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Ask The Edd Attorney – Is Edd “safe Harbor” Legislation Workable? – Part 1

By Robert S. Schriebman



Safe Harbor legislation is like holding a “Get-Out-of-Jail-Free Card.” In other words if you comply with the safe harbor provisions, you are immune from future legislation that seeks to punish the prohibited conduct. When it comes to issues of worker classification, the safe harbor rules protect employers who have previously treated certain classes of workers as independent contractors. There are no current safe harbor rules protecting an employer from an EDD audit and assessment. Since 1978 there have been safe harbor rules that have governed IRS audits. There is movement within California to persuade the Legislature to adopt safe harbor rules that, if followed, will insulate an employer from a potential EDD worker classification audit with a resulting assessment.

Is safe harbor legislation workable in California? If so, what will it look like? Will the IRS’ safe harbor model work to protect an employer from the EDD?

In this 2-part article we will look at the IRS version of safe harbor and see if its provisions can be adopted in California. If it cannot be, what will work? If safe harbor is not workable, will an amnesty framework be feasible?

IRS Safe Harbor Rules – Section 530 of the Revenue Act of 1978

A Brief History Lesson

The 1970s was not a good time for employers who treated workers as independent contractors. The IRS was very aggressive and embarked upon quite a campaign to convert independent contractors to employees. Congress felt that legislation needed to be enacted in order not to punish today working relationships that were long-standing past relationships. To this end Congress enacted a provision to the Revenue Act of 1978 setting forth “safe harbor” provisions that would allow these old working relationships to continue. Congress enacted Section 530 (Public Law No. 95-600; Public Law No. 97-248). These laws were only meant to be temporary, and they were to terminate at the end of 1979. Congress extended the legislation through mid 1982. The rules became permanent in 1982 with the enactment of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) (Public Law 97-248).

What does safe harbor mean? Simply put it means that if an employer has a reasonable basis for treating workers as independent contractors, the IRS will honor the worker status and not change it to employer-employee. “Reasonable basis” was what we lawyers call “a term of art.” This means it has a special meaning under special circumstances. In order to determine if an employer has such a reasonable basis three criteria were set forth in the legislation. If any one of those three criteria were met, the employer was given safe harbor.

How does an IRS agent apply or consider safe harbor rules? Most IRS agents will first go through the famous 20-factor test in order to determine if the worker is a true independent contractor. Once the agent concludes that the worker was misclassified, the taxpayer-employer or the representative will then be in a position to argue that the safe harbor rules apply.

Let’s now review these three criteria and, at the same time, see if they will provide workable rules that will govern EDD audits.

Safe Harbor Rule #1

The first safe harbor rule is an employer’s reasonable reliance on a judicial president, published public IRS ruling or a private letter ruling or technical advice decision (determination letter) issued to a specific employer. Federal courts issue decisions from time-to-time that determine worker status. There are many federal courts such as US District Courts, US Circuit Courts, US Court of Federal Claims, US Tax Court, and the US Supreme Court. It is not unreasonable for an employer to rely upon these decisions. A taxpayer can also apply for a private letter ruling.

Unfortunately, these federal decisions are only binding on the EDD if and when the EDD chooses to recognize them. It is not uncommon for a Californian employer to rely upon a federal case or even a private ruling only to have the EDD or an administrative law judge pays no attention to it. So, our employer is whipsawed between the IRS and the EDD. Citing federal cases and rulings to an EDD auditor is frustrating because the auditor will look you in the eye and say, “that’s very nice, but it is not binding on us.”

The Legislature must take this reality into account and pass legislation that clearly states that reliance upon federal authority constitutes a reasonable basis for treating a worker as an independent contractor. This has to be one of the cornerstones of any California legislation.

The EDD currently issues worker status rulings but they are few and far between and rarely favorable to independent contractor status.

Safe Harbor Rule #2

A past IRS audit even if that audit did not involve worker status determinations. If there were no assessments attributable to worker status, the employer has been given a pass. This is not as clear as it first appears to be. If during the IRS audit the employer treated certain workers as W2 wage earners, and subsequently changed their status to independent contractors the prior IRS audit doesn’t count. This is essentially happened in a 2018 California Supreme Court decision in Dynamex. (Please see earlier articles.) Dynamex treated truck drivers as W2 wage earners and then changed them to contractors. The business model of Dynamex remained essentially the same.

This safe harbor rule is not workable in California. I have seen instances where the EDD has audited an employer in the past and issued a “no change.” Several years later, that same employer was again audited and the contractors were found to be employees. This does not happen very often.

The more important player in this scenario is the Franchise Tax Board (FTB). The FTB conducts income tax examinations. It examines conventional categories such as income, deductible expenses, and piggy-backs on prior IRS audits. In other words, the FTB conducts a “me too” audit. However, the FTB does not examine worker status issues. That is left to the EDD. Therefore, the rules that apply to the IRS cannot apply to the FTB.

In order for the FTB to function in the same way as the IRS, the EDD would have to be either integrated into the FTB or join in an FTB audit to determine proper worker status. At this point in time, the costs involved for any type of integration may be prohibitive.

Safe Harbor Rule #3

Reliance upon long-standing recognized practice of a significant segment of the employer’s industry. Just try arguing industry standards with a typical EDD auditor. They don’t want to hear it or take this into consideration. A few years ago I represented a high-end used car dealership that treated its mechanics as independent contractors. I pointed out to the auditor that virtually every used car dealership in the community functioned on the same model. The argument went in one ear of the auditor and out the other ear without stopping for consideration in between. The same is true with pet groomers, dog walkers, spas, nail salons, you name it. In one federal case the 9th Circuit agreed with the taxpayer after producing witnesses of several dozen similar occupations. This might work at the federal level where Section 530 has been in good standing for 40 years, but I do not believe an ALJ will allow such lengthy and cumulative testimony.

Safe Harbor Rule #4

Any other reasonable basis for not treating a worker as an employee. Duh, no comment!


I do not believe that the California Legislature can adopt Section 530 in its current form to provide EDD safe harbor legislation. There is really only one safe harbor rule that is partially workable with the EDD. An entirely new set of standards must be developed and thoroughly vetted before it is enacted. I believe that the only real practical solution is going to be some form of amnesty. We will discuss this in Part 2.


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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