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What's my financial liability if EDD finds ICs have been misclassified and are employees, and payment to ICs averages $70k/year?
Anonymous4 views6 answers
Independent Contractor payments have averaged $70k/year. In the event of an EDD investigation and audit that determines they are employees, what is my likely financial liability? I appealed a similar finding by the EDD about 5 years ago, and the judge then found in my favor, determining that my workers are contractors, not employees. The EDD dropped the audit. I have been operating based on this decision, but have recently been advised that the EDD could determine against me in the future, and I want to know my financial risk.
Each case must be decided on its own facts. The arrangement you had previously may have changed since then.
The financial liability is significant. Not only are you potentially liable for the tax withholdings which should have been deducted from each affected employees' check, including social security contributions and unemployment reserve payments, there are penalties which can be added to each violation, as well. In addition, the EDD works with the Labor Commissi0oner and there could be penalties if workers compensation insurance was not provided for each employee and there may be other labor law violations (think break and overtime laws) which may be enforced. added to wage and penalties due. There is also a statutory penalty under the labor code for such violations. I have seen employers go out of business because of these issues. I don't mean to scare you but you asked.
A close member of my family had issues with the EDD and the penalties and interest for misclassification could be severe, not only with payroll tax withholdings but also with Social Security. The State is much more difficult to negotiate with then the federal government on these types of issues. I suggest that you talk to a lawyer immediately and maybe have the lawyer negotiate with the EDD on your behalf, if it gets to that point. It would be difficult at this stage to give you an analysis on what your total liability would be at this stage. Best of luck.
A prior determination might allow you to avoid penalties for willful misclassification, but it would not shield you against all the wage and hour claims that would come as a result. Keep in mind that the EDD is not the only boogeyman you have to watch out for. A single disgruntled former worker can bring a collective action and if the attorney is able to state a claim under the Private Attorney General Act, you face substantial penalties for each violation of the Labor Code for each employee, going back one year. Any claim for not allowing breaks and meal periods will go back three to four years.
If you believe you are in a gray area, you should have an audit done by competent employment counsel. These kinds of issues become "bet your company" types of claims. It is better to be proactive and deal with it than to wait and see.
Good luck to you.
I agree with my colleagues. I have handled several matters for small businesses with employees that were classified as independent contractors and then subject to an audit by the EDD as a result of misclassification. The EDD errs on the side of classifying everyone as an employee and they are incredibly difficult to work with when trying to resolve issues. Penalties, interest and tax consequences are severe. You should consult with an experienced employment attorney in your area to determine your options going forward.
I agree with the answers given and you are going to want to consult counsel to help guide you through this issue. The EDD answer given five years ago will not be given any deference by the auditor if you are subject to another audit. They will make a determination separately. However, relying on a past decision or consulting the advice of counsel, can be used as a positive factors to help you mitigate any penalties. It will not mitigate all the liability associated with the audit though. If the auditor finds that your independent contractors are employees, then you are stuck and will have to fight it through appeal.
If you are truly worried about this, I would recommend having someone review your current business operations and the way that you have your independent contractors set up within your business. Experienced counsel can review your independent contractor agreements and make recommendations based on your situation that will help minimize your liability. There's no 100% sure fire to prevent an EDD audit, but taking certain steps will significantly reduce the chance of assessment if you are audited. Given the amount you are paying in contract labor, I think this would be a good investment for you.
Consult with an employment law attorney to analyze whether your workers are employees or independent contractors. The analysis depends on their duties and the amount of control you have over their work. If it is determined that they are employees, you should learn what is required of you so that you don't get sued or charged with penalties, taxes, etc. You may be able to receive consultation via phone or in office for $300.00 or less.
