Vendor Surveillance Corp. v. Henning

• Citation: 276 Cal.Rptr.3d 458,62 Cal.App.5th 59
• Decision Date: 18 March 2021
• Docket Number: D076079
• Court: California Court of Appeals
• Parties: VENDOR SURVEILLANCE CORPORATION, Plaintiff and Appellant, v. Patrick W. HENNING, Jr., as Director, etc., et al., Defendants and Respondents.

62 Cal.App.5th 59

276 Cal.Rptr.3d 458

VENDOR SURVEILLANCE CORPORATION, Plaintiff and Appellant,

v.Patrick W. HENNING, Jr., as Director, etc., et al., Defendants and Respondents.

D076079

Court of Appeal, Fourth District, Division 1, California.

Filed March 18, 2021

Ogletree, Deakins, Nash, Smoak & Stewart, Jack S. Sholkoff, Los Angeles, and Tracie Childs, San Diego, for Plaintiff and Appellant.

Xavier Becerra, Attorney General, Lisa W. Chao, Assistant Attorney General, Brian D. Wesley, Tim Nader and Anna Barsegyan, Deputy Attorneys General, for Defendants and Respondents.

DATO, J.

Vendor Surveillance Corporation (VSC) appeals from an adverse judgment in its action seeking refund of $278,692 in unemployment insurance taxes assessed by the California Employment Development Department (EDD). The outcome turns on whether project specialists hired by VSC between January 1, 2011 and December 31, 2013 (the audit years) are classified as employees or independent contractors. The first-impression legal issue is whether in making that determination, the court should apply (1) the ABC test announced in Dynamex Operations W. v. Superior Court (2018) 4 Cal.5th 903, 956–957, 232 Cal.Rptr.3d 1, 416 P.3d 1 ( Dynamex ) and later codified in the Labor Code; or instead (2) the Borello factors ( S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, 256 Cal.Rptr. 543, 769 P.2d 399 ( Borello )), codified in an EDD regulation, California Code of Regulations, title 22, section 4304-1 (hereafter regulation 4304-1).

With little case law for guidance and an eye on appeal, the trial court prudently analyzed the evidence alternatively under each standard and determined that project specialists are VSC's employees. We hold that Borello provides the applicable standard in assessing unemployment insurance taxes during the audit years. Because the court's findings under that standard are supported by substantial evidence and its qualitative weighing of the Borello factors was an appropriate exercise of the court's discretion, we affirm.

FACTUAL AND PROCEDURAL BACKGROUND

A. Source Inspection

Aerospace manufacturers use component parts made by others (suppliers) that must be fabricated to exacting specifications. Disaster can ensue if a defective part escapes detection and is installed in an aircraft. To help ensure that such tragedies do not occur, the manufacturer inspects the part at the supplier's facility. The industry calls this source inspection.

B. Verify, VSC, and VTR

Verify, Inc. (Verify) provides management services, including source inspection, to aerospace and defense manufacturers. VSC is a wholly owned subsidiary of Verify. VSC maintains a database of persons qualified to perform source inspection, called project specialists. It also recruits and screens individuals to add to that database. During the audit years, the database contained more than 300 California-based project specialists.

When a Verify customer requests a source inspection, Verify negotiates the services to be performed and the corresponding fee. If the customer requires part-time, project-based on demand source inspection, Verify subcontracts with VSC to provide a qualified project specialist. After identifying qualified project specialists from the database, VSC contacts each to determine their interest in the work. A project specialist is free to decline work and there are no negative repercussions for doing so. VSC submits resumes of interested project specialists to Verify, which forwards them to its customer to choose from.

VTR, Inc. is a "staffing subsidiary" of Verify. If Verify's customer needs full time work (including but not limited to source inspection) in one location exceeding three months, Verify subcontracts with VTR to provide qualified personnel.

VSC classifies its source inspectors as independent contractors; VTR classifies its personnel as employees.

C. The Contractual Relationship Between VSC and Project Specialists

VSC engages project specialists under an "Independent Contractor Agreement" (Agreement). The Agreement characterizes their relationship as that of independent contractor, stating:

"[I]t is mutually understood and agreed that Contractor is at all times acting and performing his/her duties and functions in the capacity of an independent contractor; that it is Contractor who enters into this Agreement; and that no provision in this Agreement shall imply or create an employer-employee relationship .... Further, it is mutually understood and agreed that VSC shall neither have the right to exercise, nor shall VSC exercise, direction or control over the detail, manner, means or method which Contractor or his agents and employees use in performing his/her duties under this Agreement ...."

