It is important to understand that the California’s Employment Development Department (EDD) has the authority to audit businesses to ensure that employee payroll taxes are being paid accurately and correctly, for the right personnel. Therefore,  the California Supreme Court decided in April 2018, which expanded the definition of employees, makes businesses that hire independent contractors especially vulnerable to EDD audits. The resolution ruled that businesses do not have to pay employee payroll taxes or withhold employee income taxes for independent contractors but must still do so for employees. For that reason, if the EDD are inclined to think that your business may have misclassified employees as independent contractors, you and your company may be liable for substantial taxes and penalties by the EDD.

There are two main varieties of audits that the Employment Development Department (EDD) usually conducts on a business.

If your business receives a “Request Audit” notice from the EDD, it means your company is on the EDD’s radar. But, you ask yourself how did this happen? A notification for an EDD “Request Audit” often comes after the EDD investigators have gathered enough vital information regarding suspected violations, usually from your current or former workers.

Conversely, if you have received a “Verification Audit” from the EDD, your company may be safe from any liabilities. This type of audits usually happens randomly and is considered to be more of a routine audit to verify certain specifications.

Whether or not you contemplate hiring an attorney, you ought to be honest and respectful when responding to the Notice of Audit’s initial document request and questionnaire. By California law, you are required to keep certain documents – such as three (3) years’ worth of employee payroll records – so you should be able to produce the documents requested with ease and comfort. Claiming  you have not to have them could open the door to further complications and issues.

It is important to hire an experienced employment attorney who can go a long way in protecting your business from liabilities and unfavorable EDD audits. Our employment attorneys can help you navigate EDD audits and any other business law concerns you may have.