AB5 – Employee or Independent Contractor?

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Dave Towne

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Independent Appraisers or Employees & CA AB5 Law - Appraisers Blogs

Most independent appraisers are paid ‘by the job’ and are issued 1099’s for the payments made. Appraisers who are ‘staff appraisers’ for specific clients are considered EMPLOYEES, and are issued a W-2 for income paid to them. Independent appraisers should not create an EMPLOYEE RELATIONSHIP until and unless that is specifically what is desired…

I’ve been having a respectful discussion with a California appraiser, who believes (as do others) that just because a particular client requests a certain kind of appraisal report be completed using an online web based report form, then that action constitutes establishing an EMPLOYEE relationship with that particular client. This relates to the new AB5 law in California which went into effect on January 1, 2020. I don’t agree, and say why below.

Caveat: I am not an attorney, and am not offering legal advice in this essay.

However, I have read the synopsis info below about this new law, which some folks think might be adopted by other states in the future, and have added my personal viewpoints (identified by a different colored typeface than the synopsis). The law has everything to do with CA and other states desire to capture as much tax income as possible.

This really has to do with how appraisers are ‘recognized’ in their states, and by the IRS.

First, appraisers should comply with applicable state laws regarding business registrations or licenses, and pay taxes due.

Second, all appraisers should apply for and use an EIN number for your business, from the IRS, which is used in place of your SSN. This EIN can be used across all types of business organizations – sole proprietor to corporation. Do not use your SSN in any business related documents.

Third, you probably should have your own INDEPENDENT CONTRACTOR agreement signed by your AMC and direct placement clients in your office. If you do private assignments (non-lending), it may also be wise to have those clients sign your agreement so that there is no ambiguity as to the client relationship and your service to be provided.

Here’s the CA law synopsis, and my comments:

Understanding California Assembly Bill 5 (AB5)
In the 2018 Dynamex case, the California Supreme Court ruled that companies must use a three-pronged test in determining whether to classify workers as employees or independent contractors. This test assumes that workers are employees unless the company that hires them can prove the following three things:

  1. The worker is free to perform services without the control or direction of the company.
  2. The worker is performing work tasks that are outside the usual course of the company’s business activities.
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

This test holds companies to a higher standard in proving workers are independent contractors than was previously used in California. AB5 makes this test the new gold standard requirement for companies that hire workers in the state of California.

My thoughts relating to the above. As I stated, I’m not a lawyer and am not providing legal advice:

  1. You can perform assignments for AMCs or direct placement lenders whenever you choose, based on your own schedule. In my view, merely using an online ‘form’ provided by a client to fill in information to build a report is not the same thing as the client ‘controlling’ the appraiser, because the specific report content items are often different for every report of this type that is done. The form is just a ‘form’; it’s physical location when completing it is minor when the entire context of this law is considered. The entries on the ‘form’ filled in by the appraiser whenever the appraiser has time to do it basically is copyrightable appraiser writing and the client does not normally ‘control’ or ‘direct’ that content – except in entering certain info in certain spaces on the form. This is no different than using the normal ‘forms’ we use daily when doing our assignments. However, if the client makes an attempt to actually force the appraiser to do or write specific things in the report, other than fill in the form with appropriate/necessary info, then the appraiser should decline the assignment and report that client and assignment request to the proper licensing authorities for their investigation.
  2. Appraisers are licensed by the state (for FRT assignments in CA; for all appraisal assignments in most other states), while the AMCs/direct lenders do not have the same type of license or education requirements appraisers have to be in THEIR business. THEIR licenses are distinctly different from appraiser licenses.
  3. Appraisers perform their work for multiple clients as independent contractors, and the work performed for AMCs/direct lenders is similar to the work performed for other clients.
Workers Must Pass Borello Test

Except for real estate salespeople and repossessors, workers in all the exempt categories must pass the Borello test to be classified as ICs. The Borello test (based on the California Supreme Court’s decision in Borello vs. Dept. of Industrial Relations) is similar to the right of control test used by the IRS. It’s not nearly as strict as the ABC test. Under this test, the most significant factor is whether the hiring firm has control or the right to control the worker both as to the work done and the manner and means in which it is performed. In addition, the following factors are to be considered:

