How to Avoid a California EDD Tax Assesment For Misclassifying Independent Contractors

Independent contractors are the most common category of workers that are audited for back payroll taxes by the EDD.  We have also noticed that the EDD will target certain industries that it believes commonly misclassifies employees as independent contractors (delivery drivers for Federal Express and other delivery companies have recently been targeted).

In making a determination whether a worker is properly classified as an independent contractor, the EDD will examine the employer's right to control the worker, whether or not exercised, as one of the most important factors in determining the relationship. The right to discharge a worker at will and without cause is strong evidence of the right of direction and control. The following factors are also taken into consideration:
  • Whether or not the one performing the services is engaged in a separately established occupation or business.
  • The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of a principal without supervision.
  • The skill required in performing the services and accomplishing the desired result.
  • Whether the principal or the person providing the services supplies the tools, equipment, and place of work for the person doing the work.
  • The length of time for which the services are performed to determine whether the performance is an isolated event or continuous in nature.
  • The method of payment, whether by time, a piece rate, or by the job.
  • Whether or not the work is part of the regular business of the principal.
  • Whether or not the parties believe they are creating the relationship of employer and employee.
  • The extent of actual control exercised by the principal over the manner and means of performing the services.
  • Whether the principal is or is not engaged in a business enterprise or whether the services being performed are for the benefit or convenience of the principal as an individual.
  • Whether the worker can make business decisions that would enable him or her to earn a profit or incur a financial loss. Investment of the worker's time is not sufficient to show a risk of loss.
A written contract which claims to create the relationship of principal and independent contractor is not controlling if the practice of the parties shows that the principal retains the right of control under the common law test.
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