California Employment Development Department (EDD)

In recent years, California and federal agencies have highly scrutinized independent contractor status.  While that scrutiny may be abating somewhat on the federal level, it is still alive and well in our golden state.  In fact, the issue has been popping up quite a bit lately in the context of audits by the Employment Development Department (EDD).

Copyright conceptOne issue that trips up many employers involves a standard provision many companies include in their independent contractor agreements to protect their intellectual property rights.  The standard language involves a statement that any work product developed by the contractor is deemed a “work made for hire“ under the meaning of the US Copyright Act, and is therefore owned exclusively by the company.  In lay terms that means that the company retains the intellectual property rights to works developed under contract.

Unfortunately, under California Unemployment Insurance Code Section 686, that language also means that the contractor is presumed to be an employee.  Yes, that’s right.  Even if the contractor meets none of the common law factors of an employee (i.e. works independently, the company doesn’t control how they do the work, they are paid by project, etc.), and wants or even requests to be a contractor, California’s EDD requires that the contractor be deemed an employee for purposes of unemployment and state disability taxes.

When and if the company is audited, the EDD will ask for copies of all independent contractor agreements, and if those four words are in there, “work made for hire,” the EDD will find the contractor (or group of contractors) should be taxed as employees.  That translates into back taxes, penalties and interest, as well as the potential of a pretty unhelpful precedent for related legal claims.

There is a possible work-around for this language — to use very specific assignment language instead; although this could have serious copyright implications under the “termination of transfer” provisions of the Copyright Act, so please consult a copyright lawyer before going forward with such a work-around.  Companies can also be proactive and remind departing contractors that they are not entitled to unemployment, which might dissuade a contractor from inadvertently triggering an audit.

For companies that rely on independent contractors, including consulting and entertainment businesses, it is especially important to review your contractor agreements for those four “work made for hire” words.  Oh, and if you use independent contractors and don’t have a signed contractor agreement on file, well you have much more risk than just an EDD audit on this one four-word technicality!

 

Let’s say you have good reasons for termination. Perhaps the employee has well documented performance issues, has fallen asleep on the job, or has violated the harassment policy. Many employers seem to think “good cause” for termination equals good reasons to fight unemployment. A good idea? Not necessarily. Here’s why.

The standards for receiving unemployment are low. There are many circumstances where there is plenty of justification for termination, yet the employee still qualifies for unemployment. To be denied unemployment, the employee must have engaged in “misconduct” as that term is defined by the EDD.

For example, what if the employee falls asleep on the job? Is that misconduct? Quite notably, the EDD makes a distinction between deliberate sleeping (misconduct) and presumably non-deliberate “dozing off” (not misconduct). What if the employee is fired based on a customer complaint? Is that misconduct? According to the EDD, only if the employer also submits proof that the complaint was accurate.

Many employers think they must dispute unemployment to prove that the termination was justified. However, denying someone unemployment can make them just desperate enough financially to seek out a plaintiff’s attorney.

Plus, I have seen many disputed unemployment claims come back to haunt employers, especially if they go to hearing. When an Administrative Law Judge sides with the employee in a disputed claim, that employee is emboldened to sue. I have heard many plaintiffs testify at deposition that they weren’t sure they had a good claim until after winning at the unemployment hearing.

It is fine to contest a claim for an employee who has resigned (preferably with a resignation letter), but for a termination, think twice. Pushing back on unemployment may result in pushing the employee to file a lawsuit.

 

Let’s say you fire an employee for violating a very reasonable company policy, such as the harassment policy, or a safety policy, or even misappropriation of company property.  Does that mean that the employee should be prevented from getting unemployment in California?  The answer very well may be NO, and a recent case explains why.

In Robles v. EDD (pdf) the employee was terminated for attempting to use his safety shoe allowance to buy shoes for a friend in need.  The store clerk would not let him buy the shoes for his friend and informed his employer of the attempted purchase.  The employee wrote a statement indicating that he didn’t understand the limits of what he could do with his safety shoe allowance, he had two pairs of safety shoes already, he deeply regretted his attempt to buy shoes for his friend, and promised not to do it again.  He was fired anyway.

Whether an employee is entitled to unemployment depends on whether the reason for his termination rises to the level of “misconduct” as that term is defined in Section 1256 of the Cal. Unemployment Insurance Code.  The Robles case explains that to rise to the level of misconduct, the conduct must be willful, volitional, and intentional.  Conduct may be harmful to the employer’s interests, and certainly justify termination, yet still not equate to misconduct under the Code.  In fact, the Court of Appeal found that given this employee’s lack of understanding of the shoe policy and his words of regret, that his actions did not rise to the level of misconduct, and that he was entitled to unemployment.

The Court also explains that circumstantial evidence can be used to prove intent, such as multiple warnings to an employee about a particular type of policy violation.  Therefore, if you have proof that the employee knew of the applicable policy and intentionally disregarded it, then the misconduct standard may be met.  Even so, it is important to keep in mind that many (if not most) terminations will not result in the denial of unemployment.  Moreover, fighting an unemployment claim and losing it, may result in the disgruntled ex-employee feeling vindicated – indeed, just vindicated enough to sue you.

The lessons here? (1) Think twice before fighting a losing battle; and (2) don’t underestimate the power of an apology.
 

Coordination of disability payments just got more complicated.

Once again California is a trendsetter in the nation. As of December 10, 2010, the state’s Employment Development Department (EDD) began sending payments for state Disability Insurance and Paid Family Leave via a Visa-branded EDD Debit Card. This is terrific news for employees out on a leave of absence who now won’t have to wait for EDD checks by US mail. Instead, they will get a Debit Card to use to pay bills directly, or they can transfer funds posted to the card directly to their personal bank accounts.

If you are a generous employer that pays your employees for time off due to disability, maternity, or family leave issues, coordinating those employer-provided benefits with state-provided benefits just became more complicated. Until recently, many employers had simply “advanced” wages to employees on a leave of absence, paying them full pay on normal pay periods, and requiring employees to sign over their EDD checks when they arrived weeks later. This process allowed employees to maintain consistent income even when out of work, and also simplified the process for employers. Unfortunately, that simple process will no longer work.

Now employers will have to require employees to write them checks or transfer EDD provided funds back to the employer to reimburse such “advances.” Asking employees to pay the employer back for “advances” is not practical, will be hard to enforce, and may have tax consequences for both the employer and the employee. More likely, employers will now need to do the calculations they have tried to avoid and pay employees only the difference between their wages and the EDD benefits. If you provide paid time off to employees in California, make sure to revise your procedures accordingly.

Special thanks to Nancy Yaffe for this entry.