EDD Worker Classification Attorney in Bakersfield, California

Whether a worker is an employee or an independent contractor can have major tax consequences for a California business.

The Employment Development Department (EDD) routinely examines worker classification during payroll tax audits. A business that has treated workers as independent contractors may suddenly face allegations that those workers should have been employees—potentially resulting in years of additional payroll taxes, penalties, and interest.

I represent businesses and business owners in Bakersfield, Kern County, and throughout California in EDD worker classification disputes, including audits involving 1099 workers, independent contractors, the California ABC test, and the Borello test.

If the EDD is questioning how your workers were classified, the issue should be addressed early and strategically. The classification of a worker is based on the actual working relationship—not simply what the contract calls the worker.

When the EDD Says Your Independent Contractors Were Actually Employees

Many businesses legitimately use independent contractors.

The problem arises when the EDD concludes that workers who were paid as contractors should instead have been treated as employees.

That determination can dramatically change an EDD payroll tax audit. Payments that were previously treated as contractor payments may be characterized as employee wages, potentially creating liability for:

Unemployment Insurance (UI)
Employment Training Tax (ETT)
State Disability Insurance (SDI)
California Personal Income Tax withholding
Penalties
Interest

A worker classification determination can also affect how the business is expected to treat similar workers going forward.

That is why these cases require more than simply producing 1099s and written independent contractor agreements. The underlying facts of the working relationship matter.

California's ABC Test for Independent Contractors

For many EDD worker classification disputes, California starts with the ABC test.

Under the ABC test, a worker providing services for compensation is generally presumed to be an employee unless the hiring business can establish all three parts of the test:

A — Freedom From Control

The worker must be free from the control and direction of the hiring business, both under the parties' agreement and in the way the work is actually performed.

The EDD may examine questions such as:

Who determines when the work is performed?
Who determines how the work is performed?
Is the worker supervised?
Can the worker accept or reject assignments?
Who provides the tools and equipment?
How much control does the business exercise over the worker's day-to-day activities?

B — Work Outside the Usual Course of Business

The worker must generally perform work that is outside the usual course of the hiring entity's business.

This can be one of the most difficult parts of the ABC test.

For example, hiring an outside professional to perform a function unrelated to the company's primary business may present a very different classification issue from hiring workers to perform the same services the company ordinarily provides to its customers.

The specific facts matter.

C — Independently Established Business

The worker must ordinarily be engaged in an independently established trade, occupation, or business of the same nature as the work being performed.

Relevant facts may include whether the worker:

Performs services for multiple customers
Advertises independently
Operates a separate business
Maintains business licenses or insurance
Negotiates pricing
Supplies significant tools or equipment
Bears business expenses
Has the opportunity for profit or loss
Holds themselves out to the public as an independent business

Simply having the worker sign an independent contractor agreement does not necessarily establish independent contractor status.

A 1099 Does Not Automatically Make Someone an Independent Contractor

One of the most common misconceptions I see is:

"We gave them a 1099, so they were independent contractors."

Unfortunately, worker classification does not work that way.

Likewise, these facts alone do not necessarily establish independent contractor status:

The worker signed an independent contractor agreement.
The worker asked to be paid as a contractor.
The worker was responsible for paying their own taxes.
The business did not provide benefits.
The worker received a Form 1099 instead of a W-2.
The parties agreed that the worker was "self-employed."

Those facts may be relevant to the overall relationship, but the EDD applies the classification test required by California law.

The substance of the relationship is more important than the label placed on it.

When the Borello Test Applies

The ABC test does not apply to every worker or every business relationship.

California law contains numerous exceptions and special rules. Depending on the occupation and circumstances, worker classification may instead be determined under the Borello test, a multi-factor analysis developed under California law.

Unlike the ABC test, the Borello analysis does not depend upon satisfying three mandatory elements. Instead, multiple factors are considered together to determine the nature of the relationship.

Those factors may include:

The right to control the manner and means of the work
Whether the worker operates a distinct business
The level of supervision involved
The skill required
Who provides tools and equipment
The length of the relationship
The method of payment
The worker's opportunity for profit or loss
Whether the worker hires employees
The degree of permanence in the relationship

There are also industry-specific rules and statutory exceptions that can materially change the analysis.

Before conceding that the ABC test applies, I first determine which classification test the EDD is legally entitled to use.

Industries Where Worker Classification Issues Commonly Arise

Worker classification disputes can arise in virtually any industry, but they are particularly important for businesses that regularly use subcontractors, temporary workers, commission-based workers, or other nontraditional working arrangements.

In Bakersfield and Kern County, these issues can arise in industries such as:

Construction and subcontracting
Trucking and transportation
Agriculture and agricultural services
Oilfield and energy services
Landscaping
Cleaning and maintenance businesses
Professional services
Medical and healthcare businesses
Sales organizations
Automotive businesses
Restaurants and hospitality
Home services
Staffing and labor arrangements

Each industry can present different classification issues. The facts should be evaluated in the context of how that particular business actually operates.

EDD Worker Classification Audits

Worker classification disputes frequently begin during an EDD payroll tax audit.

An auditor may identify payments made to individuals who were not reported as employees and request records concerning those workers.

