I Got Audited by Unemployment

The payroll tax audit ensures workers are properly classifed, payments made to employees are properly reported, and protects workers’ rights to receive benefits. If you fail an EDD or California Labor Commissioner audit, your company could be liable to face penalties and interest on the owed taxes. Penalties and fines include a percentage of unpaid taxes, set dollar amounts for each case of unreported employees or independent contractors.

The California Labor Commissioner and EDD wage auditors conduct investigation, and audits against employers and bring a civil action against employers for violating wage law. Auditors are targeting more and more California businesses as time goes on. So when the Employment Development Department (EDD) notifies a company owner that an audit is soon to begin, the taxpayer grows understandably nervous. Being caught amid an EDD investigation creates high stress as businesses scramble to organize their records and ensure that they pay taxes properly.

EDD audits have become the norm in California, as AB-5 altered the way the EDD classifies its workers. Many companies have struggled to correctly classify their employees and independent contractors, and it can sometimes be difficult to differentiate between them.

While some EDD audits occur randomly, many are based on information the EDD receives about certain businesses. For example, an independent contractor sometimes files for unemployment insurance benefits (UI), and that specific action triggers an audit. Whatever action it is that gets on the EDD’s radar, when its audit begins, the chosen company must quickly learn to deal with it.

Many business owners in California are wary of being audited, and the number one question they ask is: what triggers an EDD audit?

In this article, our Labor Commissioner attorneys for business and employers will detail five of the most common reasons that the EDD audits companies and explain what makes these triggers so important to the EDD and companies across California.

What Are Claims Based on Wages?

When workers file for unemployment in California, they are required to fill out a lot of paperwork. Workers, for example, must remember to write down the names of all the businesses they worked for over the past year and sometimes the past two or three years.

Many workers in this “gig” economy list down their contract jobs, meaning jobs they have worked as independent contractors and not employees. However, independent contractors in California cannot collect unemployment benefits.

Companies are increasingly wary of hiring contractors because the amount of claims filed against California companies increases as they hire these workers. When a contract worker files for UI benefits in California without a record of working as an employee, the Office of Unemployment Insurance obstructs the applicant’s claims.

These problematic claims are one of the most significant triggers for audits in California when the EDD sees evidence that an independent contractor files for UI benefits, they often trace the claim to the company and audit the business.

With so many workers who have worked as independent contractors filing for unemployment, more and more companies are audited.

Let this first trigger on the list serve as a reminder to companies: develop and maintain a proper working relationship with all contract workers. Ensure that the company is compliant in classifying employees and working with contract workers. Additionally, ensure to hold onto all employment records because companies need evidence of their employee-employer relationships.

Why Are Industry-Focused Claims Important?

Sometimes, California chooses specific industries to focus its audit processes on. When the EDD decides to monitor a particular industry, it is clear that the companies within that industry see a rise in audits and must contend with them.

California’s Employment Development Department (EDD) is famous for targeting certain businesses that have recently reclassified their workforces. In recent years, new state laws have forced many businesses to recategorize their workers, changing worker statuses from that independent contractors to employees. When the EDD finds a business that misclassifies its workers, the agency sometimes begins to target the geographical area, seeking knowledge about other local companies that may also be defying payroll protocols.

Take this as a tip for business owners: if a company nearby is audited by the EDD, the agency may also be surveying other businesses in the area. It does not take long for an EDD investigation to turn into a full-fledged audit, so local businesses should stay alert. In addition, we recommend continually organizing and filing all tax and payroll documents and keeping a trusted tax attorney on hand at all times. As stated, EDD audits of businesses in California are on the rise, and currently, the EDD shows no sign of letting up.

What is an Obstructed Unemployment Claim?

Many California companies rely on independent contractors for at least part of their workload. However, it has been difficult for businesses to keep up with the state’s changing laws regarding contractors. As a result, many companies are still unsure how to correctly classify their workers.

Most companies have received unemployment claims from former independent contract workers. Even though independent contractors in California cannot receive UI benefits, they often file for them, not realizing they are independent workers. However, this error on the workers’ behalf places companies at risk of being audited. Additionally, some workers either try to collect UI benefits or file on purpose, knowing they should not receive payment.

In some scenarios, the company sends the claim form back to the state, clearly noting that the company did not classify the worker filing for unemployment as a W2. California will instantly deny the worker benefits in this case, and the case is closed.

Unfortunately, some workers appeal their unemployment claims. Even though they are in the wrong, they need money for rent, children’s schooling, or groceries. Sometimes, they cannot afford the necessities, and they see a UI claim as a way to support themselves as they search for a new job. Whatever the reason, these workers can file petitions and call the UI representative working on their claim.

The biggest headache for companies occurs at this juncture. Why? The disgruntled worker tells the unemployment representative all about their position. They detail what they did for the company, when they did it and how they imagined their status. For example, a worker challenging their unemployment claim rejection might attest that they were asked to attend meetings and training sessions and “felt, at all times, like an employee.”

