What To Do When EDD Investigates Your Contractors
The California Employment Development Department has a Joint Enforcement Strike Force (JESF) with local and federal agencies dedicated to uncovering cases of worker misclassification. If you’ve been targeted for an audit there are steps you should take immediately to protect yourself and ensure that your company’s workers are correctly classified and that EDD recognizes the elements used to correctly determine their status.
The first step you should take when your company is under EDD investigation is to determine whether your audit is a Verification Audit or a Request Audit. Verification Audits are not based on an assumption of wrongdoing but are random checks based on factors such as business size, size of payroll or other factors determined by EDD. Request Audits, are based upon evidence collected by CA EDD from former employees or people closely associated with your business. The JESF has an active “whistleblower” campaign soliciting anonymous tips from disgruntled former employees and competitors hoping to tease out information on misclassified workers.
Once you are aware your business is being investigated it’s important to reach out to a qualified Tax Attorney to represent you. Crafting the narrative around the “why” and “how” of your contractors’ classification can make the difference between your case being dismissed or your company owing back payroll taxes and fines.
The three main factors used by EDD to determine whether a worker is an employee or a contractor are:
- Behavioral Control: Do you control When Where and How the worker performs their tasks?
- Financial Control: Do you pay regularly, pay bonuses, have the power to fire the worker?
- Relationship to the Business: Can you conduct business without the worker?
Following are 13 questions EDD uses to determine Employment status.
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Questions 1 – 3: "Yes" indicates the worker is an employee. |
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1. Do you instruct or supervise the person while he or she is working? |
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When a worker is required to follow company procedure manuals and/or is given specific instructions on how to perform the work, the worker is normally an employee. |
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2. Can the worker quit or be discharged (fired) at any time? |
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Independent contractors are engaged to do specific jobs and cannot be fired before the job is complete unless they violate the terms of the contract. |
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3. Is the work being performed part of your regular business? |
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Do you use the worker in everyday operations or from time to time for specific tasks? Could you use another worker for the next instance of that task? |
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Questions 4 – 6: “No” indicates that the worker is an employee. |
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4. Does the worker have a separately established business? |
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Does the worker perform similar jobs for other clinets, advertise for his/ her own business in publications, hand out business cards? |
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5. Is the worker free to make business decisions which affect his or her ability to profit from the work? |
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Independent contractors are in control of their own acquisition of equipment and facilities. |
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6. Does the individual have a substantial investment in their job which would subject him or her to a financial risk of loss? |
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Independent contractors furnish the tools, equipment, and supplies needed to perform the work. |
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Questions 7 – 13: ”Yes" indicates the worker MAY be an employee. |
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7. Do you have employees who do the same type of work? |
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Is the work being done to handle an extra workload or replace an employee who is on vacation, a worker is hired to fill in on a temporary basis. |
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8. Do you furnish the tools, equipment, or supplies used to perform the work? |
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Independent contractors furnish the tools, equipment, and supplies needed to perform the work. |
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9. Is the work considered unskilled or semi-skilled labor? |
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Workers who are unskilled or semi-skilled are the type of workers the law is meant to protect and are generally employees. |
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10. Do you provide training for the worker? |
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Independent contractors usually do not need training. |
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11. Is the worker paid a fixed salary, an hourly wage, or based on a piece rate basis? |
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Independent contractors agree to do a job and bill for the service performed. |
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12. Did the worker previously perform the same or similar services for you as an employee? |
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Once an employee, always an employee. |
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13. Does the worker believe that he or she is an employee? |
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Intent is a factor to consider when making an employment or independent contractor determination. |
Businesses often targeted for EDD audits are those who use seasonal workers, those in the construction space, emerging / disruptive industries (think: Uber/ Lyft) and personal services. Any business, however, can be investigated and misclassifications come with hefty fines as well as back payroll taxes. Be sure to keep paperwork, contracts and pay stubs as well as invoices and business cards of contractors working for your organization . Call Milikowsky Tax Law as soon as you discover your business is facing an audit by CA EDD.
