Lawyer Monthly - June 2022

81 JUN 2022 | WWW.LAWYER-MONTHLY.COM EXPERT INSIGHT sampling is conducted, reclassification is improper and lacks support. If the auditor did not go far enough in taking a representative sample or there is no sampling at all, more interviews and diligence is warranted by the auditor under the employer’s Bill of Rights. What to Expect During the 30 Days Post Audit Depending on the outcome of your EDD audit, the aftermath will vary. The auditor may find violations, underpayments, or an overpayment of taxes. A determination of underpayment of taxes will warrant your business to pay overdue taxes with interest and penalties. Payment will be due 30 days from when the assessment is finalised; otherwise, a penalty will be added. The taxpayer’s appeal rights are limited and time-sensitive, so the 30 days post-audit are crucial. Within 30 days from the Notice of Assessment, you must either pay the amount fined or file an appeal. Any negative findings of the EDD can have serious repercussions for the future of your business. Even if you can “afford” the penalties, you may have to change how your business operates. Aside from the penalties that will accompany the EDD’s determination, the way your business operates will need some serious revisions. Changing the way your business operates comes in conjunction with abiding by a whole new set of laws and regulations that you did not have to previously follow. We have seen over the years that these changes are not easy to implement as they include an analysis of various wage and hour laws and management practices. Plus, most legitimate contractors maintain significant control over how and when they perform their tasks, negotiate mutually agreeable contract terms, are free to complete work without control by another, and would not agree to any other type of business arrangement. Why Do You Need Legal Counsel by Your Side? During an EDD audit, consulting with legal counsel will provide you with a The EDD’s Inspection Powers Are Limited by “Relevance” The law allowing for the inspection of an employer’s books and records gives the EDD the right to inspect “ordinary and necessary” records relating to workers, whether these workers are employees or outside contractors. Intrusive audits can easily get out of hand — this can occur if you deal with an inexperienced auditor who goes into a phishing expedition not necessarily with a clear purpose but to see what might be discovered. Other times, the auditor insists on inspecting each and every document listed on the EDD’s Minimum Required Records list, even when they are not relevant to the audit, or are duplicative of other requests . As interpreted by the US Supreme Court and the California Supreme Court, the information sought must be “reasonably relevant to the intended investigation.” Notably, the usual statute of limitations for EDD audits is three years, but on certain occasions may be extended up to eight years if the auditor finds “bad conduct” on behalf of the business. This bad conduct is identified as failing to pay payroll taxes on time without good cause. In the case of fraud or investigation for evading taxes, there is no statute of limitations. Employers Are Entitled to an Objective Audit For years, improper audit techniques on the part of EDD have resulted in misclassification findings while creating chaos for businesses. It is the responsibility of the auditor to take a proper representative sample of workers and their functions before considering reclassifying an entire group of workers as employees rather than independent contractors. When an inadequate better idea of your company’s rights and facilitate communication with the EDD. Legal counsel will also help you build a solid case defending your business practices, as audits can be fast-paced and have serious consequences. Competent legal counsel can spot inadequate audit methods and fight the auditor’s unreasonable expectations. This is probably the most crucial reason to have proper legal advice and representation to protect your business model, which you may be forced to change as a result of an audit. Finally, legal advice is key during the transition from the contractor to an employee model. Be sure to view this article on the Lawyer Monthly website, where a number of useful sources are listed. About Elnaz Masoom Elnaz Masoom is the founder and managing attorney of Masoom Law PC, an employment and litigation law firm based in San Jose, California. Elnaz has practiced employment and business law exclusively since 2010 and has assisted organisations across a multitude of different fields and with widely varied business strategies, cultures and product offerings. With an interdisciplinary understanding of business organisation, management practices and labour laws, Elnaz has successfully represented businesses and employers during employment tax audits up to and including administrative hearings and appeals. Random audits are rare.

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