Ask The California Employment Tax And Payroll Tax Attorney – EDD’s Newest Employment Relationship Questionnaire Form – Potential Traps For The Unwary – Part 2
By Robert S. Schriebman
2020
Introduction
Since the beginning of 2019 I have observed that EDD audits have become more aggressive and intrusive. EDD auditors feel a certain entitlement towards an ever expanding search for documentation and information. Now, as part of the audit process, auditors are demanding that the employer complete a multipage document entitled Employment Relationship Questionnaire. This is a 5-page form containing 37 questions many of which have subparts. Perhaps the EDD has become empowered by the 2018 California Supreme Court Dynamex decision, the essence of which has now been enacted as AB-5.
Questions You Already Answered!
When an employer is singled out for an audit, that employer will initially be provided with a Pre-Audit Questionnaire (PAQ). Many of the questions set forth in the Employment Relationship Questionnaire were previously answered by the employer in the PAQ. Questions such as the business address, locations, commencement of operation and the name of the principal executive have already provided in the PAQ. The mundane questions also include the number of employees and the nature of the services performed by them. Again, these questions have already been answered in the PAQ. Therefore, the auditor should be referred to the PAQ when responding to many of the Employment Relationship Questionnaire interview questions.
It is the auditor’s job to review relevant documentation and information. This includes verification of W2s and 1099s to original books of entry and to determine proper worker status. This usually requires the auditor to investigate the working relationship through written or oral interviews with 1099 recipients to determine control factors under Borello and AB-5. Part of the investigatory process does not mean requiring the employer or the representative to do the auditor’s work. As I reviewed the Employment Relationship Questionnaire, I was struck by the literal chutzpah of the person or persons who put this questionnaire together. Requiring the employer to do the auditor’s homework, strikes me as a form of slavery that went out with the 13th Amendment.
In this Part 2, we will review the second half of the Questionnaire. Questions 11 – 20 are, in my opinion, designed to establish the element of control in the working relationship, as well as to provide legal opinions and paint yourself in a corner that only yields an assessment and penalties.
Reviewing the Second Half of the Employment Relationship Questionnaire
Questions 11 (a) and (b): These questions seek to establish whether the service provider worked for the employer on a full time or part time basis, and also asks if the hours of work were fixed. The wrong answer can sink the independent contractor relationship. The best answer is to state that the employer was only interested in the end results to be achieved – a job well done.
Questions 12 (a) – (f): This series of questions, if answered incorrectly, will solidify the employer-employee relationship. These questions concern training by the firm, the following of established routines and schedules, and other elements of control exerted by the employer. As in my recommendation for Question #11 above, the best answer is still the end results to be achieved.
Question # 13(a) – (b): This series of questions concerns how the service provider was compensated.
It requires a straight-forward response.
Question 14: Was the individual eligible for a pension, bonus, paid vacations, sick pay, etc?
A yes or no answer is requested. This is a huge trap for the employer as the answer most likely requires a legal opinion. If the EDD holds that the service provider should have been classified as a W2 wage earner, that worker may elect to file a lawsuit or seek administrative benefits. This question is way beyond a yes or no answer, and perhaps it is best to leave your response blank.
Question 15: Worker’s Compensation: This question is a simple yes or no answer.
Question 16 (a) – (c) Discharge of the worker or termination of services: This series of questions asks if the employer can discharge the service provider at anytime or whether the provider may quit at anytime. It also asks what liability would be incurred in this process. These questions require a legal opinion from a business or employment lawyer. It is best to skip these questions to be on the safe side. Let the EDD auditor do his/her homework and make that determination by conducting a proper investigation.
Question 17: Please explain in detail why you believe the individual was an employee of the firm or was an independent contractor. As with question 16, your response requires a legal opinion. The only thing you will be doing by answering this question is painting yourself in a corner and doing the auditor’s homework. The determination of worker status is better left to the experts. Besides, this is the primary objective of the EDD audit process. Let the auditor make these findings. The wrong answer could also lead to justification for EDD negligence and fraud penalties.
Question 18: How did the individual report earnings for income tax purposes? Perhaps this is the silliest of all questions in the Questionnaire. What goes on another person’s tax return is between that taxpayer and the State and Federal Government.
Question 19: Has any other governmental agency ruled on the status of services performed by the individual or another person performing the same or similar services? Unless you personally applied for an IRS or EDD advanced ruling on worker status, it is impossible as well as improper for you to respond to this question. In all the years I have been practicing, I have never had a client under audit produce an advanced worker status determination. This question is best left unanswered.
Question 20 (a) – (c): Of all the questions in the second half of the Questionnaire, this series of questions may work in your favor. One of the best ways to prevail in an EDD audit is to provide objective evidence that the service provider holds him/herself out to the public as being in business for themselves. You are asked to produce pre-printed invoices, business cards, license or any other documentary proof of independence. My only fault with this part is that it requests “preprinted” invoices. There is nothing illegal or wrong with a hand-written invoice.
Specialty Areas
The final portion of the Questionnaire, questions 21 through 37, deals with the following specialized areas:
- Agent-driver or commission-driver
- Traveling or city salesperson
- Real estate salesperson or broker
- Construction industry
- Home worker
We will look at the questions regarding the construction industry and the home worker.
Construction Industry
Virtually all of the questions in this area concern whether a worker has a CSLB license. It is up to the general contractor to provide copies of CSLB licenses for subcontractors or run the risk of having them reclassified as W2 wage earners.
Home Worker
Domestic worker status has been largely ignored by EDD auditors until the passage of AB-5. This trend will likely continue throughout 2020. However, starting in 2021 these individuals must be treated as employees and given a W2. The current series of questions in the Questionnaire is directed more to an agency that refers domestic workers.
Conclusion
You have no duty to do the investigatory work required of your assigned EDD auditor. There is no legal requirement for you to respond to the Questionnaire. You cannot be fined or penalized. You cannot be forced to respond. I have found that when I do not respond, the auditor will contact me requesting that I respond to a few selected questions. It will then be up to me to determine my responses if any.
***
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. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
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.
Web Site Article 440