maximum extent permitted by law.

• (c) Except as provided in subdivisions (a) and (b) of this section, this article shall apply to work performed onor after January 1, 2020.

• (d) If a hiring entity can demonstrate compliance with all of conditions set forth in any one of Sections 2776to 2784, inclusive, then Section 2775 and the holding in Dynamex do not apply to that entity, and instead thedetermination of an individual’s employment status as an employee or independent contractor shall begoverned by Borello.

• 2786. In addition to any other remedies available, an action for injunctive relief to prevent the continuedmisclassification of employees as independent contractors may be prosecuted against the putative employerin a court of competent jurisdiction by the Attorney General, by a district attorney, or by a city attorney of acity having a population in excess of 750,000, or by a city attorney in a city and county or, with the consent ofthe district attorney, by a city prosecutor in a city having a full‐time city prosecutor in the name of the peopleof the State of California upon their own complaint or upon the complaint of a board, officer, person,corporation, or association.

• 2787. The provisions of this Article are severable. If any provision of this Article or its application is heldinvalid, that invalidity shall not affect other provisions or applications that can be given effect without theinvalid provision or application.

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AB 2257 Addresses Application of ABC + Exceptions to California Revenue & Taxation Code

• AB 5 did not mention R&T Code

• Now ABC test and AB 2257 exceptions clearly apply for

Personal income tax

Franchise and corporate income tax

Taxpayers’ bill of rights

Individual shared responsibility payment.



Exceptions to AB 5 Means Borello Factors Apply – What is the Borello Case and Factors?

• S.G. Borello & Sons v Department of Industrial Relations, 48 Cal.3d 341, 769 P.2d 399 (1989)

Involved workers engaged in harvesting cucumbers under a “share farmer” agreement.

• Worker provides tools.

• Agrees to work to maximize harvest.

• Borello owns crop until sold.

• Worker and B split gross proceeds equally.

• Workers are contractors per agreement.

• B has no supervisors in the field.

Held to be employees.

Grower controls everything from planting to crop sales.

Worker incentives found to really be a form of disguised supervision.

Share farmers are not “entrepreneurs operating independent businesses for their own accounts.”

Workers entitled to workers compensation coverage.

https://scocal.stanford.edu/opinion/s‐g‐borello‐sons‐inc‐v‐department‐industrial‐relations‐30880

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Borello Factors (Relevant if AB 5/AB 2257 Exception Applies)

• S.G. Borello & Sons v Department of Industrial Relations, 48 Cal.3d 341, 769 P.2d 399 (1989)

“We also note the six‐factor test developed by other jurisdictions which determine independent contractorship in light of the remedial purposes of the legislation. Besides the "right to control the work," the factors include

1) the alleged employee's opportunity for profit or loss depending on his managerial skill;

2) the alleged employee's investment in equipment or materials required for his task, or his employment of helpers;

3) whether the service rendered requires a special skill;

4) the degree of permanence of the working relationship; and

5) whether the service rendered is an integral part of the alleged employer's business.

(Real v. Driscoll Strawberry Associates, Inc. (9th Cir. 1979) 603 F.2d 748, 754 [Fair Labor Standards Act].)”

• Courts have applied add’l “secondary” factors as well to help ‐‐‐‐

• Also see 22 CCR § 4304‐1, Employee Defined, Rules Generally Applicable to Determinations of Employment.



“Secondary” Factors: Per California Department of Industrial Relations

“The California Supreme Court established the Borello test in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341. The test relies upon multiple factors to make that determination, including whether the potential employer has all necessary control over the manner and means of accomplishing the result desired, although such control need not be direct, actually exercised or detailed. This factor, which is not dispositive, must be considered along with other factors, which include:

1. Whether the worker performing services holds themselves out as being engaged in an occupation or business distinct from that of the employer;

2. Whether the work is a regular or integral part of the employer’s business;

3. Whether the employer or the worker supplies the instrumentalities, tools, and the place for the worker doing the work;

4. Whether the worker has invested in the business, such as in the equipment or materials required by their task;

5. Whether the service provided requires a special skill;

6. The kind of occupation, and whether the work is usually done under the direction of the employer or by a specialist without supervision;

7. The worker’s opportunity for profit or loss depending on their managerial skill;

8. The length of time for which the services are to be performed;

9. The degree of permanence of the working relationship;

10. The method of payment, whether by time or by the job;

11. Whether the worker hires their own employees;

12. Whether the employer has a right to fire at will or whether a termination gives rise to an action for breach of contract; and

13. Whether or not the worker and the potential employer believe they are creating an employer‐employee relationship (this may be relevant, but the legal determination of employment status is not based on whether the parties believe they have an employer‐employee relationship).