A company-wide audit is surely in the cards if a worker can prove that their employer treated them as an employee and not an independent contractor. However, even if the worker can show that they may have been considered an employee in some manner, or at some times, the EDD will probably audit the company.

If the company has nothing to hide, they will not mind that the worker shares many details about their work experience. The problem is that many companies in California still struggle to correctly classify their workers, creating numerous problems for even the most well-meaning businesses.

Why is the Number of Obstructed Claims Important?

Many businesses use independent contractors for specific gigs, utilizing the person’s particular skills or knowledge of a particular subject. Then, when the gig is over, the contractors move on to other companies where their skills are also valued.

This routine creates companies with high contractor turnover. Additionally, the business usually terminates the contract with the worker. Most businesses’ tendency to end their relationships with independent contractors places the companies at risk of being audited.

How do these concepts relate to each other? Let’s say a business uses 50 independent contractors in one fiscal year. Half of these workers file for UI benefits after the company terminates them. A high number of unemployment claims means many obstructed unemployment claims. When a claim is “obstructed,” the business responds to the UI claim by stating that the worker was not an employee and is ineligible to collect unemployment.

The EDD notices when the number of a California company’s obstructed claims is high. California uses specific software to oversee its UI program, and the system notices the high number of problematic claims and flags the company for an audit.

Sometimes, these conditions are impossible to prevent. However, some companies have reduced their use of independent contractors or completely eradicated it to avoid a time-consuming and possibly costly audit.

What is Significant About Discontented Contractors?

Businesspeople may have noticed ride-share companies such as Lyft and Uber and meal-delivery companies such as Doordash and Grubhub in the news as of late. Labor law has emerged as one of the most complex and debated topics of recent times. Additionally, the question of how to classify “gig workers” continues to challenge lawyers, scholars, and company heads like never before.

As the public learns more about labor law and our workforce transforms to incorporate more and more independent contractors, many workers become dissatisfied. Independent contractors complain about unfair treatment, unjust payment systems, an inability to progress, and more. Truthfully, many companies do mistreat independent contractors, and many other businesses are unsure how they can change their business models to help the situation improve.

For example, many drivers for the food-delivery service Grubhub have accused the company of treating them as employees but classifying them as independent contractors. The employees say that this classification robs them of wages. At the same time, the company has argued that Grubhub workers sign up to be contract workers, enjoy the freedom of being contract workers, and do not deserve more money.

Many class action claims continue against gig-economy companies, from Lyft to Doordash. As such, some law firms place ads on social media sites looking for workers who want to be involved in class action lawsuits.

There are many reasons that gig workers become upset with their job conditions. They call for more money, better treatment, and fairer classifications. In addition, the EDD has seen evidence of some workers attempting to provoke investigations into certain companies that they feel wronged them and their coworkers.

Ultimately, all businesses should treat their workers equitably, regardless of their status. The problem is that our new and evolving gig economy challenges both companies and gig workers. Until each party figures out how to meet the rising demand for services with fair conditions for all parties, the situation will not improve.

Why Should I Contact an Experienced Attorney?

At Nakase Wade, our tax attorneys understand how difficult audits are for businesses. Our knowledge of California employment law and experience working with diverse companies helps us provide our clients with the answers they need.

Whatever the conditions triggered the audit, we will rely on our expertise and understanding to get you through this difficult period and back to business as usual.

Suppose your company is dealing with an audit. If you have questions about a future audit or are unsure if you classify your workers correctly, contact Nakase Wade for a free consultation today.

Most recent blogs:

How to Calculate FTE

To calculate full-time equivalent (FTE), divide an employee's scheduled hours by the employer's hours for a full-time workweek.

Weingarten Rights

Understand Weingarten Rights: the right to have a representative during investigatory interviews as protected under the NLRA. Learn how these rights empower employees and safeguard their interests.

Can you get fired for using sick time

Understand your rights under California's Sick Leave Statute, protecting employees who need to take time off due to illness. Learn how legal protections safeguard against wrongful termination for using sick leave.

Insubordination in the workplace: 7 ways to manage

Navigate the challenges of insubordination in the workplace with effective strategies for managing difficult employee behaviors and fostering a positive work environment. Learn the importance of distinguishing between disagreement and insubordination for organizational health.

Diversity, Equity, and Inclusion

Explore the importance of diversity, equity, and inclusion in today's society. Learn how these values shape better, more inclusive communities and workplaces.

Human Resources (HR): Meaning and Responsibilities

Human Resources plays a pivotal role in recruiting, training, and managing employee relations, shaping a company's workforce for success. Discover the evolving responsibilities and strategic importance of HR in modern business dynamics.

10 Alternatives to Employee of the Month Awards

Discover the limitations of traditional Employee of the Month awards and explore ten innovative alternatives. Boost morale and recognition in your workplace with these creative solutions.

Learning To Learn

Discover the essential skills for modern leaders to thrive: learning to learn, adapting to change, and mastering new capabilities. Unveil strategies for personal growth and overcoming reluctance to embrace new challenges.

