A Former Contractor Filed for Unemployment: How One Claim Starts an EDD Audit and What to Do Now

What the notice of claim filed is and why you received it

The DE 1101CZ is the notice that section 1327 of the Unemployment Insurance Code (UIC) requires the EDD to send to the last employer named on a new claim, and it reached you because the claimant named your business. The form asks for the person’s job title, rate of pay, length of employment, immediate supervisor and the final incident that ended the work. For a person you paid on a 1099 those are classification questions in disguise, because a business that writes a supervisor’s name and an hourly rate on the form about a contractor has described an employee in its own hand. Behind the notice the claim is stuck, because benefits are computed from wages reported on the DE 9C and yours show none for this person, so the EDD refers the claim to an employment tax auditor.

The test the auditor applies is the ABC test in section 2775 of the Labor Code, under which the person was an employee unless the business shows that the person was (A) free from your control and direction, (B) doing work outside the usual course of your business and (C) running an independently established business of the same kind. Several licensed professions and qualifying business-to-business contracts are exempt and use the older Borello test, which turns mainly on the right to control the work.

The deadline on the notice and what happens if nothing is done

You have 10 calendar days from the mail date to respond, the EDD extends that only for good cause, and a business that says nothing has given up its one early chance to shape the record. The claim does not depend on you, though. The auditor assigned to it interviews the claimant, collects pay records and a description of the work, and issues a status determination; if the person was your employee, the wages are credited to the claim and a payroll tax audit of the twelve most recently completed calendar quarters usually follows. That audit ends in a Notice of Assessment, and under section 1222 of the UIC you would then have 30 days to petition the California Unemployment Insurance Appeals Board (CUIAB) for reassessment.

What to do in the first 30 days

The first 30 days can cover all three stages, and the work at each is the same: state the facts of an independent business, in the right words, and nothing more. In order:

1. Calendar the 10-day date from the mail date, not from the day the envelope was opened, and if you need more time ask in writing before it passes.
2. Pull everything on the person, the contract, their invoices, the 1099 forms and proof of their license, insurance, entity and other customers, and then do the same for everyone else paid outside payroll in the last twelve quarters.
3. Answer the form as a business that hired a contractor, not as an employer: no supervisor’s name and no hourly rate unless that is truly how it worked, and a short statement that the person ran an independent business, with the contract attached.
4. When the auditor’s request for information about the worker arrives, treat it as the first audit document, which it is; a power of attorney on form DE 48 lets a representative answer it for you.

Your options at each stage

There are three stages, and at each one there is a path that costs nothing, a path that costs time, and a path that costs money.

• At the claim notice. Respond with the facts and the contract, which costs nothing but care; respond with a bare label, which invites the auditor’s follow-up; or say nothing, which leaves the record to the claimant.
• At the status determination. Give the auditor the evidence on all three prongs, or on the Borello factors if the occupation is exempt. If the person was an employee on the facts, saying so about one person and showing that no one else was paid the same way is the cheapest audit you will ever have.
• At the audit. Defend the classifications, concede the workers who fail prong B and contest the rest, or take the findings to the pre-assessment conference and then to the CUIAB on a petition for reassessment.

What Brotman Law does when a contractor files for unemployment

Our work runs in three pieces that match the three stages: a claim response written with the ABC test in mind, a status determination file built on prongs B and C, and, if an audit opens, control of the audit from the first call. In the first week we read the notice and the file on the worker, decide whether the person passes the ABC test or falls under an exemption, and write the response in the right vocabulary with the proof of the person’s own business attached. When the auditor’s request for information arrives we file the DE 48 power of attorney, answer it ourselves, and ask that the determination be limited to the worker at issue. If an Inquiry Regarding Records follows, we reconcile the last twelve quarters of filings before the entrance interview and tell you the exposed number before the auditor does. Since 2013 we have represented 400+ clients in audits, and in our experience one claim is the most common way an EDD audit starts.

Do you need a lawyer when a contractor files for unemployment?

If the person who filed worked mostly or only for you, did the kind of work your business sells, or was one of several people paid the same way, this is a lawyer matter, because the response you write in the next ten days is the first exhibit in a three-year audit of every one of them. The same is true if you are an owner or officer, since section 1735 of the UIC makes a person in charge of a corporation’s or limited liability company’s affairs who willfully fails to pay an assessment personally liable for it.

The honest exception is a claim by someone who plainly ran an independent business, a licensed contractor with a crew and other customers, say, when that person is the only one you paid outside payroll. Answer the notice yourself with the facts and the contract; we would rather say so on the free 15-minute call than sign you up for work you do not need.

How the monthly flat fee works when a contractor files for unemployment

Many matters like this one run as a monthly flat-fee engagement: one number, agreed up front, that covers agency contact, deadlines, document responses and strategy until the matter resolves. It does not include the tax, penalties or interest the EDD assesses, or a CUIAB hearing or refund suit, which are scoped separately if the matter gets that far. The engagement ends when the determination closes without an audit, when the audit closes with a no-change letter or an assessment you accept, or when a Notice of Assessment issues and the petition is filed; the appeal is quoted on its own.

Documents to gather

Six items answer nearly every question the claim and the audit will raise.

• The DE 1101CZ, both sides, with the envelope, and any later letter from an auditor about the same person.
• The written agreement with the person, and every version of it.
• The person’s invoices, your payment records, the 1099 forms you issued and the DE 542 report, if one was filed.
• Proof of the person’s own business: license, insurance, entity filing, website, invoices to other customers.
• Emails or texts showing who set the hours and decided how the work was done.
• Your DE 9 and DE 9C returns, the general ledger, and the same set for everyone else paid outside payroll in the last twelve quarters.

Can an independent contractor collect unemployment in California?

Only if the EDD decides the person was in fact an employee, because benefits are computed from reported wages and a true independent contractor has none. The label in the contract does not decide it; the status determination does, under the ABC test or, for exempt occupations, the Borello factors.

Why does one unemployment claim turn into a full EDD audit?

Because the claim shows the EDD a person who was paid for services with no wages reported, and once the auditor finds that one such person was an employee, the working assumption is that others were paid the same way. The audit that follows covers every worker for the twelve most recently completed calendar quarters.

What if I miss the 10-day deadline on the DE 1101CZ?

Send the response anyway, with a sentence explaining the delay, because the EDD still considers late facts and can accept them for good cause. What a late response may cost you is the written determination with appeal rights that a timely employer receives; the audit risk is the same either way.

Should I say the person was an independent contractor on the form?

Say it and show it, because under the ABC test the person is presumed to be an employee and the label alone carries no weight. Attach the contract, the invoices and the proof of an independent business, and leave the supervisor and rate-of-pay lines for facts that are true of a contractor.

Does a signed independent contractor agreement protect me in an EDD audit?

It helps on prong A and it documents what both sides intended, but the ABC test looks at the work in fact, and no contract can move work inside your usual course of business outside it. A contract matters most when it matches the record: the person invoiced you, set their own hours and methods, and did the same work for other customers.

How do I know if the EDD has opened an audit?

An audit begins with a letter titled Inquiry Regarding Records (DE 996), which names the audit period, encloses a pre-audit questionnaire and sets an appointment for your records. A request about one worker is the status determination stage; the DE 996 means the review has widened to the whole account. Our EDD audit notice and pre-audit questionnaire page covers that letter.

Related pages

The other stages of an EDD audit:

• EDD audit attorney, the parent page
• The EDD audit notice and pre-audit questionnaire
• The EDD worker classification finding
• The petition for reassessment
• CUIAB hearing
• EDD responsible person liability
• The ABC test in California
• The EDD audit process, from our guide