Borello is referred to as a “multifactor” test because it requires consideration of all potentially relevant facts – no single factor controls the determination. …”

https://www.dir.ca.gov/dlse/faq_independentcontractor.htm

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Tax Relevance of Being a California Employee

• Per EDD, four California taxes to consider for employees:

1. Unemployment Insurance (UI) Tax

• Paid by employer

• On first $7,000 of wages

• New employees start at 3.4% rate; maximum is 6.2% ($434 maximum per employee; likely less)

• Query: How does this work if worker is contractor for federal law purposes?

2. Employment Training Tax (ETT)

• Paid by employer

• 0.1% on first $7,000 in wage ($7 maximum per employee)

3. State Disability Insurance (SDI) Tax

• Withheld from employee pay

• 2021: 1.2% on maximum salary of $128,298 ($1,539.58 maximum per employee).

4. California Personal Income Tax (PIT)

• Employer to withhold from wages

https://www.edd.ca.gov/Payroll_Taxes/What_Are_State_Payroll_Taxes.htm



Labor Law Relevance of Being California Employee

Note: Labor Code includes numerous provisions including number of times to be paid per month, provision of workers compensation insurance, required number of sick pay days, reimbursement of expenses, and more.

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Employee Expenses: California Labor Code §2802

• “(a) An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.”

• Only a few states have such laws.

• Query: If worker is still contractor for federal tax purposes, how do they treat the expense reimbursement on Schedule C 1040?

Include in income and then deduct the expenses?

Be sure to review 1099‐NEC to see if payor included the expenses in compensation.



What Are “Necessary” Expenses?

• Uber v Berwick, Superior Court of California, CGC‐15‐546378 (2015)

Found driver to be an employee (one of the few cases doing so)

Expenses – reimburse at IRS mileage rate

B’s $160 parking citation find for stopping in a lane of traffic in dropping of a passenger – not “necessary” and B “provided no evidence that [Uber] required that [B] stop in traffic to effect the drop off.”

• Interpretation of Labor Code requires attorney knowledgeable in this area.

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Relevance Under Other California and Local Laws

• For any local government law where the term “employee” is relevant, such as calculation of business license tax, see how that law defines employee.



Prop 22, App‐Based Drivers as Contractors and Labor Policies Initiative – Ballot listing

Queries: • Title wording not entirely accurate. • What are “standard benefits and protections that businesses must provide employees?

• CA Labor law requires employers to reimburse employee expenses, provide sick leave, unemployment comp. But not health insurance or flexible hours.

https://voterguide.sos.ca.gov/quick-reference-guide/22.htm

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What Uber, Lyft, DoorDash and Others Sought with Prop 22

• Prop 22 would treat gig drivers as contractors* and provide specified benefits including: earnings guarantee at 120% of minimum wage while driving based on the

local wage where passenger is picked up, payment of 30 cents per mile while driving,

• Adjusted for inflation after 2021.

health care benefits for those working at least 15 hours per week of engaged time,

accident insurance, protection against discrimination and sexual harassment, and independence in setting hours, serving and selecting customers and

working for others. public safety measures including background checks of drivers

See: Text: https://vig.cdn.sos.ca.gov/2020/general/pdf/topl‐prop22.pdf• Opposition includes: https://calaborfed.org/no‐on‐prop‐22‐faq/

• https://news.ballotpedia.org/2019/10/31/uber‐lyft‐and‐doordash‐file‐california‐ballot‐initiative‐to‐define‐their‐drivers‐as‐independent‐contractors‐and‐enact‐labor‐policies/



App‐based Drivers Treated as Independent Contractor if the Network Company …

a) does not unilaterally prescribe specific dates, times of day, or a minimum number of hours during which app‐based driver must be logged into the network company's online‐enabled application or platform.

b) does not require app‐based driver to accept any specific rideshare service or delivery service request as a condition of maintaining access to network company's online‐enabled application or platform.

c) does not restrict app‐based driver from performing rideshare services or delivery services through other network companies except during engaged time.

d) does not restrict app‐based driver from working in any other lawful occupation or business.

