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ASK THE EDD ATTORNEY – EDD AUDITS – A LOOK AT THE EDD’S EMPLOYMENT RELATIONSHIP QUESTIONNAIRE

By Robert S. Schriebman

2017

Introduction

An EDD auditor will rarely, if ever, take an employer's point of few at face value when it comes to determining whether a 1099 recipient is truly an independent contractor. An employer can argue until blue-in-the-face that an individual 1099 recipient was never an employee. Most auditors I know will treat an employer's position with a grain of salt and conduct an independent probe or inquiry. This is done in many ways. The most common methods are to conduct a telephone interview or to send a postcard requesting that the worker call the auditor. Sending postcards however, rarely yields a great return. Aside from a cold call or a postcard, the EDD auditor may send out an Employment Relationship Questionnaire (ERQ). The Questionnaire response is usually not shared with the employer unless and until the employer or a professional representative requests a copy of the audit file.

Just a few words about obtaining an audit file. I find that this is rarely done by either an employer or a professional hired to represent the employer during the audit process. I am often consulted by professionals seeking my advice on various aspects of audit or post-audit procedure. I always ask, "Did you order a copy of the audit file?" There follows a "Deer in the Headlights" non-response. The audit file contains the audit report as well as records of auditor contacts with workers treated as independent contractors.

The ERQ is sent by the EDD to a worker treated as an independent contractor. This is a four-page form that asks 20 important questions about worker status. There are also portions for recipients who are home workers, traveling sales persons, real estate sales persons, and agent or commission drivers.

As an employer it is very important for you to know in advance the questions posed to 1099 recipients. Often recipients will call the employer for advice on how to answer these questions, but there is a dark aspect to the form as well because a disgruntled worker is free to make statements that may hurt an employer especially if that worker is unemployed and is seeking unemployment benefits.

The ERQ is not signed under penalty of perjury. The only requirement is that the statements be true and correct to the interviewee's knowledge and belief.

The EDD rarely if ever contacts the employer to verify or clarify the statements made on the ERQ. An employer or representative may see the ERQ for the first time when the audit file is received. By this time the audit is over. The available future options may be expensive and time consuming.

In this article we will review a few of the key inquiries set forth in the ERQ.

Important ERQ Interview Questions

Here are a few sample questions from the ERQ that are framed in such a way that the auditor can't help but conclude that the worker should have been treated as an employee. This is especially true if the responses are vague or ambiguous.

1. Was the individual permitted to provide services for others during the same period services were performed for the firm?

2. What percent of the individual's total working time was spent for others?

3. Did the firm have first call on the individual's time and effort?

4. State the kind and value of tools, equipment and facilities furnished by the firm.

5. Did the individual hold himself/herself out to the public as available to provide similar services?

6. Was a licensed or certificate needed to provide the services?

7. Was the individual given training by the firm?

8. Was the individual required to follow daily, weekly, etc., routines or schedules established by the firm?

9. Was the individual required to report to the firm personally or in writing? If yes, explain the nature of the report and how often required.

10. Could the firm discharge the individual at any time?

11. Would liability be incurred if the individual quit or was discharged before the job was complete?

12. Please explain in detail why you believe the individual was an employee of the firm or was an independent contractor?

This is only a sample of the many questions and subparts stated in the ERQ. Some of these questions require specialized legal knowledge for an accurate response.

Conclusion

Most employers under audit do not know the methodology used by auditors to verify their statements or to attempt to force a specific audit result that turns into a stiff assessment with multiple penalties. It is a good practice to ask the auditor how he/she plans to contact 1099 recipients, and to create a record where the employer or representative makes a specific request for copies of ERQs and other interview feedback. Don't wait until this information is discovered for the first time in the audit file.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures – A Manual for Practitioners" published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures – A Manual for Practitioners" published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

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