INSIGHT

California Employers: Why EDD Audits are Surging and What You Need to Do Now 

October 21, 2025

Services: HR Consulting

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If you’re a California employer who uses independent contractors, you’re likely facing more scrutiny than ever before. In 2025, there’s been a noticeable uptick in enforcement actions by the California Employment Development Department (EDD), particularly around worker classification. The timing isn’t coincidental—this rise in audits could be partially driven by the state’s ongoing budget shortfalls, as California seeks to recover unpaid payroll taxes to help close the gap. 

Whether you employ five contractors or fifty, now is the time to take a hard look at how you’re classifying those individuals. Here’s what you need to know about this enforcement surge and how to protect your business. 

The audit landscape has changed 

EDD audits in 2025 are primarily focused on misclassification of workers, with companies in industries like hospitality, logistics, tech, and gig work now finding themselves under review. If you’ve historically classified certain roles as independent contractors, your business may be on the radar. 

These audits can result in large assessments for unpaid unemployment insurance, disability insurance, and other payroll taxes. But the financial impact doesn’t stop there. When worker misclassification is identified, it often triggers a domino effect of liability. 

Understanding your risk exposure: multiple layers of liability 

The consequences of misclassification extend far beyond EDD penalties. In addition to EDD assessments for unpaid unemployment insurance, disability insurance, and other payroll taxes, misclassified workers may pursue private claims for unpaid overtime, missed breaks, unreimbursed expenses under Labor Code section 2802, and even PAGA penalties. The financial exposure can be significant—especially when claims reach back four years and include attorneys’ fees and interest. 

Consider these potential costs: 

• State-imposed fines ranging from $5,000 to $15,000 per violation 
• Increased penalties of $10,000 to $25,000 for patterns of misclassification 
• Back pay for overtime, meal and rest breaks 
• Reimbursements for business expenses 
• Interest and attorneys’ fees 

The total liability can quickly reach six figures or more, making prevention far more cost-effective than remediation. 

Two tests you need to master: EDD and DLSE use different standards 

Here’s where classification becomes complex: the EDD and the Division of Labor Standards Enforcement (DLSE) use different tests, and you need to know both. California primarily applies the ABC Test under AB 5, which presumes a worker is an employee unless all three parts of the test are met. Under this test, you must prove that the worker: 

• Is free from your control and direction in performing the work 
• Performs work outside the usual course of your business 
• Is customarily engaged in an independently established trade or business 

But there’s a catch. The economic realities test—still used in some cases—evaluates factors like the level of control, whether the work is part of the employer’s regular business, and who provides tools and equipment. Different agencies may apply different standards. 

This means your worker could pass one test but fail another, leaving you vulnerable to enforcement action depending on which agency comes knocking. 

Your written contract won’t save you 

Many employers believe a signed independent contractor agreement protects them from liability. It doesn’t. Even if both parties agree to an independent contractor arrangement and sign a contract saying so, that agreement doesn’t determine legal status. Enforcement agencies and courts will look at the actual working relationship. 

What matters is the reality of your working relationship: 

• Do you control when, where, and how the work is performed? 
• Is the worker economically dependent on your company? 
• Does the worker provide services that are integral to your business operations? 

If the business controls the work and the worker is economically dependent on the company, classification as an employee may be required under the law. 

Act now before the EDD does: conduct a classification audit now 

Given the rise in enforcement and potential financial exposure, employers should proactively review their worker classifications. Waiting for an audit notice is the worst time to discover you have a misclassification problem.   A proactive review could help avoid audits, assessments, and costly litigation down the road. 

The bottom line 

With California facing a projected budget deficit, state agencies may be ramping up enforcement efforts to increase revenue. This isn’t likely to be a short-term trend. The pressure to generate revenue through enforcement will continue as long as budget challenges persist. 

Whether your business relies heavily on contractors or uses them occasionally, the message is clear: the risk of inaction far outweighs the cost of compliance. A misclassification discovered during an audit becomes exponentially more expensive than one you identify and correct on your own. 

Need help navigating California worker classification? 

BPM’s HR Consulting professionals can help you assess your worker classification practices, identify potential risks, and develop strategies to maintain compliance with California’s complex employment laws. Don’t wait for an audit notice to take action. 

Contact BPM today to discuss how we can help protect your business from costly misclassification penalties.