The EDD Trap: Avoiding Trouble for Yourself and Your Clients

This information is updated as of April 2, 2020. The situation changes daily, so make sure to check the most recent blog posts for the most recent updates.

The CARES Act is our federal government's $2 trillion response to the COVID-19 crisis. Among other things, the CARES Act supplements the standard unemployment benefits that states offer to unemployed workers by providing grants and loans to small businesses and contractors, as well as an additional type of aid called Pandemic Employment Assistance (PUA). The purpose of PUA is to (1) provide expanded unemployment benefits to those who already have benefits through their states, and (2) to provide basic unemployment coverage to freelancers and independent contractors who would otherwise not have access to unemployment funds.

Under the CARES Act, each individual state is responsible for distributing federal PUA money to the residents who need it. In recent days in California, the desperate need of California's freelance class for PUA assistance has combined with the legislative debacle that is AB5 to create a maelstrom of confusion and uncertainty. Different websites present conflicting or ambiguous information regarding how to obtain PUA, and no one is sure which form to fill out and how.

The purpose of this post is to help clear up some of this confusion and to explain the risks of applying for California unemployment insurance now that AB5 is being enforced by the California Employment Department. Let's dive in.

1. As you probably know, on January 1, 2020, our legislature, which is currently controlled by a Democratic supermajority in both chambers, along with our governor, Gavin Newsom, passed the law we all know as Assembly Bill 5. The law was purportedly about helping Uber drivers and Instacart shoppers and the like by forcing those companies to put all their workers on payroll and start paying into Unemployment Insurance. However, this was not the true intent of AB5. The law was drafted by the AFL-CIO, the country's largest labor union, and was pushed to a vote by Assemblywoman Lorena Gonzalez, a past AFL-CIO CEO whose entire political career is and has been funded by the unions. AB5 is not truly about gig workers, and never was; it is a scheme envisioned and executed by Big Labor to eliminate the livelihoods of California's freelance class, forcing them to find W-2 jobs so that they can be unionized. (Why the unions are so keen to increase their membership at this particular juncture will be the topic of future posts.)

2. OK. That aside. California, like every other state, allows individuals who were W-2 employees and who lost their jobs to apply for Unemployment Insurance (UI) benefits with our Employment Development Department (EDD) and receive some money while looking for work. No big news there. It’s probably also not big news that if you are a contractor who does 1099 work, you generally can’t obtain UI benefits, because there hasn't been any past employer paying into the benefits system on your behalf.

3. This next point is crucial. When you file for UI in California, you are asked to list your most recent employer and all entities that recently employed you. If on the form you list one of the hiring entities you contracted with as one of your employers, the EDD flags that hiring entity for an audit. The EDD then conducts an investigation of that hiring entity using AB5's new nearly-impossible-to-pass test, and if the EDD determines that the hiring entity misclassified you as a contractor (and, thanks to the newly-minted AB5, there is a high chance they will), it will fine the hiring entity a fine between $5,000 and $25,000 per misclassification and requires the hiring entity to pay UI retroactively to the date of misclassification, as if that worker had always been an employee. (A person who runs a small princess-for-your-little-girl’s-birthday-party business recently got audited by the EDD spanning back to 2017 and was notified that she owes the state $60,000 in fees.)

4. Now, enter the global crisis, and re-enter Pandemic Unemployment Assistance (PUA). PUA is federal money, distributed by the states, meant to provide assistance for all workers, including those who never worked as a W-2 employee. Take a moment and make sure that you understand the difference between federal PUA and state UI based on what I've said so far.

5. Although PUA is federal money, the way PUA works is that freelancers have to apply for PUA benefits through their states. State offices are to process the applications and forward the federal money to the workers. Of course, this requires state offices to provide new PUA forms so that workers can list their contract/freelance income; regular UI applications do not generally provide space to list contract work in this manner. Several state employment departments quickly updated their websites with information about their new or revised processes for obtaining PUA for freelancers and employees alike.