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Additional Aspects of Prop 22

• Network company treated as third party settlement org (§6050W) and must issue 1099‐K to FTB and driver if reportable payment transactions are $600 or more in calendar year.

• Does not provide for: Withholding

Sick and family leave

Overtime pay

• Any amendment by legislature requires 7/8 majority vote “provided that the statute is consistent with, and furthers the purpose of, this chapter.”

• Uber explanation: https://www.uber.com/blog/california/p22‐independent‐work/

Includes: “Additional earnings payments, the value of insurance premiums paid by Uber, and healthcare stipends may be reported as taxable income on a Form 1099 or other applicable form as required by law.”



Iowa SF 2257Feb. 2018, passed in House by 98-0; passed in Senate 48-1

A Few Other States – A Different Approach …

In 2018, 6 states enacted laws to treat platform workers (marketplace contractors) as independent contractors.

Florida (HB 7087), Indiana (HB 1286), Iowa (SF 2257; Chapter 1069), Kentucky (HB 220), Tennessee (HB 1978), Utah (HB 364).

Example: https://www.legis.iowa.gov/legislation/BillBook?ga=87&ba=SF2257

+ Texas Workforce Commission similar in 2019

https://www.sos.state.tx.us/texreg/archive/April262019/Adopted%20Rules/40.SOCIAL%20SERVICES%20AND%20ASSISTANCE.html

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Studying the Issue

• https://governor.mo.gov/press‐releases/archive/governor‐parson‐signs‐executive‐order‐20‐15‐creating‐interagency‐task‐force

• https://www.sos.mo.gov/library/reference/orders/2020/eo15



Review Questions 3 & 4

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5. Dealing with the Challenges



Worker Classification Challenges Include …

• Various classification rules not always easy to apply and results not always consistent

• State tax changes such as California different from federal law

• Differing perspectives in understanding gig platform work

• What lies ahead? [see Proposals for Change]

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State Tax Law Different From Federal Tax Law

• AB 5/AB 2257 only affects status for California. Likely a worker is an employee for California but a contractor for federal if

only change is application of AB 5 ABC test to the work relationship.

• Cautions: Don’t put contractor into qualified plans as that may make the plans

unqualified.

Avoid having worker complete W‐4 and don’t issue a W‐2 with feds

• These are federal forms for employees.

FTB and EDD need to get guidance out and forms so that employers with workers who are employees for California and contractors for federal tax get proper tax information forms.

• EDD website says to issue Form W‐2 to employees.

─ Be sure doesn’t go to SSA and IRS if only employee under California law

─ If no change, and worker is still contractor for federal tax purposes, highlight on W‐2 that is for California purposes only and be sure doesn’t get sent to IRS or SSA

─ https://edd.ca.gov/Payroll_Taxes/Year‐End_Notification_Requirements.htm



FAQs From California Labor & Workforce Development Agency on Federal versus California

https://www.labor.ca.gov/employmentstatus/faq/

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• Note: Starting in 2020, California employers must collect both W‐4 and DE‐4 from employees. (but not if is a contractor for federal tax purposes)

https://www.edd.ca.gov/pdf_pub_ctr/de4.pdfEDD Form DE‐4



Differing Perspectives of Gig Platform Work

• Example: 5/5/20 – California Attorney General sues Uber and Lyft about misclassification under AB 5

Concerns of gov’t – unlawfully treating drivers as contractors exploits them, allows companies to shift costs to taxpayers and “cheat their employees out of health care, unemployment benefits, and basic protections required by law”

Argue that companies (ER) don’t meet A, B or C of AB 5’s ABC test.

