278 - Another Rant on Contractor Compliance
On today’s episode of the podcast I’m sharing another rant on contractor compliance and misclassification.
To recap from previous episodes, we’re talking about whether you can hire someone to be a contractor or whether they legally must be an employee. Remember, this is not a determination you legally get to make, the law decides that. Then you get to decide based on the law what you want people to do based on how you want to classify them.
Recently, I was talking about EDD (Employment Development Department) compliance with some of my students and one said, “My CPA told me I could send my contractor a 1099 so if I can send a 1099 they must be a contractor.” This is not how it works. If they legally weren’t supposed to be a contractor in the first place, that’s a problem. But if you’ve been incorrectly paying them as a contractor, not sending them a 1099 would also be a problem.
Too often people tell me, ”my account said this,” or “my bookkeeper said that” and when we are talking about how we legally hire someone, you want to talk to a lawyer, not your CPA because if they’re advising you on this, this is potentially unauthorized practice of law.
There are some caveats to this, I’ve seen some other attorneys put themselves on a pedestal saying they’re the only ones who can do this and shame on everyone else. We’re not doing this because sometimes there are legal areas where other professionals are better equipped to assist. Like technically speaking, if we’re talking about tax deductions, it can be a legal question because we have case law about if we can deduct certain things, tax attorneys would be the most familiar, but by and large a CPA is going to be much better equipped to handle this question than your run-of-the-mill attorney.
The same goes when it comes to these hiring issues. An HR expert is going to be a lot more familiar with them than your run-of-the-mill attorney. Employment lawyers are the exception, they have the expertise in this area. I am not an employment lawyer but I have been brushing up to seek the knowledge I need to serve my audience.
Technically, I do think that accounting professionals can represent people at the EDD but my thought process on that is, having helped people who have been audited by the EDD for employer misclassification and another who was audited for having a reasonable salary that was too low for their S Corp, I understand that a CPA understands reasonable salary more than your average attorney so that’s something they could do. When it comes to misclassification issues, I haven’t met many accounting professionals who are familiar with employment laws.
With this said, I want to segue into the audit I highlighted on episode 275 and the results. On that episode I talked about the arguments we made to the EDD about why the photographer in question’s second shooter should be allowed to be a contractor.
The result that came about since that episode is that the EDD changed their initial determination based on our arguments that second shooters could be second shooters and therefore all the penalties went away.
But, it didn’t give me the clarity I was hoping to provide all of you so we’re going to go through the arguments made to explain where we still do not have clarity. To refresh, this case was based on Assembly Bill 5 (AB5) which you can learn more about here: https://www.bradendrake.com/ab5
AB5 uses the ABC test which is used by about 30 other states and if you are in a state that does not use the ABC test, I still recommend understanding it a) because Democrats have proposed it at a federal level and b) there’s a more than 50% chance that your state uses a similar rule and c) if you ever hire a contractor in a state that uses the ABC test then you need to use it. Not every state has the same exceptions that California has. That’s not all great news those because 1) they’re enforcing the law so strictly with these exceptions that there’s not a lot of wiggle room and 2) our governor gave millions of dollars to the state agency to enforce this law so the state of California is much more serious about enforcement of the law than other states.
The EDD looked at three different exceptions - the Single Day Event Exception, the Business to Business Exception, and the Professional Services Exception. The Single Day EVent and the B2B Exceptions both have a requirement that the hiring entity cannot exercise control and direction over the person they’re hiring. It states, “(1) The business service provider (the contractor in question) is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.”
The EDD said the photographer exercised too much control over the contractor and we said no, we don’t agree because it’s more of a collaboration and the main photographer isn’t telling them what to do, they’re saying things like, “I’m going wide,” which is how I would advise you talk to your second shooters. If you say you’re going wide, they’ll decide to go close-up. Tell your contractors ahead of time you can’t tell them what to do but as a working professional you have expectations of them.
The Event Professional Exception was the most surprising one to me because it was literally created for single day events, like a wedding. If it doesn’t work in the second shooter context, why do we have it?
For B2B it was baffling that the two of the 11 was control and also that they didn’t meet (2) The business service provider is providing services directly to the contracting business rather than to customers of the contracting business. This subparagraph does not apply if the business service provider’s employees are solely performing the services under the contract under the name of the business service provider and the business service provider regularly contracts with other businesses.
