The recently created California Office of Tax Appeals (OTA) has issued a ruling in the Satview case against the Franchise Tax Board (FTB)'s position that a 25% member of a California limited liability company was "doing business" in California and subject to California's minimum annual corporate franchise tax. The OTA found that passive ownership, without management, did not subject the out-of-state corporate member to California tax (although the LLC that was conducting the business in the state, and that the out of state company had invested in, was of course subject to it).
With this and other decisions, the OTA has shown that it will not rubber stamp positions taken by the FTB or other California tax agencies, especially when they make little sense, like the FTB's position in this case. Nonetheless, the FTB is anticipated to continue to apply the prior Swart case narrowly, and continue to maintain that passive members of LLCs organized or doing business in California are themselves also doing business in the state.
Monday, December 10, 2018
Monday, June 4, 2018
California Supreme Court Ruling Makes Independent Contractor Classification More Difficult
The California Supreme Court has made an important change to employment classification law for California employers, that will make it more difficult for companies to appropriately classify workers as independent contractors.
The new "ABC" standard is simpler but more strict than the prior classification scheme. In order for the company to properly classify a worker as an independent contractor, the company must prove the following (note that the burden is on company seeking IC treatment and if the burden is not met, the worker is an employee, the criminal law equivalent of "guilty until proven innocent"):
A - that the worker controls his or her work,
B - that the duties go beyond what the business normally does, and
C - that 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.
Any of these can derail a would-be independent contractor relationship, but it is the second of these prongs - the "B" in "ABC" - that will be perhaps the most difficult for many California companies including ride-sharing services that claim all drivers are independent contractors.
Whether Uber and Lyft, who have just received subpoenas for more information from the California Attorney General, will be able to argue they are in the business of providing a mobile app, rather than actual transportation, remains to be seen. If not, their business model will need to change dramatically, at least in California.
Companies whose consulting arrangements with ICs previously may have passed muster may find themselves unable to show that the pre-existing relationship still qualifies under the new ABC standard and are well advised to have a business and employment law attorney review the circumstances and agreement and then implement any needed changes.
The case is Dynamex Operations West, Inc. v. Superior Court, County of Los Angeles, Supreme Court of California, No. BC332016, April 30, 2018.
In 2012, a California law went into effect providing for additional civil penalties for wilfully misclassifying workers as independent contractors of $5,000 to $15,000 per violation.
Update: On January 1, 2020, AB 5 became law, which essentially codified Dynamex into statutory law.
The new "ABC" standard is simpler but more strict than the prior classification scheme. In order for the company to properly classify a worker as an independent contractor, the company must prove the following (note that the burden is on company seeking IC treatment and if the burden is not met, the worker is an employee, the criminal law equivalent of "guilty until proven innocent"):
A - that the worker controls his or her work,
B - that the duties go beyond what the business normally does, and
C - that 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.
Any of these can derail a would-be independent contractor relationship, but it is the second of these prongs - the "B" in "ABC" - that will be perhaps the most difficult for many California companies including ride-sharing services that claim all drivers are independent contractors.
Whether Uber and Lyft, who have just received subpoenas for more information from the California Attorney General, will be able to argue they are in the business of providing a mobile app, rather than actual transportation, remains to be seen. If not, their business model will need to change dramatically, at least in California.
Companies whose consulting arrangements with ICs previously may have passed muster may find themselves unable to show that the pre-existing relationship still qualifies under the new ABC standard and are well advised to have a business and employment law attorney review the circumstances and agreement and then implement any needed changes.
The case is Dynamex Operations West, Inc. v. Superior Court, County of Los Angeles, Supreme Court of California, No. BC332016, April 30, 2018.
In 2012, a California law went into effect providing for additional civil penalties for wilfully misclassifying workers as independent contractors of $5,000 to $15,000 per violation.
Update: On January 1, 2020, AB 5 became law, which essentially codified Dynamex into statutory law.
Tuesday, May 22, 2018
SCOTUS Rules for Employee Arbitration Class Action Waivers
The Supreme Court has resolved a conflict amongst the U.S. Federal Circuit Courts, and once again the Ninth Circuit has been overruled. This time it was for SCOTUS to confirm that class action waivers in employee arbitration agreements are enforceable (if properly drafted). The Supreme Court had previously ruled these as enforceable in consumer arbitration agreements in 2011.
Despite the favorable ruling for employers that was opposed by the Obama Administration and supported by the Trump Administration, California employers need to ensure their arbitration clauses are carefully drafted and be aware of the trade-offs in selecting arbitration over litigation in the first place.
The cases are Epic Systems Corp. v. Lewis, No. 16-285; Ernst & Young LLP et al. v. Morris et al., No. 16-300; and National Labor Relations Board v. Murphy Oil USA, Inc., et al., No. 16-307 (May 21, 2018).
Despite the favorable ruling for employers that was opposed by the Obama Administration and supported by the Trump Administration, California employers need to ensure their arbitration clauses are carefully drafted and be aware of the trade-offs in selecting arbitration over litigation in the first place.
The cases are Epic Systems Corp. v. Lewis, No. 16-285; Ernst & Young LLP et al. v. Morris et al., No. 16-300; and National Labor Relations Board v. Murphy Oil USA, Inc., et al., No. 16-307 (May 21, 2018).
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