Contractor vs. Employee

[Julie Ballantine]

I need your help.  I have been contacted by the Employment Development Department.  They are auditing my company in about 3 months.  Here is the situation:   My company provides consulting, contract-to-hire, and direct placement services to companies in need of EDI or EC related consultants.   We sent a consultant (1099), name not mentioned, let's just call her Graceful, to a company on a "contract to hire" basis.  This consultant signed a contract that clearly stated she was an independant contractor, and not an emplyee.  After 3 months, if the company liked her, they were going to hire her.  The problem was she did not perform her job functions, as she indicated she could during the screening process, and I had to let her go - at the request of the client.  Then, she submitted a request for Unemployment insurance at the EDD.    Her benefits were in question because my company responded back stating that her contract clearly stated she was an independant contractor, not an employee.  We sent EDD a copy of the contract.  This caused the contractor to call EDD and state that she "didn't understand her hiring terms and thought she was an employee".  How many of us DONT read our contracts????  Her confusion caused the EDD to investigate and ultimatly classify her as being an employee of my company.  They determined this because of the terms of the work environment: on-site, at "my clients" office.  I can understand that this type of contractor would be classified as a "employee".  An independant contractor works when they want and where they want.  I can agree with the contract to hires as beign classified as W2.  Fine.    Now, the EDD is auditing us to make sure we dont have any other "misclassifications".    The big question I have here is this.  I have other "independant contractors" that work out of their offices, on their own time, receive other income, and work with their own equipment that I do not provide.  I had explained circumstances, and the EDD stated that because they are doing work for my client and I am paying the "consultants", they are classified as W2 employees also.  I disagree with this.  What are your feelings on this?  Do you know of any resources that can help me prove the "Independant contracotr" vs. the "Employee"?  Has anyone else gone through this - win or loose?  I am going to fight this until the end.   Thanks for your input on this.   Julie