2025 Alert: EDD Audits Are on the Rise — Is Your Business Ready?
As California faces a widening budget deficit, the Employment Development Department (EDD) has intensified audit efforts in 2025—especially around worker classification. If your business uses independent contractors, now is the time to act.
Heightened Risk: Independent Contractor Misclassification
Industries like tech, logistics, hospitality, and gig-based businesses are seeing increased scrutiny. At the core of these audits is the proper classification of workers. Misclassifying employees as independent contractors doesn’t just put you at risk for back taxes—it can open the door to serious financial liabilities.
Misclassification can lead to:
- Retroactive payroll tax assessments (unemployment insurance, disability insurance, etc.)
- Private lawsuits from workers (unpaid overtime, missed breaks, unreimbursed expenses)
- Penalties under the Private Attorneys General Act (PAGA)
- Costly litigation and reputational damage
Contracts Aren’t Enough
Think a signed contractor agreement will protect you? Think again.
Enforcement agencies and courts evaluate the reality of the working relationship—not just what’s on paper. If your business exerts significant control over a worker or if the worker depends on your company for the bulk of their income, they may be legally classified as an employee.
Take Action: Conduct a Proactive Classification Review
To stay compliant and mitigate risk, employers should initiate internal classification audits immediately. Using the ABC test and economic realities test, you can determine whether your contractor relationships are legally sound.
Being proactive can:
- Prevent surprise audits
- Avoid back payments and penalties
- Safeguard your business from legal exposure
Protect Your Business Now
California’s enforcement climate is only getting tougher. Whether you engage independent contractors routinely or only on occasion, it’s essential to review your worker classifications today—not after an audit notice arrives.
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