Gen Z Years, Age Range, Meaning, & Characteristics

Explore the defining years, age range, and unique characteristics of Generation Z, shaped by pivotal events like the pandemic and the digital age. Uncover insights into Gen Z's diverse demographics, digital nativity, and shifting social norms.

Quid Pro Quo Sexual Harassment and Law

Explore the origin and evolution of "quid pro quo," a principle that embodies mutual exchange in legal, political, and everyday contexts. Learn how it differentiates from bribery and shapes contracts, policies, and workplace ethics.

What is Sabbatical Leave? It’s the best kept secret in HR

Unlock the power of sabbatical leave to boost employee motivation and retention in a stagnating labor market. Learn how a planned break can give your company a competitive edge in attracting top talent.

At-Will Doctrine

Explore the at-will employment doctrine's impact on job security and termination rights in the US, highlighting key legal exceptions. Understand how at-will affects both employers and employees, with insights into valid termination causes and protections.

7-Day Work Week

Discover your rights under the 7-day work week laws, including eligibility for overtime and restrictions in some states. Learn about federal and state regulations, and when to seek legal action for wage violations.

What Happens When Employers Make False Promises

A false promise happens when a employer or hiring manager makes a statement on something the company can fulfill or avoid, but cannot or does not want to follow through with. You may bring a fraudulent inducement lawsuit against the employer for false promises for the harm you have suffered.

What to do if your employer doesn’t pay you?

If your employer failed to pay you for all of your work hours, a court could award you back pay. When your employer doesn't pay you, you should consult with an employment lawyer.

What to Do At a Job Fair to Impress Employers and Get the Interview

This article provides guidelines for job seekers to follow to ensure they are successful at career fairs. There are many things you can do to improve your chances of getting hired at a job fair.

Emotional Duress: How to Avoid

Emotional duress is an extremely unpleasant emotional response from someone else's conduct or actions. You can sue for money damages for anguish, or humiliation. This is known as emotional harm or mental anguish.

California Termination Laws

In California, an employee's employment may be terminated at the will of either party. Employees who are terminated must be paid all wages due at the time of termination.

Late Paycheck Penalty

When your paycheck is late, the employer has to pay a penalty of one day's pay for each day that the paycheck is late, up to a maximum of thirty days.

How To Calm Down Before An Interview

12 simple ways on to calm your nerves before and during an interview is to use relaxation techniques. Before an interview, imagine how you would ideally want to present yourself in the interview and then visualize yourself in the interview.

How to Include a Referral in Your Cover Letter?

Your cover letter should start with mentioning the referral's name because it instantly qualifies you. A referral cover letter helps you to define the mutual contact that has referred you for the job.

Best Job Options For Someone With A Criminal Record

This article identifies jobs for someone with a criminal record; examples are: delivery service, freelance designer, truck driver, chef, etc.

What are Weingarten Rights?

Weingarten rights guarantee an employee the right to Union representation during an investigatory interview by their employer.

What Is Job Rotation: Advantages And Disadvantages

Job rotation is the practice of moving employees between roles or positions in a company. Job rotation temporarily assigns employees to other roles to teach them new skills, learn about other functions within the team, and develop relationships across the business.

What is the meaning of Pay Rate?

Pay rate is the total money a worker receives during regular working hours, excluding overtime. In order words, pay rate, also called salary rate or compensation rate, is the wage amount paid to an employee per hour, per day, or per task completed.

How can part-time or temporary work help you explore career choices?

Part-time or temporary work offers a practical way to explore exploring and understanding what career you want. Temporary work or part time work gives you the opportunity to discover your strengths, preferences, and passions without the long-term commitment required by full-time work.

Understanding Incentive Pay: Definition, Types, and Benefits Explained

Learn how different forms of incentive pay, from bonuses to commission, can drive business success and enhance workforce engagement. Discover the key benefits and best practices of implementing incentive pay strategies in your organization, essential for attracting and retaining top talent.

What Happens When You Get Audited EDD

Gain clarity on the EDD audit process with our comprehensive guide, detailing what happens when you get audited by the Employment Development Department, including steps to prepare and respond effectively." "Navigate the complexities of an EDD audit smoothly with our expert insights, exploring the implications, documentation requirements, and key strategies to manage the auditing process efficiently and confidently.

What is FMLA Intermittent Leave of Absence?

An employee uses their 12 weeks of unpaid leave intermittently under FMLA Intermittent leave, taking it off and on, unlike continuous family medical leave or a reduced work schedule. FMLA leave can be taken intermittently by employees – in separate blocks of time for a single qualifying reason – or on a reduced leave schedule, which involves reducing the employee's usual weekly or daily work schedule, when it is medically necessary.

What is a statutory employee?

A statutory employee is a salesperson, either traveling full-time or based in a city, who represents you and submits orders from wholesalers, retailers, contractors, or operators of establishments such as hotels and restaurants. The merchandise sold should be for resale, or the supplies should be for use in the buyer's business operation. For you, the principal business activity performed must be the salesperson's work.