VSC presents the Agreement on a take-it-or-leave-it basis. The only negotiable term is the project specialist's hourly rate. A project specialist is free to accept work from VSC's competitors; however, the Agreement prohibits soliciting employment from Verify's "customer or a supplier." VSC may terminate the Agreement "for cause" and also without cause on 30 days' notice.

For each project, VSC and the project specialist also agree to an addendum containing details of the assignment and the project specialist's hourly rate. The addendum requires the project specialist to invoice time and expense charges, "using the prescribed forms," which as a practical matter is Verify's computer system. The addendum also requires the project specialist to provide VSC and the customer with an inspection report and "detailed narrative" using "prescribed forms."

D. The Legal Landscape— Empire Star Mines, Borello and Dynamex

Some legal background is helpful in placing the remaining litigation history in context. California has an unemployment insurance program providing benefits for " ‘persons unemployed through no fault of their own, and to reduce involuntary unemployment and the suffering caused thereby to a minimum.’ " ( Air Couriers International v. Employment Development Dept. (2007) 150 Cal.App.4th 923, 931–932, 59 Cal.Rptr.3d 37 ( Air Couriers ).) Tax contributions from employers fund this program. ( Id. at p. 932, 59 Cal.Rptr.3d 37.) However, a hirer is required to pay the tax only for its employees, not for independent contractors. ( Ibid. )

In Empire Star Mines Co., Ltd. v. California Employment Commission (1946) 28 Cal.2d 33, 168 P.2d 686 ( Empire Star Mines ) the California Supreme Court held that in distinguishing an employee from an independent contractor for purposes of unemployment insurance tax, "the most important factor is the right to control the manner and means of accomplishing the result desired." ( Id. at p. 43, 168 P.2d 686.) "Other factors to consider" are:

"(a) whether or not the one performing services is engaged in a distinct occupation or business; (b) 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; (c) the skill required in the particular occupation; (d) whether the principal or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee." ( Empire Star Mines , at pp. 43–44 .)

In Borello , the California Supreme Court applied the Empire Star Mines factors in the context of worker's compensation. As a result, they are now commonly known as Borello factors. ( Borello, supra , 48 Cal.3d at pp. 350–351, 256 Cal.Rptr. 543, 769 P.2d 399.) And for many years, California courts "applied the test articulated in Borello, supra , 48 Cal.3d 341, 256 Cal.Rptr. 543, 769 P.2d 399 to determine whether a worker is an employee or an independent contractor." ( Gonzales v. San Gabriel Transit, Inc. (2019) 40 Cal.App.5th 1131, 1151, 253 Cal.Rptr.3d 681, review granted Jan. 15, 2020, No. S259027 ( Gonzales ).) Then in 2018, Dynamex addressed application of the Borello test in the context of a wage-and-hour lawsuit in which delivery drivers alleged they had been misclassified as independent contractors. On the wage order claims, the court declined to apply Borello in favor of a "simpler" three-part "ABC" test.¹ ( Dynamex, supra , 4 Cal.5th at p. 950, fn. 20, 232 Cal.Rptr.3d 1, 416 P.3d 1.) "Under the ABC standard, the worker is an employee unless the hiring entity establishes each of three designated factors: (a) that the worker is free from control and direction over performance of the work, both under the contract and in fact; (b) that the work provided is outside the usual course of the business for which the work is performed; and (c) that the worker is customarily engaged in an independently established trade, occupation or business." ( Ibid. )

E. EDD Determined that VSC Misclassified Project Specialists

Having classified project specialists as independent contractors, VSC did not pay unemployment insurance tax on their earnings. After a project specialist sought unemployment insurance benefits, EDD conducted an audit of VSC. In the audit, EDD found that with one exception, project specialists did not operate an established business of their own. They did not have their own clients, advertise, or hold themselves out as self-employed. EDD also found that project specialists had a "continuous" relationship with VSC. "They would get assignments and then get new assignments when the assignments were completed." The audit further determined that source inspection "was an integral part" of VSC's business. EDD concluded that "[w]ithout these workers, there is no business." Based on these and related findings, EDD determined that VSC's project specialists are "[c]ommon [l]aw [e]mployee...