• (A) worker is free from control and direction of hiring entity in connection with performance of the work, both under the contract for the performance of the work and in fact;

• (B) worker performs work that is outside usual course of hiring entity’s business; and

• (C) worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

https://oag.ca.gov/news/press-releases/attorney-general-becerra-and-city-attorneys-los-angeles-san-diego-and-sanhttps://oag.ca.gov/system/files/attachments/press-docs/2020-05-05%20-%20Filed%20Complaint.pdf

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AG Arguments that A, B and C not met

A – Control Test

• App acts like “an algorithmic manager” similar to a human manager

• ER sets driver standards and type of car

• Can terminate driver per terms of service

• ER sets the ride fares and collects them for the drivers

• ER handles payments and dispute resolution and driver/passenger conflicts

• App matches driver and passenger without any negotiation between them

• ER monitors drivers via passenger feedback




B ‐Worker performs work outside usual course of hiring entity’s business

• ER’s business is providing on‐demand rides as a transportation company

• Drivers are integral to this business

• “Lyft has trademarked the slogan, “Your Friend with a Car.” Lyft advertises: “Get a Ride Whenever You Need One”; “A ride in minutes”; and “Our drivers are always nearby so you can get picked up, on demand, in minutes.””

• ER only generates revenue from drivers

• “Far from being a mere technology company, each Defendant is deeply enmeshed in the provision of transportation services.”

• Lyft prospectus for 2019 IPT says its overall strategy depends on its drivers

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C ‐Worker customarily engaged in independently established trade, occupation, or business of the same nature as the work performed

• “Drivers are not engaged in an independently established trade, occupation, or business of the same nature as the work they perform for each Defendant. Driving itself is not a distinct trade, occupation, or business.”

• “When driving for each Defendant, Drivers are not engaged in their own transportation business, but are instead driving Passengers and generating income for the respective Defendant.”

• “There are no specialized skills or training necessary to drive passengers on a ridehailing service.”

• Drivers are dependent on ER app

• “Each Defendant’s Drivers generally invest little to no capital to drive for each Defendant. To offer ride‐hailing services on each Defendant’s App, Drivers only need a smartphone and a car.”

• “The limited economic levers that each Defendant leaves to its Drivers, such as whether to drive at busier times or for more hours, are not consistent with the level of decisionmaking normally exercised by entrepreneurs or those operating their own independent businesses.”

• ER doesn’t let drivers see all ride opportunities in the area.

• Drivers have limited ability to decline rides without consequences.

• Drivers can’t solicit info from passengers



Add’l arguments of AG

• ER practices deprives drivers of employee rights.

• Drivers not paid for all hours worked (such as when driving from drop off to next pick up, or refueling), not paid for overtime or expenses.

• Not provided paid sick leave or health benefits.

• No disability insurance or unemployment benefits or worker’s comp.

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Observations: Counterarguments

• Drivers can control when they drive, provide good service to gain tips, manage costs, drive for multiple platform companies and can find passengers on their own.

• Payment via app is a convenience for which drivers pay commission to ER. Credit card companies provide similar services to many businesses for a fee.

• Are ERs making money from rides or its commission? What if yellow pages had a model of collecting per referrals rather than

flat fee, could it be the employer of those placing ads?

• Car, fuel and maintenance costs are a significant investment.

• No self‐employed entrepreneur is guaranteed a minimum fee or paid when there are no customers and is responsible for own insurance.



Observations: Arguments missed by AG

• Uber and Lyft do more than provide app for ridesharing: [relevant to B]

Scooters

Autonomous vehicles

Uber Freight

Other types of transportation solutions

• Why do Uber and Lyft provide access to app before asking if the driver is already in a driving business? [relevant to C]

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Uber and Lyft Lose AB 5 Suit Brought by California AG (8/10/20)

• California v. Uber Technologies, Inc.; Lyft, Inc. and Does 1‐50, No. CGC‐20‐584402 (Superior Ct SF, 8/10/20)

• State won preliminary injunction ordering Uber and Lyft to comply with AB 5 Goes into effect within 10 days

Will parties appeal?

