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Law Office of Robert S. Schriebman
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Rolling Hills Estates, CA 90274

Phone: 310-997-0342
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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.

In this 2nd part we will briefly review why the long-standing IRS safe harbor rule-structure will not work for EDD audits. We will then look at the feasibility of an EDD amnesty program. Without truly creative legislation, an amnesty program may be the answer.

Why IRS Safe Harbor Rules Won’t Work with the EDD

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).

The IRS safe harbor rules consist of four criteria. If any one of these criteria is met, the employer will be allowed to conduct business as usual. Let’s take a brief look at these rules and why they may not be helpful in an EDD worker status audit.

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. Of the four criterion of Section 530 “Safe Harbor” legislation this is the only one workable for EDD audits. We need specific legislation that clearly states that the EDD will be governed by federal determinations such as public and private rulings, determination letters, and federal court decisions at all levels. This must be the cornerstone of any meaningful California safe harbor legislation.

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. Because of the structure of the current California system of taxation, the FTB does not get into worker status determinations. On the other hand an IRS income tax audit can also become a payroll tax audit. For the last several years the IRS has conducted random payroll tax audits by employment tax specialists. These specialists do not review the usual categories of income tax examinations. This criterion is just unworkable when applied to the EDD.

Safe Harbor Rule #3

Reliance upon long-standing recognized practice of a significant segment of the employer’s industry. EDD auditors, for the most part, pay no attention to what other business do or do not do. No one I know ever won an EDD audit using this argument by itself.

Safe Harbor Rule #4

Any other reasonable basis for not treating a worker as an employee. This criterion is in reality empty legislation. There are no rules and there is no significant federal case law dealing with miscellaneous reasonable causes.

Is a Workable Amnesty Program Feasible?

California taxation is no stranger to amnesty legislation. The FTB has initiated amnesty programs in the past with success. Amnesty programs have centered around the filing of past due returns, granting relief for out-of-state corporations and partnerships, and limited domestic corporation amnesty. Most programs granting amnesty for the filing of these returns, offered taxpayers reduced penalties and interest. The EDD can certainly adopt a model along the same lines used by the FTB but this amnesty program will only provide relief centering around compliance. It will have nothing to do with worker status issues.

Any successful EDD amnesty for worker status matters has to take into consideration the future. There must be a quid-pro-quo between assessments for past violations in exchange for the employer’s agreement to treat misclassified workers as employees at some future date. Amnesty should not mean total forgiveness or a free ride.

The model for this type of amnesty might well be the EDD’s current Settlement Program. If you take advantage of this program, the EDD will reduce an audit assessment, but you must agree to treat misclassified workers as W2 wage earners at a date certain in the future.

What would this type of amnesty look like? I have a proposal:

  • The amnesty program will be in effect for six months from the date of enactment, or promulgation.
  • Employers can take advantage of the amnesty program by filing an application for amnesty.
  • If an employer is audited by the EDD, that employer can request amnesty. Upon approval of the application, the audit will not go back more than the typical current three-year (12 quarters) audit.
  • The usual list of audit penalties, including the Negligence Penalty would not be assessed.
  • The fraud penalties pursuant to CUIC §§ 1128 (a) and (b) would not be applied.
  • The UI, DI, and ETT rates would total 1.5% of the employer’s wages including 1099 compensation. This rate would be allowed only for employers who filed quarterly payroll returns during the audit periods in issue. If no returns were filed the rate would be 3%.
  • The PIT would be totally abated.
  • The Worker Information Return Penalties (CUIC §§ 13052 13052.5) would not be assessed.
  • No interest would be assessed.
  • The EDD would grant employers generous installment payment arrangements for the payments of deficiencies resulting from taking advantage of the amnesty program. Installment payment arrangements up to 36 months would be granted upon application and the furnishing of the usual financial statement and other required disclosures.

In return for these amnesty concessions, the employer would agree to treat all workers as W2 wage earners upon a date certain established by the EDD.


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.


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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