ASK THE EDD ATTORNEY – WERE YOU REALLY AN INDEPENDENT CONTRACTOR? HOW TO BE PREPARED FOR THE WORKER INTERVIEW QUESTIONNAIRE – PART 3
By Robert S. Schriebman
July 7, 2016
If you are an employer who treats workers as independent contractors, whether properly or improperly, you are at risk for an EDD audit and a possibly an IRS audit as well. This article will deal solely with your exposure to an EDD audit. Many IRS worker-status audits piggy-back onto completed EDD audits.
If you are audited by the EDD you can expect the EDD auditor to contact the workers that you treated as independent contractors. This contact can be done in several ways. It is common fr the EDD auditor to ask for contact information such as a worker’s address and telephone number. Most likely the auditor will call the worker and conduct a telephone interview. Sometimes the EDD auditor will send out a postcard asking the worker to contact the auditor. It is a common practice however, for the EDD auditor to send out a questionnaire asking the worker to answer the questions and return the questionnaire to the auditor. This method is gaining in popularity with EDD auditors. This is why I am writing this series of articles to alert you to the questions that will be asked. If there is something that you are currently doing that may expose you to a risk of an EDD assessment, this article may help you correct your ways. What may help you avoid or minimize an EDD assessment may also help you minimize your exposure to an IRS audit.
This is Part 3 of a several part series of articles dealing with EDD’s probing questions set forth in the Worker Interview Questionnaire to determine if the worker was truly an independent contractor. The EDD obtains the list of workers from any one or more of several sources such as 1099s, Employer Interviews, General Ledgers, or referrals from other interviewed workers.
At this point in our discussion it is very important that you are made aware of certain ground rules regarding the EDD’s attempt to solicit information from current and former workers. First, it is illegal for an employer or anyone else to advise a potential interviewee not to answer these questions. This can lead to criminal prosecution. Never tell anyone that he or she should refuse to talk to the EDD. Former workers as well as current workers are witnesses in an EDD audit. A witness does not belong to anyone. Second, no one is legally obligated to answer any questions unless ordered to do so by a judge.
If you are being interviewed by the EDD with regard to the questions presented in this article, be sensitive to any EDD caller who is trying to get you or your workers to answer any questions in a specific way. Always answer any question honestly and in your own words. Do not let anyone put words in anyone’s mouth.
Questions Relating To Initial Employee/Contractor Status Continued
The EDD has written a questionnaire structured in such a way as to conclude that just about every service-providing independent contractor should be treated as a W2 wage earner. While the following questions seem to be straight-forward, they play into an agenda that is designed to have an auditor conclude that the independent contractor has been misclassified.
Were you provided any training?
Bob’s comment: Workers who are unskilled such as fruit pickers are generally classified by the EDD as common law employees. On the other hand, workers who are educated and licensed professionals such as physicians and attorneys may be acknowledged by the EDD to be independent contractors. If a worker is required training by the employer, the EDD assumed a low skill level as well as control by the employer. In these instances the EDD will insist that the worker be treated as a common law employee. Off site training by a third party creates a gray area. In that event the EDD will look for other factors showing control as set forth in the questions listed below.
Were you paid during the period in which you received training? If yes, how much?
Bob’s comment: Compensation paid while undergoing training is a clear sign of control by the employer. With regard to the factor of training itself, see the above commentary.
Were you provided with any supplies, tools, and/or equipment? If yes, what specifically?
Bob’s comment: I see this come up in almost every EDD audit. If the employer provides the necessary tools and equipment for the job, it is a sure thing that the EDD will conclude that the worker is a common law employee. I recently had a matter where the employer was in the business of repairing and maintaining cell phone transmission towers. The employer provided the vans, but mobile carriers provided their own dedicated tools and specialized equipment for the repair projects. The workers were required to wear uniforms provided by the employer. The EDD reclassified the independent contractor workers as common law employees because of the vans and uniforms provided. By way of another example, gardeners provide their own trucks, mowers, blowers, etc. This is why the EDD usually treats gardeners as independent contractors. Handymen, on the other hand, who own their own trucks as well as their own tools and equipment, are usually found by the EDD to be common law employees – go figure.
Did you have to pay for the use of facilities and/or equipment? If yes, how much and how often?
