A problematic issue for California companies in the case of employee misclassifications is that the Employment Development Department (EDD) has been auditing employers who incorrectly categorize their workers as independent contractors. The result of an EDD’s determination that the employer had indeed improperly classified workers as independent contractors is that the employer has to pay back taxes, interest and penalties.
How we help employers prepare for an EDD audit
First, we try to figure out what exactly it was the independent contractor doing? How were they doing it? Was there any control by the employer? Was the control minimal or substantial?
There are many factors that go into the determination. We discuss some of those in other blog posts. Are the services provided by the worker something that is a distinct from the business or are the services core to what the business does? For example, if I’m representing someone who is a plumber, and he or she works as an independent contractor for a plumbing company, that’s not going to look like they’re working as an independent contractor because they’re doing the same type of work that the business is doing.
On the other hand, if I represent a plumber and they bring someone in to do some carpentry work at the plumber’s place of business, that is going to look more like someone is a true, independent contractor, because that is a business that is distinct from the business of the employer or the principal.
Another factor that is frequently considered is who supplies the tools, the instrumentality, things of that nature. Those things are explored not only when you are looking at independent contractor classification in the wage and hour sense, but also get looked at by the EDD. The EDD uses a very similar test that the Labor Commission or the courts would.