The EDD may ask for:

General ledgers
Bank statements
Check registers
Forms 1099
Contractor agreements
Invoices
Payroll records
Worker lists
Business licenses
Workers' compensation records
Proof of insurance
Communications with workers
Descriptions of the services performed

The auditor may also want information concerning who supervised the workers, how they were paid, whether they worked for other businesses, and how much independence they actually had.

This is where the presentation of the facts becomes extremely important.

Documents should not simply be turned over without understanding what the EDD is attempting to establish from them.

How I Handle an EDD Worker Classification Case

When a business owner comes to me with a worker classification problem, I do not begin with the assumption that the EDD is right.

And I do not treat the case as a simple checklist.

I want to understand how the business actually operated.

Who found the customers? Who controlled the schedule? Who supplied the equipment? Could the workers reject jobs? Did they negotiate their compensation? Did they work for other companies? Did they advertise their own services? Did they have their own licenses, insurance, employees, or business expenses?

Those details can completely change the classification analysis.

I also want to understand what the EDD auditor is really looking for before records or explanations are provided.

My preference is to deal directly with the EDD, organize the evidence, identify the correct legal test, and present the strongest classification argument available from the beginning.

Sometimes the dispute is whether the workers were employees at all. Sometimes the EDD has applied the wrong test. Sometimes only certain workers or periods are disputed. And sometimes the classification determination itself may be difficult to overcome, but the amount of the proposed assessment can still be challenged.

The objective is not simply to respond to the auditor.

It is to control the presentation of the case and put the business in the best possible position before an assessment becomes final.

Challenging an EDD Misclassification Assessment

An EDD auditor's conclusion is not necessarily the end of the case.

If the EDD issues an assessment based upon alleged worker misclassification, the business may have the right to challenge the assessment through the California Unemployment Insurance Appeals Board (CUIAB).

Depending on the assessment, the issues may include:

Whether the ABC test applies
Whether an exception to the ABC test applies
Whether the Borello test applies
Whether particular workers were actually employees
Whether the EDD identified the correct employing entity
Whether particular payments constitute wages
Whether the audit period is correct
Whether the EDD's calculation of the assessment is correct
Whether penalties should apply

Deadlines in EDD cases can be short. A petition for reassessment generally must be filed within the applicable period stated on the assessment, so an EDD notice should never be ignored.

The Amount of the Assessment Can Matter Just as Much as Classification

Worker classification is often treated as an all-or-nothing issue.

It is not always that simple.

Even if the EDD establishes that certain workers should have been classified as employees, there may still be substantial questions regarding how much tax is actually due.

The audit should be reviewed worker by worker and period by period.

Issues may exist regarding the amount of compensation, the taxability of particular payments, the periods included in the assessment, available adjustments, penalties, or the EDD's underlying calculations.

A classification determination should not automatically mean accepting every number contained in the audit.

EDD Worker Classification Lawyer Serving Bakersfield and Kern County

If your Bakersfield or Kern County business has received an EDD audit notice, request for records, proposed assessment, or other correspondence concerning independent contractors, it is important to determine exactly what the EDD is investigating before responding.

I represent businesses in EDD payroll tax audits, worker classification disputes, administrative appeals, assessments, and collection matters.

My office is located in Bakersfield, allowing me to provide local representation to businesses throughout Kern County while handling EDD matters throughout California.

Frequently Asked Questions About EDD Worker Classification

Can the EDD decide that my 1099 workers are actually employees?

Yes. The fact that a worker received a Form 1099 does not determine the worker's status. The EDD applies the classification standard required by California law based on the actual relationship between the parties.

Does an independent contractor agreement protect my business?

A properly drafted agreement can be relevant evidence, but the agreement alone does not determine worker status. The EDD can look beyond the contract to determine how the parties actually operated.

What is the California ABC test?

The ABC test generally requires the hiring entity to establish that the worker is free from its control, performs work outside the usual course of the hiring entity's business, and is customarily engaged in an independently established business of the same nature as the work performed.

All three requirements generally must be satisfied when the ABC test applies.

Does the ABC test apply to every independent contractor?

No. California law contains exceptions under which the Borello test or another classification standard may apply.

Determining the correct legal test should be one of the first steps in evaluating an EDD classification dispute.

Can I appeal an EDD worker classification assessment?

Generally, yes. Businesses that disagree with an EDD assessment can have petition rights before the California Unemployment Insurance Appeals Board. The deadline depends on the particular notice and should be reviewed immediately.

What happens if the EDD determines my contractors were employees?

The EDD may assess unpaid employment taxes, penalties, and interest for prior periods and may require the workers to be treated as employees for state payroll tax purposes going forward.

The classification determination and the amount of any assessment should both be independently reviewed.

Should I talk to the EDD auditor myself?

You may communicate directly with an EDD auditor, but statements made during an audit can affect the classification analysis.

Before giving detailed explanations about how workers were hired, supervised, scheduled, or paid, it can be useful to understand which classification test applies and what facts are legally significant.

Talk to a Bakersfield EDD Worker Classification Attorney

An EDD worker classification audit can turn years of independent contractor payments into a significant payroll tax assessment.

But an auditor's initial position should not automatically be accepted.

If the EDD is questioning whether your independent contractors should have been treated as employees, I can review the working relationship, determine the applicable classification test, deal directly with the auditor, and challenge an incorrect or overstated assessment.

Contact my Bakersfield office to discuss an EDD worker classification, independent contractor, or payroll tax dispute. I represent businesses throughout Kern County and California in matters before the Employment Development Department.