Prop 22 with alternative classification approach is on November 2020 CA Ballot

• https://www.oag.ca.gov/system/files/initiatives/pdfs/19‐0026A1%20%28App‐Based%20Drivers%29.pdf

• Court: Companies fail “B” of ABC test as “drivers do not perform work that is ‘outside the usual course’ of their businesses. Defendants’ insistence that their businesses are ‘multi‐0sided platforms’ rather than transportation companies is flatly inconsistent with the statutory provisions that govern their businesses as transportation network companies, which are defined as companies that ‘engage in the transportation of persons by motor vehicle for compensation.’ It also flies in the face of economic reality and common sense. … To state the obvious, drivers are central, not tangential, to Uber and Lyft’s entire ride‐hailing business.”

• Companies will not “suffer grave or irreparable harm.” Will incur costs but should have been incurring them over two years ago.

• https://oag.ca.gov/news/press‐releases/attorney‐general‐becerra‐secures‐early‐court‐victory‐fight‐protect‐workers [8/10/20]

• https://oag.ca.gov/system/files/attachments/press‐docs/Order_on_Peoples_Motion.pdf



Labor Law Interpretations for Gig Workforce Among Federal and State Agencies and Courts has Been Varied –What Will Help Add Clarity?

What’s Been Said and Ruled Regarding Ridesharing Drivers Pre‐AB 5?

State and federal court and labor agency rulings in several states with varied outcomes (not a complete list). ‐‐‐

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Platform Workers: Examples of Contractor Rulings (non‐tax) ‐ 1

• Vega v Postmates, Inc., 525233 (NY S Ct, 6/21/18)

Contractors – while some evidence of control, relationship “lacks the requisite indicia of supervision, direction and control necessary to establish an employer‐employee relationship”. With dissenting opinion.

• http://decisions.courts.state.ny.us/ad3/Decisions/2018/525233.pdf

• NLRB, Uber (4/16/19) – “Applying the common‐law agency test as explicated in SuperShuttle DFW, Inc., we conclude that the drivers were independent contractors.” Features showing entrepreneurial independence of drivers:

Set own schedule

Control work location

Could work for competitors

https://www.nlrb.gov/case/13‐CA‐163062

https://www.nlrb.gov/case/16‐RC‐010963 [Super Shuttle, 1/25/19]

https://www.nlrb.gov/news‐outreach/news‐story/nlrb‐returns‐long‐standing‐independent‐contractor‐standard [1/25/19 press release]

• Uber settlement in O’Connor (California) and Yucesoy (Massachusetts)

https://www.uber.com/newsroom/growing‐and‐growing‐up [4/1/16]



Platform Workers:Examples of Contractor Rulings (non‐tax) ‐ 2

• U.S. Dept. of Labor, FLSA 2019‐6 (4/29/19)

Workers for “virtual marketplace company” (VMC)

Platform app offering various services

Opinion: Contractor per economic realities test

• Is worker economically dependent on employer

https://www.dol.gov/whd/opinion/FLSA/2019/2019_04_29_06_FLSA.pdf

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Platform Workers:Examples of Employee Rulings (non‐tax)

• CA Unemployment Insurance Appeals Board

http://uberlawsuit.com/Uber%20Case%20No.%205371509.pdf

• CA Labor Commission

http://21stcenturytaxation.blogspot.com/2015/06/uber‐lyft‐and‐others‐worker.html

• Also check other states



Federal and State Tax and Non‐tax Examinations

• Tax example: New Initiative for IRS TE/GE Division

Per 1/4/21 updated compliance priorities, a new initiative for compliance strategies:

https://www.irs.gov/government-entities/tax-exempt-government-entities-compliance-program-and-priorities

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6. Practice Tips



Employer “To Do” List in Light of AB 5

• Identify California contractors you plan to continue to use after 2019.

Starting 1/1/20, they are employees, UNLESS

• ABC test is met, or

• If ABC test not met, an exception applies and worker is a contractor under Borello factors.

• AB 2257 – look at modified, expanded list of exceptions

If still a contractor, need to document this (prior documentation likely won’t suffice under new classification scheme).

If no longer a contractor under California revised laws, consider

• What is required to get them to be identified as a California employee?

─ DE‐4 form? Something else?

• Will you continue to employ them?