Bob’s comment: This question has a lot of the same factors as the above answer relating to tools and equipment. Workers who work from home usually bear the cost of rent or a mortgage as well as utility bills. Most own their own computer related equipment. It would seem clear that these individuals should be treated as independent contractors by the EDD. Don’t bet on it; you will lose.
Were you engaged to perform services on a continuous basis or on per project basis?
Bob’s comment: Workers who are paid on a project-by-project basis or are paid piece work are more likely to be treated by the EDD as independent contractors. However, we have seen situations where this is not always the case. For example, entertainment production companies who are hired to produce an end result project such as a highly technical exhibit at a trade show must engage the services of many different talents. Most of these subcontractors have their own businesses and take on several projects at a time. It would seem clear that these specialists should be classified as independent contractors as they have their own independent business identity. However, the EDD wants to treat these subcontractors as the employees of the production company. What is the EDD thinking? Sometimes the project can only be done on the employer’s premises such as machine shop piece work. Even though these machinists are paid for each completed project the EDD wants them to be employees of the owner of the machine shop.
Were you supervised by anyone? If yes, by whom? What type of instructions did you receive from the person who supervised your services?
Bob’s comment: Of all of the questions set forth in this series of articles, perhaps no other factor is of such key importance and no other factor so misunderstood by the public and the EDD alike. EDD auditors are trained to conclude that any supervision at all automatically means an employer-employee relationship. Independent contractors cannot be supervised according to the EDD. What the EDD fails to acknowledge is that there is an element of supervision and control to be found in virtually every business relationship. In the government everyone has a boss. In the business service world every customer has a right to put his or her two cents into the job.
There is an element of control present in most business relationships. But the “control” that requires a worker to be treated as an employee under CUIC § 621(b) is control over the details of the job as opposed to the control of the outcome.
A principal beneficially interested in work being performed has the right to retain limited controls over the manner and means of the performance of the work for limited purposes without thereby becoming an employer. See Western Indemnity Company v. Pillsbury (1916), 172 Cal. 807 at page 811; Bohannon v. McClatchy Publishing Co. (1936), 16 Cal. App. 2d 188 at page 199.
“Complete abnegation of control is not essential to the establishment of a status of independent contractor. Where one person is performing work in which another is beneficially interested, the latter may exercise over the former a certain measure of control which looks to the results to be obtained without creating the relationship of employer-employee.” Bates v. Industrial Accident Commission (1958) 156 Cal. App. 2d 713, Tax Decisions Nos. 87, 115, 148, 260, 658, 1176, 1858, 1972 and 2167.
In an employer-employee relationship the principal must have the right to control not only the result of the employee’s work but also the means and method used to accomplish that result. Packard v. Commissioner, 63 T.C. 621 (1975). If control may be exercised only as the result of the work and not the means by which it is accomplished, and independent contractor relationship is established. Tieberg, 2 Cal. 3d at 946 -947. As the Ayala Court explained, “[w]hether a right of control exists may be measured by asking ‘whether or not, if instructions were given, they would have to be obeyed’ on pain of at-will ‘discharge for disobedience’.”
An individual is considered an employee if the “employer” can control WHAT that person can do, HOW they do it, and WHEN they do it.
Were reports required? If yes what kind and how often?
Bob’s comment: If a worker is required to produce regular reports, it is an indication of the type of control that is exercised by a boss as opposed to a business operation that is essentially a third-party logistics coordinator. In large and complex projects such as the construction of a high rise building or a motion picture production, periodic reports are necessary and often required by building codes or the reality of producing a multi-disciplined entertainment project.
Were meetings held? If yes, where and how often? Who conducted the meetings and were they required?
Bob’s comment: The EDD loves this factor. Auditors are trained to conclude that the requirement of meetings automatically proves an employer-employee relationship. However, I have discussed above large and complex projects require periodic and milestone meetings. Take for example, a NASA space project where many skills and disciplines are necessary. Is the EDD going to tell NASA that the meetings it requires with major aerospace companies automatically makes those companies NASA employees?
As you can see by the discussions above it is often “heads I win – tails you lose” at the EDD. There is absolutely no simple and best formula for coming out ahead in an EDD audit.
There are many more questions contained in the EDD Worker Interview Questionnaire. While some questions appear to be simple and straight-forward, other questions carry great potential harm and risk of assessment. In our next article, we will continue our review of the Worker Interview Questionnaire.
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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