In 2025, my firm is seeing a noticeable uptick in enforcement actions by the California Employment Development Department (EDD), particularly around the classification of workers as independent contractors. While it’s purely speculative, this rise in audits and assessments could be partially driven by the state’s ongoing budget shortfalls, as California seeks to recover unpaid payroll taxes to help close the gap.
Here are five key things California employers should know:
1. We’ve Seen An Increase In EDD Audits —Be Prepared
We’ve seen an increase in EDD audits in 2025, primarily focused on misclassification of workers. Companies that have historically classified certain roles as independent contractors—especially in industries like hospitality, logistics, tech, and gig work—are now finding themselves under review. These audits can result in large assessments for unpaid unemployment insurance, disability insurance, and other payroll taxes.
2. Misclassification Can Trigger Multiple Layers of Liability
In addition to EDD assessments, 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.
3. The EDD and DLSE Use Different Tests—Know Them 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. However, 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. Employers must be familiar with both tests, as different agencies may apply different standards.
4. Even a Written Contract May Not Protect You
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. 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.
5. Now Is the Time for a Classification Audit
Given the rise in enforcement and potential financial exposure, employers should proactively review their worker classifications. Consider having legal counsel conduct an internal audit using the ABC and economic realities tests to identify any high-risk roles. A proactive review could help avoid audits, assessments, and costly litigation down the road.
Bottom line: With California facing a projected budget deficit, state agencies may be ramping up enforcement efforts to increase revenue. Whether your business relies heavily on contractors or just uses them occasionally, now is the time to reassess and ensure compliance.