Truck Law

A Transportation Law Blog from TransportationAttorneys.NET

Month: September, 2017

Personal Liability for EDD Assessments

by G. Spencer Mynko, Esq.

“Responsible Individuals” Can Be Personally Liable For EDD Assessments

A question I frequently get asked by clients is: “Can I be held personally liable if my business is assessed by the EDD?” As most of you know who have read my articles, if a company receives a Notice of Assessment after an EDD audit, the company has two basic options: pay the assessment or file a notice of appeal. This article will assume that the taxpayer has exhausted their appeal rights and is now in the position of having to pay the assessment. The short answer to this question is “yes”: any director, officer, or major stockholder can be personally liable for the assessment. But like so many things in the law, personal liability of responsible individuals for EDD assessments is a complicated matter.

The Law – California Unemployment Insurance Code (CUIC) sections 1735 and 1735.1.

The California EDD can’t hold trucking company owners liable for tax assessments simply because they want to, or think it’s a good idea. It is California law that enables the EDD to hold Company owners personally liable for assessments. California Unemployment Insurance Code (CUIC) Sections 1735 and 1735.1 are the weapons used by EDD to go after responsible individuals whose corporations and LLCs fail or refuse to pay their EDD assessments.

CUIC §1735 states:

Any officer, major stockholder, or other person, having charge of the affairs of a (corporation or LLC)…who willfully fails to pay contributions…shall be personally liable for the amount of the contributions, withholdings, penalties, and interest due and unpaid.

1735 makes it clear that corporate officers, stock holders and directors can be personally liable for an EDD assessment, including penalties and interest.
These sections allow the EDD to “pierce the corporate veil” and personally assess those individuals who are ultimately responsible for treating true employees as independent contractors. Therefore, if the EDD assesses a corporation or an LLC, and that business entity fails or refuses to pay the EDD assessment, the EDD has the right to tag the responsible persons for every penny owed by the entity.

This is exactly what happened in Cote v. Emple. Dev. Dep’t (In re Cote), 2015 U.S. Dist. LEXIS 133480 – Christopher Cote was the president and sole shareholder of a transportation and distribution company called “Cote Distribution Systems, Inc.” (“CDS”). The EDD audited and found that CDS’s drivers were employees and not independent contractors. EDD then assessed retroactive tax liability on CDS for failure to withhold state employment taxes on the newly classified employees. CDS was later dissolved, so the EDD opened an audit against Mr. Cote as a responsible person for CDS. Following the personal audit, the EDD assessed the employment tax liability owed by CDS against Mr. Cote under CUIC § 1735. The court noted that “any person having charge of a corporation is personally liable for tax liability owed by that corporation if he or she “willfully fails to pay” contributions required of that corporation.”

But please note: The two key elements of CUIC 1735 are responsibility and willfulness. The EDD must be able to prove both elements before they can make the 100% assessment stick. This is why it is critical to have competent counsel defend against a personal liability tax assessment.

Who’s In Charge?

EDD audit reports typically have a section entitled “responsible corporate officer/individual liability during the audit.” Companies go belly up everyday. When that happens, the State of California will look to “responsible individuals” to pay the bill. With that in mind, EDD auditors will always ask these questions:

Who managed and directed into the operations?

Who determined what bills would be paid?

What business expenses were paid with corporate/business funds?

Who authorized these payments?

Who signed these checks?

Who will have the authority to authorize payment of the assessment?

Obviously, these questions have nothing to do with determining whether a specific worker is an employee or independent contractor. The purpose of these questions to determine who will pay the assessment bill if the corporation or LLC under audit fails or refuses to pay the eventual assessment. Every tax dollar, every penalty dollar, and every dollar of interest owed by the corporation can come back to haunt those who ran the company during the audit period. And unlike the IRS, the EDD asserts a full 100% exposure to targeted responsible individuals and a 10% non-abatable assessment penalty.

What if I just close the corporation or LLC?”

Simply closing up shop won’t work. The case I cited above should make that clear. Furthermore, dissolved entities with substantial outstanding payroll liability are increasingly popular targets for the EDD. The EDD will run searches on former directors, officers, and owners of a corporation to see if they are connected with any new EDD account numbers. The directors and officers that are connected to a new business venture that is “substantially similar” to the dissolved entity are subject to a “trust fund recovery interview” and possible reassessment of their former payroll tax liability. The “trust fund recovery penalty” is a means by which the EDD can take steps to hold you personally liable for your companies nonpayment of payroll taxes. All of your personal assets are at risk and can be seized, including your home and any other personal property.

Finally, as a matter of common sense, if simply closing the company would work, people would be opening and closing new companies all the time. They would go on breaking the law until they were caught and then close the company, only to open a new company the next day. In my opinion, this conduct constitutes “willfully attempting to evade or defeat a tax”, and would make a responsible person liable under CUIC § 1735. So no, simply closing your company won’t work – The state of California can and will come after you, and if you were the guy or girl in charge, you will be personally responsible for the EDD assessment.

Is bankruptcy an option?

Generally speaking, no. Most tax debts cannot be wiped out in bankruptcy. If you file Chapter 7, you will still owe the taxes at the end of the bankruptcy case. If you file Chapter 13, you will have to re-pay the taxes in full in a repayment plan.

While there are exceptions, payroll taxes (exactly what the EDD assesses) and fraud penalties can never be eliminated in bankruptcy.

