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ASK THE EDD ATTORNEY – WERE YOU REALLY AN INDEPENDENT CONTRACTOR? HOW TO BE PREPARED FOR THE WORKER INTERVIEW QUESTIONNAIRE – PART 2

By Robert S. Schriebman

July 6, 2016

Introduction

If you are an employer who treats workers as independent contractors, whether properly or improperly, you are at risk for an EDD audit and a possibly an IRS audit as well. This article will deal solely with your exposure to an EDD audit. Many IRS worker-status audits piggy-back onto completed EDD audits.

If you are audited by the EDD you can expect the EDD auditor to contact the workers that you treated as independent contractors. This contact can be done in several ways. It is common for the EDD auditor to ask for contact information such as a worker’s address and telephone number. Don’t play games with the audit process, if you have this information, provide it. Most likely the auditor will call the worker and conduct a telephone interview. Sometimes the EDD auditor will send out a postcard asking the worker to contact the auditor. It is a common practice however, for the EDD auditor to send out a questionnaire asking the worker to answer the questions and return the questionnaire to the EDD. This is why I am writing this series of articles to alert you to the questions that will be asked. If there is something that you are currently doing that may expose you to a risk of an EDD assessment, this article may help you correct your ways. This series of articles may help you avoid or minimize an EDD assessment, may also help you minimize your exposure to an IRS audit.

This is Part 2 of a several part series of articles dealing with EDD’s probing questions set forth in the Worker Interview Questionnaire to determine if the worker was truly an independent contractor. The EDD obtains the list of workers from any one or more of several sources such as 1099s, Employer Interviews, General Ledgers, or referrals from other interviewed workers.

At this point in our discussion it is very important that you are made aware of certain ground rules regarding the EDD’s attempt to solicit information from current and former workers. First, it is illegal for an employer or anyone else to advise a potential interviewee not to answer these questions. This can lead to criminal prosecution. Never tell anyone that he or she should refuse to talk to the EDD. Former workers as well as current workers are witnesses in an EDD audit. A witness does not belong to anyone. Second, no one is legally obligated to answer any questions unless ordered to do so by a judge.

If you are being interviewed by the EDD with regard to the questions presented in this article, be sensitive to any EDD caller who is trying to get you or your workers to answer any questions in a specific way. Always answer any question honestly and in your own words. Do not let anyone put words in anyone’s mouth.

Questions Relating To Initial Employee/Contractor Status Continued

The EDD has written a questionnaire structured in such a way as to conclude that just about every service-providing independent contractor should be treated as a W2 wage earner. While the following questions seem to be straight-forward, they play into an agenda that is designed to have an auditor conclude that the independent contractor has been misclassified.

  • Where were your services performed?
    Bob’s comment: If the services were performed on the employer’s premises, or performed on a job site under the direction and control of a manager or supervisor working for the employer, the auditor will conclude automatically that the worker is a common law employee. On the other hand if the services are performed at the worker’s home, or at a place owned or leased by the worker, it is harder for the EDD to find that element of control necessary to establish an employer-employee relationship.

  • Were you required to be at the employer’s premises during any specific hours? If yes, what were the hours?
    Bob’s comment: This is a very dangerous question. As far as the EDD is concerned its world view is to find any element of control of a worker that will establish an employer-employee relationship. The EDD has refused to acknowledge that in every business relationship there is going to be some element of control between the parties. Sometimes the work has to be performed on the employer’s premises. For example, most construction projects must take place at the employer’s location or a job-site under the employer’s overall control. If a worker is required to report to the employer’s premises each work day and "punch-in" that is an indication of absence of independence. However, if a production company requires periodic meetings, on the employer’s premises for logistical purposes, no control should be inferred.

  • Were you required to be at the employer’s premises during any specific days? If yes, what were those days?
    Bob’s comment: This is another potentially dangerous question but not materially different from the question immediately above. Many businesses that we represent during an EDD audit are basically a third-party logistics company. Its function is to coordinate the services of many elements in one overall project. Motion picture and entertainment related companies can be classified in this manner. Their job is to produce an end result. They require meetings and status conferences during the normal work week. Unfortunately EDD auditors turn a blind eye to this reality and simply conclude that the requirement for these types of meetings clearly shows an employer-employee relationship. Nothing could be further from reality.

  • What was the method of payment for your services, i.e. hourly rate, salary, commission, piece rate?
    Bob’s comment: If a worker is paid a straight salary or paid by the hour the EDD will automatically conclude that an employer-employee relationship exists. However, being paid on a piece–work basis, where the work is performed at the worker’s home or a place that he or she rents or leases, is an indication that there is an absence of control. The problem comes when the work can only be done on the employer’s premises. For example, piece-work done on heavy machinery located on the employer’s premises. Now things are not so clear. However you can bet that under these circumstances most EDD auditors will find an employer-employee relationship.

    Workers who are paid on a commission basis may come under a special law allowing them to be treated as independent contractors. A written contract is very important here.

  • Who determined the rate of payment?
    Bob’s comment: This is a tricky question. The EDD is looking for negotiations. Is the worker free to negotiate his or her rate of compensation? For example, RNs working through a Nurses’ Registry may be free to negotiate their rate of compensation. If so, this would tend to show an element of independence. On the other hand, a domestic worker seeking employment through a Domestic Agency, may be confronted with a "take or leave it" rate of compensation. If so, this would tend to show an element of control by the agency.

  • Were you paid on a regular basis? If yes, how often?
    Bob’s comment: This is essentially the same question as directly above. However, paying a worker on an hourly basis or a straight salary per week or month, tells the EDD auditor that the worker is more likely to be an employee than an independent contractor. However, this is not always the case. Professionals such as attorneys and CPAs, as well as gardeners, electricians or plumbers are paid on a regular basis with little argument that they are all independent contractors. Pizza delivery workers, paid per pizza delivered, on the other hand, are employees. When it comes to worker status issues there is no clear compass.

Conclusion

There are many more questions contained in the EDD Worker Interview Questionnaire. While some questions appear to be simple and straight-forward, other questions carry great potential harm and risk of assessment. In our next article, we will continue our review of the Worker Interview Questionnaire.

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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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