benefits Corner The ABC Test Does Not Apply To Expense Reimbursement Claims.

By: Stephanie J. Lowe

Fred Bowerman was a vendor for Field Asset Services, Inc. (FAS), which was a business engaged in preforeclosure property preservation. Under Bowerman’s contract with FAS, he was required to cover his own business expenses. Bowerman filed a lawsuit on behalf of himself and other class members alleging FAS willfully misclassified them as independent contractors rather than employees. One of his claims was the misclassification resulted in FAS’s failure to reimburse him for business expenses.

In March 2017, the district court granted partial summary judgment in favor of Bowerman by finding that the class members had been misclassified as independent contractors and FAS was liable for failing to pay their business expenses. The district court relied on the common law test for distinguishing between employees and independent contractors from S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (Borello test). The Borello test primarily considers whether the hiring entity has the right to control the manner and means of the work and then assesses a number of secondary factors about the service relationship

After FAS appealed the district court’s decision, the California Supreme Court issued a decision in Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 in 2018, which established the ABC test for distinguishing between employees and independent contractors. The ABC test presumes a worker is an employee and only finds that a worker is an independent contractor if: (A) the worker is free from the control and direction of the hirer; (B) the worker performs work that is outside the usual course of the hiring entity’s business; and (C) the worker is customarily engaged in an independently established trade, occupation, or business.

The Ninth Circuit held FAS’s appeal in abeyance pending Dynamex. On appeal, FAS argued that the Borello test, and not the ABC test, applied to Bowerman’s reimbursement claim. The Ninth Circuit agreed with FAS. Bowerman’s expense reimbursement claims were based on Labor Code section 2802, which requires employers to indemnify (or reimburse) employees for all necessary expenses incurred in the discharge of duties.

The Ninth Circuit held that Dynamex only applied the ABC test to wage order claims. Since Bowerman’s expense reimbursement claim was rooted in Labor Code Section 2802 and not a wage order, the ABC test did not apply to determine whether class members were employees for purposes of determining whether they were entitled to business expenses reimbursements. Thus, the Borello common law test, and not the ABC test, applies to the expense reimbursement claims. The Ninth Circuit further assessed that there was evidence of both an independent contractor and employee relationship under the Borello test and reversed the district court’s decision that class members had been misclassified.

Bowerman v. Field Asset Services, Inc. (9th Cir. 2022) 39 F.4th 652, amended February 14, 2023.

NOTE:

After the Dynamex case, the Labor Code was amended to apply the ABC test beyond the wage orders, although not to expense reimbursement claims. The ABC test applies to employment status for Workers’ Compensation coverage and Unemployment Insurance coverage.

Agencies Should Maintain Records of ACA Filings

With the March 31st deadline for electronically filing Forms 1094-C and 1095-C quickly approaching, agencies should maintain a file of records after completing the filings. Keeping a record of the filings will serve to defend the agency in the event the IRS charges the agency with a penalty under for failing to furnish and/or file forms under Internal Revenue Code Sections 6721 and 6722. Employers should retain the following records:

(1) Documentation proving the employer furnished (handed out or mailed) Forms 1095-C to current and former full-time employees by the March 2 deadline.

(2) A copy of all electronic records (Forms 1094-C and 1095-C) within each submission, along with the Receipt ID for each transmission.

(3) A document showing the transmission status when the IRS completes processing. The transmission status should state one of the following: Accepted, Accepted With Errors, Partially Accepted, or Rejected.

(4) If the transmission status is anything but “Accepted,” maintain the Error Data File. The Error Data File contains a detailed list of errors, which are critical to understand for making corrections. Employers should troubleshoot the error and refile the forms without error as soon as possible.

Employers who use a third-party transmitter to file documents should obtain these same records in case the third-party transmitter goes out of business or otherwise becomes unavailable to file corrections for the employer. See IRS Publication 5165 for more information.

ACA Compliance Question: Cash in Lieu

Did you know that cash in lieu of health insurance can affect whether your agency offers affordable minimum essential coverage? Cash in lieu is added to the employee’s required contribution for purposes of calculating affordability. The one exception is where cash in lieu is conditioned on an “eligible opt-out arrangement.” To learn more about what constitutes an “eligible opt-out arrangement,” reach out to us.

Benefits Best Practices Timeline

Each month, LCW will present a benefits timeline of best practices. This timeline is intended to apply to agencies that are applicable large employers for Affordable Care Act (ACA) purposes.

March

• Furnish Form 1095-C to each full-time employee by March 2, 2023 for the 2022 calendar year.

• File Forms 1094-C and 1095-C by March 31, 2023 if filing electronically (file earlier on February 28, 2023 if filing on paper). Ensure the IRS accepts the filing.

• If agency administers the maximum grace period for health FSAs or DCAPs, the period ends March 15 for plan years that ended December 31, 2022.

April

• If the IRS rejects the Forms 1094-C or 1095-C filing, immediately troubleshoot and correct the error and refile.

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Question:

An employee recently asked if she could take California Family Rights Act leave to care for her friend who has a serious health condition. Is this allowed?

Answer:

Yes, effective January 1, 2023, employees may use leave under the CFRA to provide care to a “designated person” with a serious health or medical condition. The CFRA defines a “designated person” to mean “any individual related by blood or whose association with the employee is the equivalent of a family relationship.” (Gov. Code Section 12945.2(b)(2).) An employer may limit an employee to one designated person per 12-month period for family care and medical leave.