ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – EDD SETTLEMENT AGREEMENTS – WHAT YOU NEED TO KNOW – PART 2
By Robert S. Schriebman
This is Part 2 of a 2-Part series.
An EDD Settlement Agreement is exactly what it says it is – an agreement and a contract between the employer and the EDD. The EDD takes a passive role in the process once it gets its money from the employer. The employer, on the other hand, has obligations and duties to the EDD that lasts long into the future. For example, if the employer breaches the agreement this could result in termination of the settlement amount and restoring the original assessment obligation together with large amounts of compounding interest. This can occur if the employer fails to pay any installment under the agreement. This can also occur if the EDD elects a rare reexamination of the employer and finds that the employer is continuing to treat questionable workers as independent contractors. If this happens, the EDD Settlement Office will refuse to entertain a second settlement of the second examination. This leaves the employer with only two options – fully paying the second assessment or taking his case before an administrative law judge. If you don’t think this can happen – guess again.
The Elements of an EDD Settlement Agreement
The typical EDD Settlement Agreement contains four sections:
- General Recitals,
- Settlement Obligations,
- Miscellaneous and
- Signature Blocks
In Part 1, I discussed the elements of the General Recitals. In this Part 2, I will review the Settlement Obligations and Miscellaneous provisions.
Before discussing the elements of provisions relating to Settlement Obligations, let’s get one thing clear – a settlement means that you will be paying a portion of the assessment to the EDD to resolve your matter. You are not going to walk away free. Having said this, understand that the provisions relating to Settlement Obligations are, for the most part, all about money.
There are two ways to pay the settlement, either in a lump sum or in monthly installments averaging between 12 and 18 months. The lump sum or first installment payment is due 30 days following the date the Settlement Agreement is approved by the CUIAB. There is only one problem – no one tells you when that 30-day period expires. In order to make your payment timely, I recommend you contact your Settlement Officer periodically and monitor the due date.
If you elect to pay the EDD in installments, California law assesses an additional 15% penalty on the unpaid balance for failing to pay the full assessment within 30 days. By way of example, if you settle your matter for $10,000 and you wish to pay installments of $1,000 pe month, you will be assessed a penalty of $1,350 (the EDD will not assess a penalty on the first $1,000 as it is being paid within 30 days).
If you are making installment payments, each is due on or before the 20th day of each month. If you are delinquent for two or months in a row, the EDD may exercise its right to declare a default.
In an event of a default or a material breach of the Agreement, you will owe the EDD the full unpaid assessment balance plus interest. You will immediately be turned over to a collection agent who will demand immediate payment and file a Notice of State Tax Lien on the unpaid balance.
Reclassification of Workers
As part of the Settlement Obligation provisions, you must agree to treat questionable workers as employees as of a date certain in the future. A typical provision looks like this:
“Beginning January 1, 2024, and continuing thereafter, XYZ, Inc. agrees to report amounts paid to workers engaged by or for XYZ, Inc., who perform services of the types at issue in tax case number 1234567 and pay the applicable employment taxes on those amounts.”
This paragraph, though not that well written, is the heart of the Settlement Agreement. It means that questionable workers found by the original auditor to have been misclassified as independent contractors, must be treated as employees in the future. The paragraph is not limited to the specific workers under examination. It applies to all future workers doing the same type of work. The paragraph also means that if the EDD elects to audit you in the future, and it finds you have not reclassified these types of workers, you will be in for big trouble. You will not be able to settle a future audit and you run the risk of being assessed both civil fraud penalties.
No Limit on Future Audits
Nothing in the Settlement Agreement prevents the EDD for conducting worker status audits in the future.
These are standard provisions found in most contracts, such as each party being responsible for their respective attorney fees, and that the person signing the agreement has the authority to bind the employer. This is the usual broiler-plate provisions.
The signature block requires that the agreement must be signed by the business owner, or an officer of a corporation or LLC, authorized to sign the agreement.
An EDD Settlement Agreement is exactly what it says it is – an agreement and a contract between the employer and the EDD. Entering into the settlement process is nothing to take lightly. A settlement means you are going to have to pay the EDD. Someone once said that a good settlement means that neither side is happy. But, at the end of the day it’s a win-win!
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 50 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.
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