In the case I stated above, Mr. Cote attempted to discharge his EDD assessment in bankruptcy. The court held that because he willfully failed to pay contributions, he was personally liable for the contributions and withholdings owed to the EDD by his company, CDS. The final sentence of the opinion reads: “Because the state disability insurance withholdings and state personal income tax withholdings are taxes required to be collected under CUIC § 13020 and for which (Cote) is liable under CUIC § 13070(a) and § 987, the court finds them non-dischargeable.”

Sleep Apnea – DOT Withdraws Plan to Test Truckers for Sleep Apnea

by G. Spencer Mynko, Esq.

The Federal Motor Carrier Safety Administration has withdrawn a proposed rule which they published in March 2016 that would have required truck drivers to be tested for Obstructive Sleep Apnea. Obstructive Sleep Apnea (OSA) is a sleep disorder characterized by episodes of complete cessation of breathing during sleep, which results in numerous medical problems, including sudden death. Undiagnosed or inadequately treated OSA can result in daytime sleepiness and decreased attention, concentration, awareness, and memory, which reduces a drivers ability perform his or her duties.

What is Obstructive Sleep Apnea?

OSA is a sleep disorder that involves cessation or interruption of airflow in and out of the lungs, despite the presence of breathing effort. During these episodes, a person’s blood oxygen may drop to dangerously low levels and the person will be aroused from sleep. OSA that is associated with excessive daytime sleepiness is commonly called obstructive sleep apnea syndrome. Symptoms of OSA develop slowly and are often present for years before a person seeks medical attention. Obesity is probably the biggest risk factor for developing OSA. Other risk factors include being male, middle aged, and having a family history of OSA.

Night Time Symptoms include:
Snoring, that is usually loud, habitual, and bothersome to others.
Witnessed apneas (moments where air flow completely stops), which often interrupt the snoring and end with a snort.
Gasping and choking sensations that wake a person from sleep.
Bed wetting or frequent nighttime urination.
Insomnia and restless sleep, where people experience frequent arousals and tossing or turning during the night.

Daytime symptoms include:
Nonrestorative sleep (ie, “waking up as tired as when they went to bed”)
Morning headache, dry or sore throat
Excessive daytime sleepiness during activities that generally require alertness (eg, driving)
Daytime fatigue/tiredness
Cognitive deficits; memory and intellectual impairment (short-term memory, concentration)
Decreased vigilance
Morning confusion
Personality and mood changes, including depression and anxiety
Sexual dysfunction, including impotence and decreased libido
Gastroesophageal (Acid) reflux
High Blood Pressure

OSA can cause heart disease, heart failure, heart attack, stroke, kidney disease, and even sudden death during sleep.

Treatment includes weight loss, alcohol avoidance, sleeping on one’s side, and continuous positive airway pressure (CPAP). Thankfully, CPAP machines have become small and easily manageable and fit into sleeper berths.

Untreated OSA is particularly dangerous. Dr. Stefanos Kales of the Harvard School of Public Health, who has studied the link between sleep apnea and serious accidents, stated “Drivers with untreated obstructive sleep apnea who were noncompliant with treatment had a five-fold increase in the risk of serious preventable crashes.”

What’s up Doc?

The FMCSA stated that the current protocol in place for OSA screening is sufficient. That protocol – issued in January 2015 – put the onus on drivers’ medical examiners. The FMCSA protocol states that medical examiners should refer drivers for apnea testing if they “believe the driver’s respiratory condition is in anyway likely to interfere with the drivers ability to safely control and drive a commercial motor vehicle.”

While I believe most medical providers do the best they can, many, if not most, CDL evaluations take place in walk in clinics or urgent care clinics where the doctor on duty doesn’t have the benefit of a thorough history and a prior doctor-patient relationship with the driver. Screening for OSA requires detailed questioning and a thorough physical examination. A time pressed or rushed medical provider may not adequately evaluate a patient for OSA.

Therefore, I urge all drivers to make a special appointment with their primary care doctors to discuss and get evaluated for OSA. A 15 to 25 minute screening evaluation should determine if further testing, such as a sleep study, is warranted. It will be good for the driver, their family, their company, and the public at large.

Check Yourself!
Anyone can answer a questionnaire on their own to determine if they are at risk for OSA.  For example, you can take the STOP-BANG Sleep Apnea Questionnaire:
Do you SNORE loudly (louder than talking or loud enough to be heard through closed doors)?
Do you often feel TIRED, fatigued, or sleepy during daytime?
Has anyone OBSERVED you stop breathing during your sleep?
Do you have or are you being treated for high blood PRESSURE?
BMI more than 35kg/m2?
AGE over 50 years old?
NECK circumference > 16 inches (40cm)?
“Yes” to 5-8 = High risk, 3-4 = Intermediate risk, 0-2 Low risk.

Motor Carriers Can Legally Require Testing

Finally, I want to mention that motor carriers can legally require testing for OSA for certain truck drivers. The Eighth Circuit Court of Appeals ruled that Motor Carriers can implement sleep apnea screening programs. The United States Supreme Court declined to overturn the ruling. Therefore, carriers can institute OSA screening policies, such as the one the FMCSA’s medical review board recommended, which requires drivers with a BMI of 33 and higher, and who meet other criteria, be flagged for automatic OSA testing.