One of the big red flags that can trigger an EDD audit is when a former worker files for unemployment. This type of audit occurs when the California Employment Development Department (EDD) determines that a business has classified a worker as an independent contractor instead of an employee. You may have always seen that individual as a contractor. But the application for unemployment, even when filed by an independent contractor, is a presumption that the contractor may have been an employee because unemployment is only open to employees.
Here’s what to expect if a former contractor of yours files for unemployment:
- Representatives from several agencies, including the Department of Labor, EDD and Workers Compensation, can be sent to your work site to interview workers and determine if they are being treated as employees. They will perform on-site interviews of the workers, asking the type of work they perform, how long they have been performing it, how they are paid, when they are paid, etc.
- You will then receive an Inquiry Regarding Records notice from the EDD. This means your business has been selected for an audit. This audit specifically targets the payroll taxes. When you receive this inquiry notice, it’s best to contact a tax attorney, preferably one who has experience with EDD audits. The attorney should advise you to gather your records and other relevant documents in order.
- The most common records the EDD requests during an audit are general employment questionnaire, payroll records, federal income tax return, bank statements, wage information for particular time frames, and employee registers.
When it comes to classifying a worker as an employee, there is typically control by the business owner on the employee’s affairs. As such, if you want to clearly demonstrate the individual filing for unemployment was not an employee, you will have the burden of proof. For example, you may need to show that you did not ask the contractor to do certain tasks or abide by rules that an employee would do. These include working certain days and times, require them to attend company meetings or trainings, or if you did not want them working for other companies.
EDD audits can be overwhelming, especially when they involve a former employee or independent contractor. Don’t try to navigate the waters yourself. The best thing you can do to protect your business is speak to a tax attorney with experience in EDD audits.
Allison Soares is a partner and tax attorney at Vanst Law. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.