─ Will a contractor outside of California serve the need?

• Confirm the classification under federal law (were they misclassified before)?

• Do you want them to also be employee under federal tax law? Is there benefit in exercising more control over the worker and any other actions to have them be an employee under the common law factors, if possible and desired?

• Anything else? Who explains all of this to the worker?

─ What if worker disagrees?

• Does insurance cover costs of misclassification?

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Worker “To Do” List in Light of AB 5

• Determine how it affects you.

Also look at changes made by AB 2257.

• Does your payor or service recipient agree with your interpretation?

• If classification will change to employee and you prefer to be contractor, likely can’t do anything to change ABC test as A & B depend on payor’s business model.

Might an exception apply? Is there anything you can do to ensure an exception applies?

• If will be reclassified under California law, will you also be reclassified under federal law such as because service recipient starts to exercise more control over the manner and means of how you do your work?

• Is the service recipient providing any insights on how they interpret AB 5?

• What if effect, if any, on retirement, health and other insurance plans if become employee for California and also possibly for federal?



Tax Adviser “To Do” List in Light of AB 5

• Tread lightly!

• AB 5 / AB 2257 are complex due to ABC test and intricacy of the numerous exceptions

Refer clients to labor law attorney.

• Caution: California Labor Sec. 2753:

(a) A person who, for money or other valuable consideration, knowingly advises an employer to treat an individual as an independent contractor to avoid employee status for that individual shall be jointly and severally liable with the employer if the individual is found not to be an independent contractor.

(b) This section does not apply to the following persons:

(1) A person who provides advice to his or her employer.

(2) An attorney authorized to practice law in California or another United States jurisdiction who provides legal advice in the course of the practice of law.

Penalty: Labor Code Sec. 226.9

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CPA Engagement Letter Considerations

• Reminder that worker classification is more than a tax determination and many federal, state and local laws come into play on classification and as to relevance of classification.

Client needs to consult labor/employment attorney .

• Reminder about tax reporting rules employer subject to and getting timely W‐4 or W‐9 and any equivalent state form.

• Contractors might not have 1099‐NEC for all assignments.

• Contractors need to operate in business manner

Books and records

Estimated tax payments

Follow all federal, state and local tax laws.


7. Proposals For Change

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Congressional Activity on Gig Workforce

• Senator Warner

“ committed to putting forward practical solutions to keep up with this fundamental shift in the economy and to make the on‐demand economy work better for more people”

https://www.warner.senate.gov/public/index.cfm/gig‐economy

• Senator Thune

S. 700, New Economy Works to Guarantee Independence and Growth (NEW GIG) Act

• “The bill would create a safe harbor based on objective tests, which, if satisfied, would ensure that the service provider (worker) would be treated as an independent contractor, not an employee, and the service recipient (customer) would not be treated as the employer. In the context of the gig economy where an internet platform or app facilitates the transactions and payments, that third party would also not be treated as the employer. ”

• https://www.thune.senate.gov/public/index.cfm/2019/3/thune‐reintroduces‐bill‐to‐add‐certainty‐to‐worker‐classification‐rules

• https://www.congress.gov/bill/116th‐congress/senate‐bill/700



Examples of Types of Classification Proposals Over the Past Several Years

• Reduce number of factors in classifying workers.

• Repeal or restrict Section 530.

• Increase penalties for failure to file Form 1099.

• Increase penalties for misclassification.

• Require employers to withhold on payments made to contractors.

• Check the box agreement between employer and worker.

• Allow parties to enter voluntary withholding agreement .

• Minimize incentive to misclassify by equalizing tax treatment of employees and contractors, such as allowing deduction for work‐related expenses, equalizing hiring incentives and retirement plans and health insurance.

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Possible Tax Law SolutionsFreelancer Focused

• Clarify worker classification rules

Include “freelancer” as statutory contractor in IRC §3508.

Create safe harbor checklist.

Create new class of worker, such as “dependent contractor”.

Standardize so one classification applies for all laws and governments.

• Improve compliance

Lower or remove filing threshold for Form 1099‐K.

Require withholding.

Standard deduction for expenses.

• Benefits/Safety Net

Allow system for worker and payor to contribute.

