Y&J ENTERPRISES, INC.

Y&J Enterprises, Inc.

17525 Ventura Blvd., Ste. 312
Encino, CA 91316
Yoram Shakib, RTP
YoramS@Alphatax.biz
Jennifer Shakib, RTP
JShakib@Alphatax.biz

To: Jennifer Shakib, Y & J Enterprises, Inc., CEO

From: Daniel Hadavi, CPA
Date: October 14, 2016
Subject: Increased Liability from Questionable Payroll Processing

On Friday afternoon I was asked to review various payroll clients, their requests, submissions, and
practices, as well as the subsequent handling of their submissions. Once I began reviewing our records
I found that there were serious inconsistencies with our standards and what we set forth in our training.
Through this memo, I want to stress the importance of upholding company standards in processing
payroll and maintaining the quality our company has become associated with.
Upon reviewing our records, I found instances of underreporting and manipulation of overtime rates,
intentionally not paying payroll tax that is due, and the hiring of illegal employees. Notifying our
clients of the risk of these actions is consistent with our practices; however, I have begun to notice that
there is a lack of written communication between our employees and the clients as it relates to our
standards. We as a company have become lackadaisical and docile when informing our clients of the
risks and mistakes they are making with their payroll. We must aggressively pursue every instance of
inaccuracy and manipulation to maintain our standard of perfection. If we do not inform every client of
their mistakes and receive written acknowledgement of their acceptance of liability, we ourselves may
be liable. If we do not have sufficient documentation, in the form of emails and written communiques,
that we informed our clients of the risks they are taking, we can become liable as a company.
In order to protect our interests and maintain our high standards, I suggest we take additional
steps to inform our clients of their fraudulent and sometimes illegal actions with regards to
payroll processing.
We are all aware that our clients may from time to time, bend the rules to save money but we must not
allow them to dictate how we do our jobs. We must bear the responsibility of informing them of the
correct course of action and not allow them to deviate from that course. If they refuse to conform to the
standards of California Labor Law, we must require a signed and dated letter acknowledging they
understand the risk and liability and indemnify us from any liability. I suggest HR hold a meeting with
the departments employees to discuss this issue, as well as any necessary steps and solutions that must
be implanted, such as written acknowledgements and routine audits.
I reviewed various records but found two companies to be particularly troubling, SJ Electrical, Inc.,
and YB Granite, Inc. Both these companies have manipulated overtime rates as well as actual hours

17525 Ventura Blvd #312 Encino, Ca 91316 : Fax 818/936-0313 : Ph 818/784-2525

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worked to avoid paying their employees the overtime they incurred. They intentionally reduce the
overtime hours the employee worked in a ratio equal to that of overtime pay so that they still pay the
regular rate. An example of this would be to lower an individuals overtime hours from 8 to 5.3 so that
their regular rate of pay at 8 hours would equal that of their overtime at 5.3, essentially underpaying
the employee by 50%. As mentioned earlier, if we are party to this manipulation and dont have
sufficient documentation showing our office informed the clients of the illegality of their actions we
may become liable as well if suit is brought against them. The Internal Revenue Service code clearly
states in some cases, lenders, sureties, or other persons who are not employers may be personally
liable for withheld taxes due. (IRC 5.17.7.2) If collections actions are ever initiated and unsuccessful,
we as a firm may be targeted to and held personally liable. There are several examples of third party
payroll processors becoming liable for their clients misdeeds.
For example, in her article, CPAs May Be Responsible for Clients Payroll Tax Penalties, CPA and
columnist for The Tax Advisor Jan F. Lewis, discusses the case of Erwin v. United States v. Coggin, et
al. Charles B. Erwin, who operated a company very similar to our own, was held liable for a portion of
the back payroll tax for one of his clients. Lewis discusses how accountants can be held liable for the
total amount of the tax withheldif they are considered to be a responsible person (par. 13). Erwin
neglected to be aggressive and proactive as it related to his clients poor decision making and as a
result was held liable. Lewis even explicitly states that if the accountant had promptly resigned in
writing, [he] may have avoided such hard scrutiny (par. 2). Though we do not have to resign and
terminate our engagement with our clients, a simple written acknowledgement of indemnification
would be sufficient for our purposes. If this policy of retrieving written acknowledgement is not
implemented and followed through with, it can have potentially dire consequences for our company.
Another issue I encountered was the misclassification of employees. Our clients have the tendency to
misclassify employees as exempt, but only to their detriment. Pamela Fyfe, J.D., a Labor and
Employment Risk Manager for various non-profits, discusses this very issue in her article Can I Be
Held Personally Liable for Misclassifying an Employee as Exempt? She notes how employers can be
liable for unpaid wages, fines, imprisonment, liquidated damages, and Attorneys fees and costs if
they misclassify their employees (par. 5). We should endeavor to educate our clients on these issues as
well as the financial implications of their actions, as noted above, so that they can avoid these
potentially corporation ending mistakes.
In our company records, there was information about an employee being aware of our clients payroll
illegalities and his subsequent inaction when faced with the issue. We must be more active with our
staff, informing and training them on any and all laws that are related to California labor. His
misinformation and inaction is a problem, as many of our clients use our office and service as a fount
of knowledge on the dos and donts of payroll. The following are several ideas and practices that I
believe we should implement as standards in our company.
We should hold monthly meetings discussing any new labor law changes in the Los Angeles and
California areas. I am aware that in the last year and a half there have been a number of changes to the

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minimum wage and sick pay laws, all unnecessarily complex and mundane. The purpose of these
meetings would be to teach and further enforce the knowledge of our support staff regarding these
recent wage laws, so that they can issue spot and correct any mistakes and problems our clients may
face.
Another suggestion I have is to hold random and routine audits of our clients files to make sure that
they are adhering to the strict labor law in California. Upon selection for audit, we would examine their
last four payroll submissions, including timecards, requests, and end payroll tax to determine if
anything is in need of adjustment or correction. I recommend we do this on a weekly basis and though
this may be time consuming, it is only in our benefit to be vigorous in these pursuits.
My final suggestion is the one that has been discussed in great length, written acknowledgement. If a
client adamantly refuses to conform to the standards set forth in California Labor Law, they must sign
a written acknowledgement that they understand the risks they are accepting. This is the one measure
that must be treated with grave importance. If we treat this final measure lightly, it can have
immeasurable financial repercussions for our practice.
These practices are ones that should be deliberated over and given serious consideration and thought. If
you have any recommendations or ideas regarding additional policies we can put in place, please let
me know. We draft these memos in the sincere hope that our recommendations are given their due
consideration and I hope that you give this issue the time and attention it deserves. I look forward to
hearing from you regarding this matter, as well as the discussion of the implementation of my proposed
policies, or any potential changes that you think would better suit our companys structure.
Thank you for your time. If you have any questions, please call me at extension 106, email me, or
come by my office to discuss the matter further.

Regards,

Daniel Hadavi, CPA

Junior Partner
Tel: (818) 784-2525 ext. 106
Email: Daniel.H@Y&JEnterprises.com

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Works Cited
Fyfe, Pamela Can I Be Held Personally Liable for Misclassifying an Employee as Exempt? Blue
Avocado. 26 Apr. 2011. Web. 14 Oct. 2016.
Lewis, Jan F. CPAs May Be Responsible for Clients Payroll Tax Penalties. The Tax Adviser. 01 Oct.
2015. Web. 14 Oct. 2016.
United States. Department of the Treasury. Internal Revenue Service. 5.17.7 Liability of Third Parties
for Unpaid Employment Taxes. Washington: GPO. Web. Post Date: 18 July. 2012. Access Date:
14 Oct. 2016.