Over the years, we’ve represented clients in hundreds of audits and appeals before the Washington State Employment Security Department (“ESD”) and Washington State Department of Labor & Industries (“L&I”). While it is perhaps reasonable to assume that these agencies would conduct audits using similar processes, in reality, each agency has its own processes, policies and goals which can lead to very different results. As such, to get the best possible results in an audit or appeal before these agencies, it is critical to know the agency that’s auditing you and how it tends to operate.
See our table below for a summary of various considerations in the audit and appeal processes for the two agencies, and how their practices compare to each other.
| Employment Security Department (ESD) | Labor & Industries (L&I) | |
| Purpose of an audit | ESD administers Washington State’s unemployment insurance program and conducts audits to ensure that all Washington workers (including independent contractors) are enrolled in the state’s unemployment insurance program and thereby entitled to collect unemployment benefits due to job loss, unless such worker is expressly exempt by state law (Title 50, RCW). | L&I administers Washington State’s workers’ compensation insurance program and conducts audits to ensure that all Washington workers (including independent contractors) are enrolled in the state’s workers’ compensation program and thereby insured against on-the-job injuries, unless such worker is expressly exempt by state law (Title 51, RCW). |
| Most common reasons for an audit | A small percentage of audits are random. More often than not, you will be selected for an audit because a worker (who you’ve not reported to ESD) files for unemployment, because of a complaint to the agency, or because of other discrepancies in your reports to ESD. | Only a small percentage of L&I audits are random. Businesses will typically be audited for specific reasons: e.g., a worker sustains an on-the-job injury; independent contractor misclassification allegations; worker/competitor complaints to L&I; job site inspection; etc. |
| Are audits “in-person”? | In-person audits are less frequent with ESD. Most ESD audits are conducted via email and phone requests for information. These are sometimes referred to as “paper audits.” | All L&I audits require an interview. Often it is your choice whether it will be in-person (at your place of business or at an L&I office), over the phone, or via video conference. |
| Audit process | ESD audits typically follow the following process: 1) Notification of selection for an audit. 2) Request of company business and employment records for auditor’s review. 3) Email requests for further information or explanations. 4) Informal notification of audit decision. 5) Formal issuance of Order and Notice of Assessment. This process can take several weeks or months. | L&I audits follow the following process: 1) Notification of selection for an audit. 2) Request of company business and employment records for auditor’s review. 3) In-person or video/phone conference to discuss operations and practices. 4) Follow-up requests for further information or explanations. 5) Informal notification of audit decision. 6) Formal issuance of Notice and Order of Assessment. This process can take several weeks or months. |
| Can one agency refer you for an audit to the other agency? | Yes. In certain cases, ESD can refer you for an audit by L&I or even IRS if the agency finds significant discrepancies that it determines to warrant involvement of another agency. These referrals are rare, however. | Yes. L&I can refer you for an audit to ESD. Similar to ESD, these referrals are rare and only seem to occur in instances involving alleged fraud and/or other egregious conduct. |
| Appeal process | ESD’s appeal process is more formal than L&I. An ESD audit decision is appealed by filing an appeal with the Office of Administrative Hearing. This appeal initiates a formal hearing process and involves legal briefing by both parties, a hearing/trial, and a decision by an Administrative Law Judge. | L&I has an excellent appeal process. After a Notice and Order of Assessment is issued, you are able to request “reconsideration” of the decision. During the reconsideration process, you are able to work with L&I via an informal process to see if the audit result can/should be changed. If a settlement can’t be reached during this process, then your appeal would proceed to the Board of Industrial Insurance Appeals for a formal trial/hearing and a decision by the Board. But unlike ESD, L&I offers a fairly efficient, customer-oriented process before your matter needs to be escalated to a full-blown appeal. |
| In an independent contractor audit specifically, can you actually receive different decisions depending on the agency. | Yes. It’s to be expected, even. While both agencies have a similar independent contractor tests, ESD has an additional simplified three-part test, and is often less rigid than L&I, , relatively speaking, in applying its tests. In addition, ESD’s legal framework has exemptions for independent contractors that L&I doesn’t offer. Thus you could complete an ESD independent contractor audit and be given the “all clear” on your independent contractors, only to turn around in an L&I audit and be issued a large assessment. | Yes. Part of L&I’s mandate is to ensure as many workers as possible are “covered workers” for workers’ compensation purposes. As such, L&I appears to take a more aggressive stance in conducting its audits; it appears to be more rigid in applying its independent contractor test; and unlike ESD, it’s legal framework offers less exemptions from covered worker status. |
| Which audit tends to lead to more expensive assessments. | ESD calculates assessments as a percentage of wages paid. Thus ESD audit results will depend on the number of workers involved and the wages they were paid. And if workers are on the lower end of the pay scale, an ESD audit may not be devastating, or as devastating as an L&I audit. | L&I calculates assessments based on number of hours worked. Thus an employer who hires a lot of workers can expect to receive a large assessment if L&I determines their workers to be covered workers. L&I assessment amounts can be further escalated if the industry you’re in is at high risk for work place injury, which results in higher premiums applied to hours worked. And then in situations where an employer is not keeping records of hours worked, or is keeping inaccurate or unreliable records, L&I will estimate hours worked, which can result in excessive assessments. Then L&I has a series of penalties it is able to add. In short L&I is easily the more expensive of the two. |
| Which audit is more common? | ESD audits are not as common as L&I audits. This could be because L&I audits are driven by multiple audit triggers don’t apply in to ESD’s audit process. | L&I audits are common enough that every business that works with independent contractors and other workers that L&I seeks to protect should expect to be audited at some point. And it’s not unreasonable to be audited multiple times over a course of several years. |
Finally, do we have a preference for audits and appeals? I’d say the ESD audit is easier, relatively speaking, because the agency appears to be less rigid, and because assessments are not as large. ESD’s appeal process, however, is very formal and expensive. So when auditors get an audit wrong, it’s more difficult to correct. L&I makes up a lot of ground on ESD because it has an efficient initial process to appeal decisions. So where an audit leads to an incorrect result, L&I offers an accessible process to make corrections. For that reason alone, I might give L&I an edge? This is too tough. I prefer neither. 🙂