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ASK THE EDD ATTORNEY – WERE YOU REALLY AN INDEPENDENT CONTRACTOR? HOW TO BE PREPARED FOR THE WORKER INTERVIEW QUESTIONNAIRE – PART 5

By Robert S. Schriebman

July 11, 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 possible 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. 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 auditor. This method is gaining in popularity with EDD auditors. 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. What may help you avoid or minimize an EDD assessment may also help you minimize your exposure to an IRS audit.

This is Part 5 and the final part of a 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 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 your 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.

  • Could the employer discharge you without notice?

    Bob’s comment: This is a popular and often resorted to factor by the EDD to prove an employer-employee relationship. If an employer has the right to discharge a worker without notice, this an indication of an employer-employee relationship as the employer might be sued for wrongful termination, or might be taken to the Labor Board, but the employer may not be sued for breach of contract. Of course this depends on whether the worker has a written contract in existence at the time of termination. Most large companies give a new worker a written notice that he or she can be discharged at any time.

    If an employer wrongfully discharges an independent contractor, there is exposure to a breach of contract cause of action at the minimum.

    The EDD will often ignore clear provisions in written contracts that clearly allow the parties to terminate or discharge with minimum notice or no notice at all.

  • Could you terminate your services with the employer without notice?

    Bob’s comment: This is also popular and often resorted to factor by the EDD to prove an employer-employee relationship. If a worker has the right to terminate his or her services, with little or no notice, the EDD most likely will conclude that the worker is an employee and jump to the conclusion that the terminating worker will have no civil liability for his or her actions. The ability to terminate a business relationship with little or no consequence tells the EDD auditor that the relationship is realistically one of employer-employee. If on the other hand there are consequences to early termination, the relationship indicates independent contractor status.

    The EDD will often ignore clear provisions in written contracts that clearly allow the parties to terminate or discharge with minimum notice or no notice at all.

  • Why did you stop working for the employer?

    Bob’s comment: Here the EDD auditor is looking for signs of control. The EDD auditor may be hoping for negative feedback about the employer.

  • What type of services do you normally perform for others?

    Bob’s comment: A clear indication of worker independence is the freedom and the ability to work for others in the industry. If a worker holds himself out to be for hire and does not solely work for one employer, this is a sign of independence. There are cases however, where a worker chooses to work for one employer because of the volume of business as well as the business relationship. This is a problematic situation. The EDD auditor will conclude that the worker is an employee because his or her time is being monopolized by one employer. In that event the audited employer will have to obtain testimony from the worker favorable to a position that the worker is an independent contractor.

  • Do you normally work as an employee with deductions or as a contract help?

    Bob’s comment: Here it is all about the intention of the parties. If there is a written contract between them clearly stating that the worker is an independent contractor, and is responsible for the payment of state and federal taxes, the EDD auditor might concede the worker to be an independent contractor…but don’t count on it. I have seen many cases where the EDD auditor totally ignored the provisions of a written contract and found the worker to be a common law employee. This is true even when the work has told the auditor that he or she is an independent contractor. In cases where there is no written contract, it does not matter what the worker tells the EDD auditor. The auditor will conclude the worker to be a common law employee.

Conclusion

This concludes our 5 part discussion on common questions EDD auditors usually ask workers. In no way were these series of articles meant to confine any EDD audit to these questions. EDD auditors, like IRS auditors, are free to search for information as the situation presents itself. With these lists of questions you have a head-start on where the EDD is likely to be going.

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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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