For this one, the EDD focused on the first part and said they were photographing the customers so they were providing services to the customers. Our counter argument was the second shooter doesn’t have contact with the clients. If we had appealed this, I think we would have had good arguments in our opinion but that doesn’t mean they’d agree.
It came down to the Professional Services Exemption and for this one you have to be specifically referred to as a professional services provider and there is a carve out in the law for this one for photographers in which case you have to have a written contract and six additional requirements. In this case, the EDD said the photographer did not pass requirement 4 which says “(4) Outside of project completion dates and reasonable business hours, the individual has the ability to set the individual’s own hours.”
The EDD said you told them to be at the wedding at this time and leave at this time to which my argument was it says “outside project completion dates” and the project completion date is the wedding. They agreed with our argument.
The EDD also said “(6) The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.” was not met. Nuance is so important with legal things because we focus on the tiniest things. Contrast this to the earlier exemption that the service provider is free from control which is a very strict term. Customarily and regularly does not mean always, this sounds less strict. We argued the second shooter did customarily and regularly exercise discretion because they decided where to stand, what settings to use on the camera, etc.
I met with a videographer recently who is dealing with a similar circumstance. Most of these exemptions have a requirement that whoever you’re hiring has to have a business license and is properly licensed in the jurisdiction where they work and this videographer didn’t think most of their contractors had that so they will be SOL on the vast majority of these exemptions.
This is why I’ve been saying since AB5 passed and then the amendment, I started sharing that once you hire a contractor, especially if they fail the ABC test and you’re trying to claim and exception, then you should always request a copy of their business license, copy of their insurance and a written contract for every event and scope of work that they work.
Before we get into other examples, I want to remind you that what’s not a problem is folks who pass the ABC test.
If you are a photographer, business coach, florist, etc. and you hire someone to do PR pitching, your website, brand photos, etc. then these are not within the usual course of your business and they pass the ABC test. We’re mainly talking circumstances where the person you’re hiring does something similar to you and I would argue that most operation roles would not pass the ABC test.
Places where it gets sticky are day-of assistants for wedding planners, hair and makeup artists, and floral assistants. None of these folks have exceptions under the professional services exemption. There is an exception for beauty professionals (more on this in the AB5 blog post)
Let’s look at the Single Day Event exemption for these folks. We have requirement #1 - neither individual is subject to the control and direction of the other. That’s going to be really hard to meet because if you have an assistant, regardless of the industry, you’re probably telling them what to do, where to put things, etc. and they probably won’t be able to pass this.
Going back to the business license, if someone files the ABC test, you cannot hire a friend or family member who just wants to help you and doesn’t do this as a business, they’re likely not to pass.
Now look at the B2B Exception. This has the same control requirement and the business license requirement and the same industry requirement.
All this to say, I think it’s going to be impossible for wedding planners and florists to hire assistants as contractors anymore in the state of California, they have to be employees.
I do think second shooters could pass the Single Day and B2B exemptions in other contexts. My photographer client was audited based on EDD interviews with their second shooters. But let’s talk about associate photographers. Going back to the Professional Services Exception, that’s what my photographer client got approved for.
Thinking out loud, I think an associate photographer would meet the exceptions but the EDD could say you’re giving them direction however that’s not a requirement under Professional Services Exception. I would say maybe associates are fine but I’ve always said I think second shooters could be contractors but associates should be employees based on my instinct. I started saying this because in the B2B exception, the requirement that they’re providing services to the business owner and not the client gets a little dicey because as associate is the primary photographer on the day of the wedding but this requirement is not in the Professional Services Exception so you might be able to pass that but I still think it would be beneficial to hire them as employees.
The purpose of this podcast is not to tell you the benefit of hiring employees or why you should hire employees (other than you don’t want to get audited). I don’t want you to hear this and think that hiring someone is so terrible and that you might get sued so it’s not worth it, I want you to know it’s not that hard and scary. There’s some paperwork and expense but won’t you do it there’s a lot of benefits to you. Coming up in the next couple months I will talk more about the benefits because I want you to think of this as more of an opportunity and less of an obligation.
