Regulations Matter, Too

I used to have my office in Irvine, California. Today, like most days, the weather in Irvine will be absolutely gorgeous: A high of 79 and a low of 66. You can’t ask for better (weather) climate. How about the business climate?

Well, I tell my clients that taxes matter but they’re not the only thing. Regulations matter, too. Let’s say I hire Joe to work remotely as a tax professional assisting me. I give him a return to work on, but I don’t care if he works at 8am or 8pm–just get it done in the next week. Joe works on his computer in his home at his pace. Almost everywhere he would be considered an independent contractor. But not in California.

The California Supreme Court ruled
in Dynamex Operations West, Inc. v. Superior Court of Los Angeles County that in order to have an independent contractor in California three conditions must be met:

1. That the worker is free from control and director of the hirer in regards to the performance of the work;
2. That the worker performs work that is outside the usual course of the hiring entity’s business; and
3. That the worker is customarily engaged in an independent trade, occupation or business in regards to the work performed for the hiring entity.

Note the second condition. This means that it is impossible in California for a software company to hire an independent contractor to write software. Or for a hair salon to hire independent contractor hair stylists (even though that is the norm in this industry and has been so for decades). Or for a tax professional to hire an independent contractor tax preparer.

Back in 2011 I wrote about why I left the Bronze Golden State. I noted:

With the growth of my business, I looked at possibly hiring another tax accountant in 2010. When I ran the numbers, I found that I would lose money by hiring a productive tax accountant. That’s because of all the regulations and costs that I would immediately incur if I had an employee. I’m not stupid: If I lose money by hiring someone, I’m not going to do it.

A question I was asked by friends was, “Why didn’t you hire an independent contractor?” The reason was that California’s Employment Development Department (one of four California statewide tax agencies) was stating that a business that was in activity A (whatever that activity was) couldn’t have independent contractors doing A. I didn’t care to be a test case. I was left with two choices: Hire an employee and lose money or hire an independent contractor and likely lose more money. Neither option appealed to me, so I’m in Las Vegas.

The CBS Sacramento article notes the problem impacts small businesses. It actually impacts all California businesses. It’s yet another factor causing businesses in California to pay more than a comparable business in a neighboring state. Is California free to do this? Absolutely. Are California business owners free to take their businesses elsewhere? You bet, and I suspect that this ruling will just increase the flow.

Another way of stating this: California, doing everything it can to cause full employment in neighboring states.

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