5. As of April 3, 2020, California has not. Instead, California’s EDD website continues to provide only the regular UI form where you can only list your W-2 income. Their statement on the matter could not be more ambiguous:

"The Pandemic Unemployment Assistance is a brand new program. The EDD is working quickly with state partners to set up this new program to serve unemployed Californians who don’t usually qualify for regular state UI benefits, including the self-employed. Californians should follow the current instructions on this page regarding potential UI benefits with more details to come later in the week as soon as they are available."

The site then goes on to fail to give any specific instructions to the self-employed about which forms to use and how to fill them out. Are freelancers to fill out a form, or not? This has led to mounds of confusion over the past several days as many have tried to fill out the form. Some people filled out the form by listing all the companies they contracted with as their employers. Some people simply listed their employer as themselves. Some people checked certain boxes and others did not. Some claims were rejected outright and some were accepted by the system. Many expressed frustration at the lack of response and mobility from our EDD.

6. The frustration is compounded by the fact that the EDD's inaction on this matter appears to be part of a campaign with an intended result. To wit: the CA EDD is actively and expressly encouraging all contractors, without qualification, to fill out the regular UI form and list their contractor hiring entities as their employers to get UI. See the problem? Refer back to #3. When you list someone who contracted you as one of your employers, that someone gets flagged in the EDD system for a possible audit. Then it becomes the EDD’s job to conduct an investigation of that someone and determine if they misclassified you. Only after the EDD has gone through this arduous, at-least-weeks-long process with each and every entity who contracted you to determine if that contractor was “supposed” to bring you on as an employee will you find out if you get money. You only get UI money if the EDD finds that the hiring entity misclassified you. A finding of misclassification  gives the EDD authority to fine the hiring entity for past unpaid UI premiums that the EDD determines your hiring entity should have been paying on your behalf.

7. The end results are the following. (1) CA freelancers are being actively denied the opportunity to receive PUA thanks to the EDD’s inaction in posting a PUA form on its website. (2) Instead of providing a clear way for contractors to get PUA, the EDD is appears to be weaponizing the crisis as a way of increasing its database of businesses to later audit and raze to the ground with fees. (3) If you are a legitimate contractor and you do what the EDD is currently telling you to do, you will wait a long time for the EDD to conduct a classification investigation and if the EDD determines that you were in fact properly classified as a contractor then you will receive $0 in regular UI. (That's the truly harmful part -- the EDD is misleading genuine contractors into filling out the regular form, knowing that many of them will never get benefits that way and those that do will be waiting a very long time.) (4) If the EDD does determine you are misclassified, you eventually get UI money, but the entity who hired you is now on the hook for exorbitant fees. Many businesses have had to close due to onerous EDD audits and fines, and those jobs no longer exist.

If you think that you as a humble lone freelancer are exempt from negative consequences here, please understand that you may not be. Here’s a simple real-world example. You are a professional vocalist who gets paid a fee each Sunday morning to sing as a section leader at a church. Back in November of 2019, you were out of town for the weekend and so you asked your colleague to sub in for you. (This is a typical contractor-subcontractor relationship.) You forwarded your $100 payment that the church gave you to your sub. Now, it’s March 2020, and the person who subbed for you is trying to get money during the pandemic. They go to the California EDD website and apply for UI, and they follow the EDD’s instructions by listing you as one of their “employers” on the form. Boom. You get triggered for an audit. Several months down the line, you get a letter from the EDD informing you that under AB5, your substitute was supposed to be your employee. You would be on the hook for unpaid unemployment insurance premiums and other payment requirements under the Labor Code. Your case could get referred to the State Franchise Tax Board and the IRS for further investigations of failure to withhold taxes. You could also be liable for $5,000 - $25,000 per misclassification if the EDD determines that the misclassification was "willful."

Please see our Freelancer Pandemic Assistance Chart for the most up-to-date information about applying for benefits while avoiding the pitfalls of AB5.

If you're concerned, energized, or frustrated by AB5, please join our Facebook group, The People v. AB5, where we will be coordinating specific, scaled action items to raise awareness and get our lawmakers' attention.