  1. Whether the worker is engaged in an occupation or business that is distinct from that of the hiring firm
    (Appraisers are distinct, as noted above, due to our licenses; we provide multiple services to a variety of clients; in other words we don’t provide a specific ‘product’ to everyone that does not vary by client; further explanation below)
  2. Whether the work is part of the hiring firm’s regular business
    (Ordering appraisal reports is regular business, but the ordering firm [the client] does not DO the report.)
  3. Whether the hiring firm or the worker supplies the equipment, tools, and the place for the person doing the work
    (The worker – the appraiser – provides the necessary technology and the workplace. Just because an appraiser fills out an online form for certain assignments does not circumvent the intent of this item in my view and could be easily challenged if appraisers are under the impression that this one item constitutes establishing an employee relationship with the client)
  4. The worker’s financial investment in the equipment or materials required to perform the work
    (See above)
  5. The skill required in the particular occupation
    (Appraiser skills are distinctly different than the client’s)
  6. The kind of occupation — whether, in the locality, the work is usually done under the hiring firm’s direction or by a specialist without supervision
    (Appraisers who work independently without direct client supervision merely accept assignments under agreed turn times, and send in reports on or before the due date – ideally)
  7. The worker’s opportunity for profit or loss depending on his or her own managerial skill
    (All appraiser services and report fees are negotiable)
  8. How long the services are to be performed
    (This relates to specific independent assignment due dates, and to the longevity of the particular appraiser to do this work with the client; both are variable and are not exclusively mandatory – unless the appraiser is a ‘staff appraiser’ for a particular client)
  9. The degree of permanence of the working relationship
    (There is no loyalty or permanence in many client/appraiser relationships; many appraisers work with multiple clients to avoid becoming dependent on too few sources of income)
  10. The payment method, whether by time or by the job, and
    (Most independent appraisers are paid ‘by the job’ and are issued 1099’s for the payments made. Appraisers who are ‘staff appraisers’ for specific clients are considered EMPLOYEES, and are issued a W-2 for income paid to them)
  11. Whether the parties believe they are creating an employer/employee relationship.
    (Independent appraisers should not create an EMPLOYEE RELATIONSHIP until and unless that is specifically what is desired)

No single factor in the Borello test is determinative, the first one —whether the individual’s work is the service or product that is the company’s primary business—is given the most weight. (It is key for appraisers to understand the difference between their providing a ‘service’ to clients, rather than delivering a ‘product.’ I think too many appraisers believe that just because we write and deliver, or verbalize, appraisal reports, we provide a ‘product’ to clients. Wrong. What we do is analyze information as a ‘service’ to the client and then provide a ‘service’ report detailing the info we have gathered and evaluated. The ‘service’ we provide has differing deliveries, i.e., types of written or verbal reports per USPAP, depending on the intended user(s) and intended use of that analysis and ‘service’ we agreed to do.)

Workers Providing Professional Services

Workers providing various types of professional services are ICs if they pass the Borello test — plus satisfy the following six factors. They must:

  1. maintain a business location separate from the hiring firm—this may include their residence
  2. have a business license, in addition to any required professional licenses or permits
  3. be able to set or negotiate their own rates for the services performed
  4. be able to set their own hours
  5. (a) be customarily engaged in the same type of work under contract with another hiring firm, or (b) hold themselves out to other potential customers as available to perform the same type of work, and
  6. customarily and regularly exercise discretion and independent judgment performing their services.

(In all cases, the above is true for independent appraisers. Not so for ‘staff appraisers’ contracted to a specific client.)

Business-to-Business Contractors

Business service providers involved in a bona fide business-to-business contracting relationship are ICs if (1) they pass the Borello test, and (2) they satisfy the following criteria. The business service provider (worker):

  • is free from the hiring firm’s control and direction while performing the work (this must be set forth in the contract and be true in fact)
  • provides services directly to the contracting business rather than to customers of the contracting business
  • has a written contract
  • has all required business licenses or business tax registration
  • maintains a business location separate from the business or work location of the hiring firm
  • is customarily engaged in an independently established business of the same nature as that involved in the work performed
  • actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring firm
  • advertises and holds itself out to the public as available to provide the same or similar services
  • provides its own tools, vehicles, and equipment to perform the services
  • can negotiate its own rates
  • consistent with the nature of the work, can set its own hours and location of work, and
  • is not performing the type of work for which a license from the Contractor’s State License Board is required.

