Overzealous Tax Agencies Remain a Threat to California Businesses

Tom Sheehy, principal and founder of Sheehy Strategy Group, in testimony before the California Advisory Committee to the U.S. Commission on Civil Rights warned against the dangers of overzealous regulatory enforcement agencies like the Employment Development Department (EDD).

EDD is known in some cases to be extremely aggressive and overbearing in how it interprets the law especially as it relates to employee classifications and independent contractors. The “ABC” independent contractor test created by the California Supreme Court in the Dynamex decision and codified into the labor code by AB 5 in 2019 is a minefield for employers that could result in EDD fines, assessments, and litigation.

“If administrative enforcement agencies, such as EDD, are over the top in enforcing employee classification regulations, then what we thought we had achieved by way of a safe harbor in the labor code working with the author of AB 5 and the Legislature will disappear like a puff of smoke,” Sheehy said. “The resulting impact to regulated businesses may be frivolous lawsuits and audit findings costing them tens of thousands of dollars in legal fees and lost revenues.”

Some job classifications were exempted from the “ABC” test in the AB 5 legislation. However, those exempted classifications are still subject to the Borello test, which was the employee classification test used for decades prior to the Dynamex decision. Although the Borello test is easier to meet for most job classifications than the “ABC” test is, it is not a walk in the park either. EDD’s enforcement in this area is known to be overly aggressive.

California employers and especially small- and medium-sized businesses cannot afford frivolous audit findings and unnecessary litigation imposed by a rogue EDD. Employers and job creators need certainty that their employee classification systems are lawful and will be treated as such when they are audited by administrative agencies. The rules of the employee classification system must be enforced fairly and consistently so that California citizens can get the goods and services that they need to live their lives.

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