Modify gov’t subsidies for health coverage to cover more workers and/or have greater equity.

Improve rules for all workers.



Safety Net Considerations for Contractors

• Why not extend certain laws to contractors?

Discrimination laws

Ability to join union

Ability to pay into unemployment comp

Purchase of disability insurance

• Such as employees pay into in California

• COVID‐19 legislation had safety net benefits for self‐employed

Unemployment comp, FFCRA paid leave credits, employment tax deferral

• Modify tax rules to distribute current tax expenditures benefiting employees to also benefit self‐employed

Example: $224 billion/year cost of employer‐provided health insurance exclusion

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GAO, TAXPAYER COMPLIANCE: More Income Reporting Needed for Taxpayers Working through Online Platforms (6/29/20)

• Asked to look at compliance and other issues of platform workers.

• 7 recommendations:

1. Change Sch C or 1099‐NEC to indicate payment from platform work.

2. Develop process for monitoring feedback on IRS communications efforts and products for platform workers.

3. Clarify instructions and pubs for 1040 and 1099‐K by adding plain language

4. Amend §6050W tie‐breaker rule so payments by TPSO’s 3rd party payment network are reportable under §6041 rather than under §6050W.

5. Change info filing threshold.

6. Implement voluntary withholding.

7. Assess impact of w/h and make proposal to Congress to require TPSOs to offer tax w/h to platform workers and other contractors who choose to participate.



GAO Suggestions to Improve Voluntary Compliance of Platform Workers

https://www.gao.gov/products/GAO-20-366

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Some States Pursuing AB 5 Approach

• New York – S6699A and A8721A “The purpose of this bill is to reclassify more workers as employees rather

than independent contractors in order for them to receive benefits such as healthcare and retirement.”

Requires classification using ABC test. https://www.nysenate.gov/legislation/bills/2019/s6699

Governor Cuomo has indicated support for treating more gig workers as employees.

• New Jersey – S‐4204 Requires classification using ABC test. https://www.njleg.state.nj.us/2018/Bills/S4500/4204_I1.HTM

Opposition from U.S. Chamber of Commerce ‐ https://www.uschamber.com/comment/letter‐opposing‐new‐

jersey‐senate‐bill‐s‐4204



Federal Proposals On Bargaining and ABC Approach

• S. 1306 & H.R. 2474 (116th Congress), Protecting the Right to Organize Act of 2019 – use ABC test under National Labor Relations Act

H.R. 2474 passed in House on 2/6/20 (224‐194)

Adds ABC classification test for NLRA

https://www.congress.gov/bill/116th‐congress/house‐bill/2474

https://www.help.senate.gov/imo/media/doc/PRO%20Act%20Fact%20Sheet%202019%20FINAL1.pdf

• S. 664, Protecting Workers’ Freedom to Organize Act (116th) – similar but with less provisions (only the ABC test for NLRA, not other changes as in S. 1306)

• Opposition

U.S. Chamber of Commerce ‐ https://www.uschamber.com/letters‐congress/us‐chamber‐letter‐

opposing‐hr‐2474‐protecting‐the‐right‐organize‐act

Competitive Enterprise Institute ‐ https://cei.org/content/case‐against‐protecting‐right‐organize‐act

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2020 Democratic Party Platform

• Support use of ABC test for worker classification. (p 15)

“We will increase funding and staffing at the Department of Labor to aggressively enforce wage, hour, health, and safety rules across the economy. Democrats believe employees who are being misclassified, including gig and platform workers, deserve wage and workplace protections including minimum wage and overtime pay, and we support using the ABC test to determine employee status.”

Observation: Assuming this would be for all federal laws including tax, will cause some contractors to become employees (or lose work or need to change business operations).

Page 18 – support funding for programs to support women and minority owned businesses.

• Observation: Conflicts with ABC test.

https://www.demconvention.com/wp‐content/uploads/2020/08/2020‐07‐31‐Democratic‐Party‐Platform‐For‐Distribution.pdf



Review Question 4 & 5

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Thank You for Attending Today’s Program



Final Exam

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Worker Classification: Dealing with Current Rules and What ...

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