Unemployment claims are in the millions as a result of the coronavirus epidemic and the ensuing quarantine and lockdown. Small businesses are being deeply impacted by the downturn and many are having to lay off over half their workforce. Since the start of the outbreak, 3.2M people have filed for unemployment in the U.S. and more than 1M people filed for unemployment in California. As restaurants and other businesses reliant on in-person services, foot traffic and face to face interactions reduce their workforce by large numbers to try to stay afloat and ride out the COVID-19 crisis, many more workers will be forced to file for unemployment.
Business owners who lay off portions of their workforce, both 1099 and W-2, due to the global slowdown from COVID-19 should communicate clearly with those people who are let go, informing them of their ability or lack of ability to file for unemployment. To quickly review: a 1099 contractor can only file for unemployment if their independent business is folding, not if they lose contract work with one of their clients (you). A W-2 worker can file for unemployment benefits listing their most recent full time employer with no negative ramifications to the business entity listed on the unemployment documentation.
As small to mid-sized businesses (under 500 employees) prepare for the many possible repercussions of the coronavirus outbreak they should be aware that one of the possible effects could be an uptick in EDD audit activity. The California Employment Development Department audits businesses for many reasons. One of the surest ways to trigger an EDD audit, however, is to have a 1099 contractor incorrectly file for unemployment. If your company has released 1099 contractors due to the downturn from coronavirus and those 1099 contractors in turn file for unemployment listing your business as their most recent employer (whether through ignorance or malice), EDD is likely to audit your company.
Communication and education are the best friends of business owners looking to protect themselves from unnecessary, time consuming and potentially damaging or even criminal investigations and audits by CA EDD. As a business owner you must:
Inform workers who are let go of their status.
Remind them that 1099 contractors cannot file for unemployment unless their own independent business has folded.
Keep impeccable records.
The following business records should be kept for each 1099 contractor you hire: EIN’s, evidence of a contract, copy of the contractor’s business card, the contractor’s website or evidence they are promoting their own business, business tax license, and Professional Licenses.
Do your research
The law changed at the start of 2020 and EDD is auditing businesses who hire a large number of 1099 contractors. Know the new criteria and when in doubt, double check a 1099 contractor’s status using a tool like clear1099.com or other reliable reference.
Above all if you are audited by CA EDD, reach out to a qualified ta attorney. We can help mitigate the damage an EDD audit can cause.