Unlike the other exceptions, this exception is not limited to workers performing specific types of services. It applies to individuals who conduct business as sole proprietors, partners in partnerships, members of limited liability companies, or corporations.

(All of the above is true for independent appraisers. However, some appraisers believe that filling out an online form on a web site provided by a specific client constitutes ‘control and direction’ of the appraiser by that client. In my view, that is highly restrictive and is not the intent of the law, especially when all the other provisions of the above information is considered.)

There you go. My thoughts and suggestions for CA AB5, which may surface in your state someday, because there is an insatiable and unstoppable desire of legislators to capture as many tax dollars from as many sources as possible.

Independent appraisers need to watch activity in their own states carefully, lest getting caught up in a poorly written law of unintended consequences.

Dave Towne

Dave Towne

AGA, MNAA, Accredited Green Appraiser - Licensed in WA State since 2003. Dave Towne on e-AppraisersDirectory.com

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8 Responses

  1. Avatar Dave says:

    In my opinion, if the AMC hold SS taxes, federal state and local taxes from you from the check they send you, then you would be considered an employee. If they mail you a check without withholding any taxes, then they consider you to be a contractor. This really isn’t rocket science. I’m sure every state is different, but do independent appraiser’s really consider themselves employees to lowly AMC’s.

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  2. Avatar SB says:

    In my opinion, if a company has complete control and unfettered access to my desktop/appraisal report database, which CoreLogic does with their “cloud”, then I should be considered their employee.

    Where’s my overtime?????
    Where’s my health benefits????
    Where’s my 2 weeks vacation????
    Where’s my XMAS bonus???
    Where the F is my 401k????????????

    Biggest RIP OFF EVER.

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  3. Avatar CM says:

    The author sounds like a hack for the AMCs. Appraisers/employees are not under any obligation to comply with this law. The burden of proof must be supplied by the employer, not the contractor.

    The client doesn’t give you a form to fill out, we have the form in OUR software. They tell you statements to include though, how many sales and listings to use, demand continual updates and make you use their interactive software to upload reports. How about demand for photos of water heaters and CO detectors? What’s that got to do with an appraisal?

    Also, the intent of the law is not to collect employment taxes, those are already collected on an individual basis. The intent of the law is to protect workers from predatory employers and help restore the middle class. It’s stated in the preamble to AB5.

    I certainly don’t want to be an employee of an AMC but I am tired of being micromanaged and constantly threatened with being kicked off panels, holds, cancellations and reduced payments if I don’t meet requirements and revisions exactly as detailed.

    If we had a true business to business relationship the AMCs would not be able to shove these one sided agreements down our throat. Anybody try to make changes to the latest agreements? They won’t let you. Anybody out there believe we are free to perform the work without their direct management? Anybody believe they are in a different business than us? Anybody believe we aren’t required to use their tools (websites and software).

    If you ask me AB5 clearly and directly applies to the lender/appraiser relationship. Unless the state backs down this will end up in court and the relationship will be redefined. Hopefully the appraisers can get out from under the AMCs direct supervision and gain some true independence.

    3
    • Baggins Baggins says:

      Mr Dave Towne is not an amc hack. He is an experienced appraisal educator with active experience in the fields he writes about. His intention and purpose in writing articles is to educate and converse about a wide variety of interesting industry focused topic matters.

      The purpose of those specific requirements you mention is that those aspects of real property compliance with local code and regulation are an integral part of valuation service within mortgage lending. When dealing with FRT’s, the loans are saleable, bundled into larger mortgage backed securities. There is a constant default rate for all types of mortgage loans, I think FHA has the highest, posting twice if not more the comparative volume of defaults against other funding programs.

