ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – THE CONUNDRUMS OF A WRITTEN INDEPENDENT CONTRACTOR AGREEMENT
By Robert S. Schriebman 2020
The dictionary defines the word “conundrum” as a riddle or any perplexing question or thing. This is exactly the situation I encounter when advising clients when it comes to creating a written contract between the employer and a potential independent contractor relationship. The recent passage of AB-2257, repealing AB-5, has created even more twists and turns. Several provisions of the new legislation require a written contract be extant as a requirement for independent contractor status under the new law. For example, the business service provider exemption requires that a written contract specifying payment amount, rate of pay, and payment due date be created to establish the legal relationship (§ 2776). The same can be said for consultants, and members of the entertainment industry (§ 2780). In the construction industry, a written contract is a must (§ 2781). This is only a representative sample; there are many more exemptions that require written contracts.
Setting aside for a moment the requirement of a written contract, the real question I encounter from my professional experience, is whether or not the written contract will be honored by the EDD during the audit process.
In this article, I will discuss several of these perplexing conundrums that I have encountered representing employers during EDD audits.
EDD Auditors Want Copies of Written Contracts
At the beginning of most EDD audits, the assigned auditor will issue a list of documentation and information initially required for the examination. One of those items will be a copy of any written contract between the employer and an independent contractor. If there is no written contract, the auditor will usually reclassify the contractor an employee automatically. Savvy employers will require a contract that establishes the status of the worker and protects and sets forth the rights and duties between the parties.
EDD Audits and Written Contracts
After many years of representing employers throughout the EDD audit process, my takeaway has been frustrating, gorged and embittered. I have seen all types of contracts ranging from the inadequate and even stupid versions obtained free from the internet, and works of art written by the top lawyers in the top firms in America. They all have one thing in common when it comes to an EDD audit – little if any attention is paid to them by the auditor and virtually none have been honored by the EDD in their entirety.
The typical EDD auditor will acknowledge the existence of the contract, but will always find some reason for not honoring the relationship intended by the parties. The most common attack by the auditor comes by way of criticizing the agreement because the auditor does not believe that the contractor will face any punishment or risk of loss upon termination. Another common complaint from EDD auditors is absence of any written requirement for the withholding and paying of payroll tax obligations. The first thing I look for in any written contract are clauses clearly stating that an independent contractor relationship has been created and that the contractor is obligated to file all appropriate tax returns and withhold payroll taxes to both the EDD and IRS.
Even when the contract appears to my eyes to be well drafted, and to have all the “goodies” necessary in my mental checklist, the auditor will disregard the contract. The auditor will telephone the contractor and determine via a personal interview the impact and validity of the contractual provisions.
Either way, the auditor finds a way to disregard the written agreement.
Thoughts on a Recent Audit
All of the above came to the foreground on a recent audit of a very well operated nursing registry. I was called into the case after a prior attorney resigned due to frustration with the auditor. My new client did it right. He hired the best talent to draft long and highly detailed agreements. Attached to each agreement was proof of professional liability insurance and all required licenses from the State of California. Altogether there must have been 150 of these contracts submitted to the auditor. They were totally disregarded – I doubt if one was read cover-to-cover. The auditor had made up her mind that all RNs, LVNs and other service providers were employees.
Thoughts on a Recent Telephone Conference
During a recent conference call with a new client and the referring attorney, the subject of a written contract came up. The attorney had prepared an opinion letter on the impact of AB-2257 on specific workers. We discussed whether the client needed a written contract. Up popped the devil – the conundrum. Under AB-2257 a written contract must be in existence between the parties. The client wanted to know what specifics were needed to make the contract bullet-proof to the EDD. There is no such animal.
The conundrum – while a written contract is required, will it be recognized and honored when it comes to an EDD audit judging from the EDD’s historical treatment of contracts in general? I could offer no assurances.
Conclusion – A Word of Advice to My Professional Colleagues
I have learned and I pass onto you some words of wisdom based upon my own experience over several decades two truths:
- You can never be assured that you can give an iron-clad opinion about the independent contractor status of any worker where there are no statutes guaranteeing worker status. Under AB-2257 there are now a few limited statutes providing for safe harbor worker status. Outside of these statutes, there are no guarantees.
- You will never be able to draft a written contract that will totally be honored by the EDD. And it is very important that your client knows this.
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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