Nonprofit Report - October 2019

Date: 10/18/19

California - Are Your Independent Contractors Really Employees?

By: Kellie L. Newton

If you use workers in California and classify them as independent contractors, you should review new California law AB-5 (AB-5) to determine whether these individuals must be treated as employees beginning January 1, 2020. 

AB-5 is a new law that will require many workers in California currently classified as independent contractors to be reclassified as employees.  Although the new law was primarily designed to cover app-based employers such as Uber and Lyft, the new law will impact any business that hires workers in California, even if the business does not have an office there.  The new law is more strict than the current federal guidelines used to determine whether a worker can legitimately be classified as an independent contractor.  For federal employment tax purposes, common law rules require a business to consider the degree of control and independence between a business and a worker by examining three categories—Behavioral Control, Financial Control and the Relationship of the Parties.  AB-5 presumes that a worker is an employee, unless the business can satisfy all three prongs of an “ABC” test. 

AB-5 codifies the ABC test established by the California Supreme Court in its 2018 decision in Dynamex Operations West.  The Court in Dynamex classified all workers as employees, with a few exceptions, thus entitling them to minimum wage and overtime pay, workers’ compensation if they are injured while on the job, paid sick leave, paid family leave, and all other benefits afforded employees, unless the hiring entity passes the ABC test.  The California legislature noted the Dynamex Court’s consideration of the lack of significant workplace protections for independent contractors, the unfairness to employers who compete with companies that misclassify employees as independent contractors, and the loss of state revenue derived from workers’ compensation premiums, Social Security, unemployment, and disability insurance assessed against employees.

The ABC test requires a worker to be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all three of the following conditions are satisfied:

(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The law specifically exempts certain professions such as lawyers, architects, engineers and accountants, who hold active licenses in the State of California, and certain medical professionals.

Please note that language in a contract between the business and the individual is not controlling.  If the person is an employee under the AB-5, he or she will be an employee under California law, notwithstanding that the contract between the business and the individual identifies the person as an “independent contractor.”

IRS Issues Proposed Regulations and Announces Penalty Relief to Allow Certain Section 501(c) Organizations to Continue to Omit Donor Names and Addresses from IRS Form 990, Schedule B Filings

By: Jeffrey P. Altman & James A. Kahl

As we previously reported, this past summer a U.S. District Court judge in Montana invalidated the IRS’s 2018 rule that had eliminated the need for most 501(c) organizations to report the names and addresses of their large donors to the IRS.   In response to that ruling, the IRS issued proposed regulations in September to address the Administrative Procedure Act rulemaking defect in the prior rule that was the focus of the District Court ruling.  The IRS also issued a companion notice announcing penalty relief protection for nonprofit organizations other than Section 501(c)(3) and Section 527 Political Organizations that earlier this year omitted donor names and addresses from their IRS Form 990, Schedule B filings in reliance on Rev. Proc. 2018-38.  This penalty relief also protects eligible calendar year organizations that are still on extension to file their 2018 returns.  According to the penalty relief notice, the 2018 rule may be relied upon in preparing Forms 990 and 990-EZ for any taxable year ending on or after December 31, 2018 and on or prior to July 30, 2019.  The proposed new regulations, if adopted, will continue this relief for organizations with later taxable years.  

Leading Authority on Nonprofits and Charities Joins Whiteford in Richmond

At the end of August, J. William Gray, a leading authority on charitable giving and tax-exempt organizations, has joined Whiteford, Taylor & Preston’s nationally recognized Nonprofit Organizations and Associations practice, resident in the firm’s Richmond office.  With nearly 40 years of experience, Gray advises on the formation of charities, business leagues, social welfare organizations, title-holders and other exempt entities, advising them on tax reporting, disclosure and corporate governance issues.  Additionally, he advises high-net-worth clients in their charitable gift planning.

“We are delighted to welcome Bill to the firm,” said Managing Partner Martin Fletcher.  “He is a highly regarded authority on nonprofit and charitable advisory law, in Virginia and nationally.”

A fellow of the American College of Trust & Estate Counsel, Gray is a founding director and former president of the Virginia Gift Planning Council.  He recently served on the National Association of Charitable Gift Planners’ Board of Directors and is a frequent speaker at state and national programs on charitable giving, nonprofit formation, planned giving and compliance.

“We are thrilled and honored to welcome Bill in Richmond,” said Richmond Managing Partner Vern Inge.  “He has tremendous expertise in guiding nonprofits and charities in increasingly complicated operating environments.  And his arrival is a further sign of our rapid emergence as a full service resource for clients in the region.”

Whiteford has experienced rapid growth in Richmond since opening an office in July 2018, recently taking over a full floor of Two James Center.