In the 23 years DDI has been in business, we have seen and managed more than 100 audits, the vast majority of which have been led by the State’s department regulating unemployment insurance. In almost every case the initial audit notice has stated something to the effect of “Your company has been randomly selected for audit by the <insert regulatory agency here>.”
If you’ve been audited you can rest assured that there was nothing random about it! In virtually all cases, audits are triggered by at least one event. Below are the top five triggers of unemployment audits.
Obstructed Unemployment Claim – If you use contract labor and you’ve been in business for any significant period of time, at one point or another you’ve received an unemployment claim from a contractor who ceased working with you. Typically, the individual filing the claim is aware that he was an independent contractor and further understands that he doesn’t qualify for unemployment. That doesn’t mean however that he won’t attempt to collect it. He’s got himself and possibly others to house and feed.
In many cases, when you return the claim form asserting that the individual was not a W2 employee of your firm, the State will deny the claimant benefits without a second thought and you’ll never hear about him or his claim again. However, in some instances the claimant will not go quietly into the night. He has the right to appeal the decision by filing a petition or calling the unemployment representative assigned to his claim. Through the petition process, it is likely that the claimant will share all sorts of details about the work he did with or for you, his perception of the nature of the relationship, etc. When this occurs an audit is nearly unavoidable.
Quantity of Obstructed Claims – If you have high turnover in your contractor program, particularly when you are the party ending most of the contractor relationships, you’re at risk of having a lot of unemployment claims filed against you. In most States, when a company receives a significant number of claims in a short period of time (usually a fiscal quarter) and those claims come back obstructed (meaning your response is that the claimant wasn’t an employee, or is ineligible for other reasons), an audit will be triggered by whatever software the State uses to manage and administer its program.
Industry Focus – It isn’t uncommon for a State to target specific industries after reclassifying a company’s workforce from contractors to employees within that industry. Our home State of California is notorious for doing this. If a local messenger service is audited and ultimately reclassified, the auditor may look for any and all other messenger services in their assigned geographic area and initiate investigations against those firms.
Disgruntled Contractors – Never before has the general public been as aware and educated about labor law, the controversy around worker classification, etc. Plaintiff law firms are paying for ads on social media platforms looking for plaintiffs and claimants to join or initiate class action claims against gig companies, big and small. Uber, Lyft, Doordash, Grubhub, Postmates, and Instacart are ALL in the news for their treatment of independent contractors. Contractors that become disgruntled with their companies for financial reasons, reasons related to treatment, etc. are always a threat. DDI has seen several cases over the years in which disgruntled workers have maliciously contacted various regulatory agencies in an attempt to initiate investigations against the companies they’ve worked with.
5. Wage-Based Claims – In 2019 when a workers file for unemployment in almost any State, even when the claim is for a W2 job they were laid off or terminated from, they’re almost always required to list ALL companies they’ve worked for/with over the past 12, 24 or 36 months. In many cases, with no malice at all, workers are listing contract jobs. The risk to companies using contractors is that the number of claims that will be filed against their firms has increased exponentially, thus increasing the number of obstructed claims, which is an auto-trigger for audits in many States.
The likelihood that your company will be audited by your State’s unemployment department has never been greater. It is more important than ever that you operate a compliant model and establish the proper relationship with your contractors – a business relationship that can be substantiated by evidentiary support. DDI’s program is designed to do just that!
To discuss further or if you have any other questions related to independent contractor compliance, please contact DDI today at 949-398-0489 or firstname.lastname@example.org.