      So when a default happens, forensic review ensues and in the litigation world, non compliance with real property local requirements is seen as a valid justification to force a loan repurchase. Also loans can become compromised if borrowers are subject to tear down or compliance issues with the local jurisdiction so those are typically for everyone’s benefit. So yeah, the apparently minor details matter and for your own protection from liability and state licensing boards, it’s good form to embrace the requested additional sow overlays and do so consistently. It’s also as you mention round about, important to distinguish from unnecessary time draining purposeless sow add ons. A good way to judge that is to know the FRT rules up and down, referring to the various handbooks because that is the base source for sow structures, as well as knowing localized rules. Beyond that individual lenders and middle managers often form additional requirements based on the specific litigation and repurchase penalties they may have dealt with in the past. If it happens once, all future originations are likely to be subject to new scope of work safeguards intended to deflect future repurchase litigation.

      I’m thinking this law may affect VA appraisers, with their permission to go inactive status forms and all, the inability to say no to any given specific assignment. Even if I could claim employee status with so many clients it’s doubtful I’d find value in pursuing that. Unless they’re writing the checks for my insurance, ce, licensing, internet, hardware, software, and all of that, I’ll be writing those off to reduce my effective tax rate. If you can set yourself to vacation without any permission necessary, you’re an independent.

      Be careful what you wish for SB. Under common employee agreements and non disclosure contracts you would have just departed from a dozen company standards. Charge enough to make it worth your time or press the easy button and actually go pursue those benefits. I miss punching and and punching out, fair workload distribution, being part of a team. Us younger generation of appraisers did not have the stepping stones the older appraisers had, we will fall off in much greater numbers and won’t be able to weather the storm and hold on until retirement when there is nothing left to fund a retirement package. Frozen fees and grossly imbalanced volume of request distribution trends have a long term influence which has not yet been fully realized, give it time.

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    • I think you are right that this will wind up in court. Realtors are exempt because they are licensed under CA Business and Professions Code (like appraisers and attorneys) instead of Ca Labor Code like Uber and Lyft who the law was directed at.

      Dave’s article raised valid points, though an EIN us NOT required to be a sole proprietor; and you are allowed to use your SSN.

      The AI is seeking to amend the law by lobbying. Its better than doing nothing, though I question if lobbying is more cost effective than a suit. Its their money, and their choice. Kudos for doing something.

      For my part I see most NORMAL AMCs relationship with us as exempt (compliant with the three assumptions).

      Exceptions may be the bifurcators; online proprietary form dictators, and 48 hour turn around time micro-managers.

      Pete Christiansen has a free webinar 1/31/20 dealing with this. AB has the article and links.

      Lets not fear AB5 or be panicked into ridiculous new AMC requirements. Read the law and exceptions for yourselves.

      Compliance shouldn’t be that difficult.

      2
  4. Avatar CM says:

    Baggins

    1) This blog is about AB5, a new law in California that has wide ranging employment implications including for appraisers. It’s not about default rates or individual funding programs.

    2) The AMCs, and lenders, current practices are an obvious violation of the new law as written.

    3) Appraisers follow USPAP, not some underwriters whims.

    4) Appraisers don’t cause defaults, unless they are approving unreasonably high values. Predator loans, overzealous lenders and greedy realtors cause many more defaults than appraisers.

    5) VA is a federal agency and unlikely to be concerned with a state employment law.

    6) Again, appraisers do not have any obligations to conform to this law unless they themselves are paying independent contractors. The obligation and liability all belong to the employer. i.e. AMCs and lenders.

    3
  5. I think you are right that this will wind up in court. Realtors are exempt because they are licensed under CA Business and Professions Code (like appraisers and attorneys) instead of Ca Labor Code like Uber and Lyft who the law was directed at.

    Dave’s article raised valid points, though an EIN us NOT required to be a sole proprietor; and you are allowed to use your SSN.

    The AI is seeking to amend the law by lobbying. Its better than doing nothing, though I question if lobbying is more cost effective than a suit. Its their money, and their choice. Kudos for doing something.

    For my part I see most NORMAL AMCs relationship with us as exempt (compliant with the three assumptions).

    Exceptions may be the bifurcators; online proprietary form dictators, and 48 hour turn around time micro-managers.

    Pete Christiansen has a free webinar 1/31/20 dealing with this. AB has the article and links.

    Lets not fear AB5 or be panicked into ridiculous new AMC requirements. Read the law and exceptions for yourselves.

    Compliance shouldn’t be that difficult.

    2

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AB5 – Employee or Independent Contractor?

by Dave Towne time to read: 8 min
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