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When It’s Your Turn For a Government Payroll Audit

For California, the Employment Development Department (EDD) is responsible for the administration of unemployment and disability insurance, workforce training services and payroll audits. The agency has the power to impose significant, potentially fatal penalties for non-compliance.

An EDD visit to look over pay practices is perhaps inevitable for any business that survives and thrives long-term. Random selection or anonymous employee or ex-employee complaints to the agency are common triggers. As with earthquake preparedness in this state, it is better practice to presume such scrutiny will arrive sooner, not later.

About the Audit Process

At the outset, the auditor will typically conduct an interview with the company’s representative to explain the audit process and obtain general information on the scope of the business.

An audit commonly proceeds with on-site examination of company records within a test period of the most recent calendar year. The scope of review can sometimes stretch back two or even three years.

The EDD’s California Employer’s Guide advises that review can encompass a wide range employment and business records including payroll, pay stubs, check registers, annual financial statements, cash payments records, ownership verification, forms 1099, any license required, and federal employment tax reports (e.g. W-2 and W-4).

The dramatically altered criteria for proper classification of independent contractors — issued in the California Supreme Court’s landmark Dynamex decision — can become a major focus of the inquiry. See, Game Changer (June, 2018).

Best practices:

• Achieve and maintain an understanding of current and evolving workplace laws and how they affect the business’s operations, policies and documentation
• Match that understanding with regular internal audits of workplace practices and record-keeping to confirm compliance
• Keep employment-related records for at least the last four calendar years to comply with retention requirements
• Avoid misclassification of independent contractors by properly defining and documenting such relationships. See also, Independent Contractor Status? It Depends (November, 2018)
• If and when the EDD comes calling, to the extent possible, create a cooperative and positive foundation with the auditor for the process, promptly establishing a clear understanding of the audit’s aims, scope and timing. If feasible by the personality dynamics, welcome and regard the auditor as a sort of outside advisor and the audit as an opportunity to confirm compliance and, as appropriate, to improve upon current practices.
• It is not uncommon for a business to engage experienced legal counsel to assist with these interactions. A knowledgeable, proactive attorney can help with communications, preparations and guidance toward correction as needed and lasting compliance and stable operations.
• There are sometimes discussions with auditors over their authority to remove records from a business’s premises. Without an official subpoena or other court order, an agency’s legitimate ability to access is not its blank-check power to seize and take away any record arbitrarily. The employer should take care to avoid agency removal of original records, thus crippling that company’s ability to manage its personnel and its obligation to protect the integrity of accompanying record-keeping. A business can almost always maintain balance and cooperation with an auditor by working out a timetable for provision of copies of records properly within the scope of the agency’s inquiry. It should be rare that a disagreement over document access and possession pushes the government to resort to subpoena power to get its way.

For additional assistance, please contact one of our attorneys Tim Bowles, Cindy Bamforth or Helena Kobrin.

Tim Bowles

April 5, 2019