ASK THE EDD ATTORNEY – What Important Decisions Are Necessary After The Edd Issues A Notice Of Assessment?
By Robert S. Schriebman
If you are audited by the EDD for treating workers as independent contractors instead as employees you can expect to receive a Notice of Assessment (NA). What are your options after you receive an NA? This article will discuss several of the options available to you as well as the pros and cons of these options.
There are four options available to you after you receive an EDD Notice of Assessment as follows:
- Option No. 1: Pay the Assessment
- Option No. 2: Pay the Assessment and File a Petition to Contest the EDD Assessment before the California Unemployment Insurance Appeals Board (CUIAB)
- Option No. 3: Consider a Settlement of Your Matter with the EDD Settlement Office
- Option No. 4: Hearing and Trial before an Administrative Law Judge
Option No. 1: Pay the Assessment
I am sure you have heard the expression, “You can’t fight City Hall.” Many people believe, unfortunately, that they have no options other than paying the assessment and converting their independent contractors to employees. Paying the assessment in full certainly brings closure to the audit nightmare. The EDD may now be out of your life. You are now at a critical point vis-à-vis the treatment of your workers. If you simply pay the assessment but continue to treat your workers as independent contractors, gambling that you will not be audited again, you may be in for a nasty surprise. Your next audit by the EDD may result in civil fraud penalties or even a criminal tax evasion charge and conviction under new legislation enacted by Governor Brown. For more information see Article No. 95.
Contact a Labor Attorney
If, on the otherhand, you begin to treat your misclassified workers as employees, you may expose yourself to state and federal past labor violations. This could cause you severe penalties and other headaches. You may be required to pay addition fringe benefits such as retroactive retirement plan contributions. I am not a labor lawyer, and I would strongly advise you to seek the services of a competent labor law attorney who specializes in representing employers before the 30-day period to contest the NA expires. You may also wish to contact your retirement plan administrator to determine your exposure.
There is a risk that the IRS may also audit you if you resolve your EDD matter too soon by way of electing not to contest the NA. We recently had a very unpleasant experience with a new client who elected not to contest the NA prior to retaining our office. The time for filing an appeal to the CUIAB had expired. The client never filed quarterly payroll tax returns with either the IRS or EDD. He was making monthly payments to an EDD collector when he received an IRS audit notice to examine many years of non compliance. If one thought the EDD assessment was large, it was small in comparison to the resulting IRS bill not to mention additional assessments for delinquency penalties and interest on both the tax and penalty portions.
Option No. 2: Pay the Assessment and File a Petition to Contest the EDD Assessment before the California Unemployment Insurance Appeals Board (CUIAB)
Most clients can not afford to full pay the EDD assessment. They are hoping for a settlement that will lower the original bill or a hearing before a judge who will rule that their classification of workers as independent contractors is correct. For those who can afford to fully pay the assessment and stop the running of interest, we strongly recommend that you do so. Paying the bill does not prevent you from contesting the assessment. When the assessment is fully paid after a petition is filed that petition is automatically treated as a claim for refund (CUIC § 1179.5). The courts have held that full payment of the taxes, all penalties, and interest must be fully paid before the refund claim conversion is allowed. In the world of tax law redundancy is a good thing, and that is why some practitioners file a separate Claim for Refund even though they have also filed a petition before the CUIAB. It can not hurt to be too careful.
If you are successful in settling your matter under Option No. 3 below, or if you win your ALJ hearing, discussed in Option No. 4 below, you will receive a refund from the EDD plus interest according to law.
Option No. 3: Consider a Settlement of Your Matter with the EDD Settlement Office
The EDD settlement procedures allow for a possible settlement of your matter without the risk or expense of a formal administrative law hearing. Of course, the settlement means that you will have to pay the EDD some money to resolve your matter, but the savings can be substantial. As part of the settlement process you will have to agree to treat the misclassified workers as employees at a date certain in the future. The importance of this aspect of the settlement is that the employee classification is not retroactive. The EDD allows you the benefit of the doubt for your past “transgressions.” This may make it possible for you to avoid labor issues and having to retroactively provide worker fringe benefits.
The EDD settlement process is not fast; it can take more than a year to resolve your matter.
Not all cases are accepted by the EDD Settlement Office, and you may want to contact them in advance to determine if they will entertain a settlement in your matter.
Option No. 4: Hearing and Trial before an Administrative Law Judge
If you believe strongly that you have properly classified your workers as independent contractors, and especially if you have legal authority in your favor, you may elect to have your case heard by an administrative law judge. This option is also available to you if you have previously attempted to resolve your matter with the EDD Settlement Office but you have not reached a satisfactory resolution. I firmly believe that you should be represented by experienced counsel should you decide to have an ALJ hearing. If you lose your ALJ hearing you are allowed to proceed to the Appeals Division of the CUIAB. Of course, if the EDD loses an ALJ hearing the EDD has the same appeal option.
An EDD lawyer, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States.
As a trusted EDD attorney, Robert S. Schriebman has successfully dedicated more than 30 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 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 and 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.