California EDD Audit Defense
ABC Test Under AB 5: Prong-by-Prong Analysis
The ABC test under Labor Code §2775(b)(1) presumes every worker your business pays for services is an employee — not an independent contractor. To classify a worker as a contractor, you must affirmatively prove all three prongs, and failing any single prong triggers full employee reclassification across your entire 12-quarter audit period.
This page covers the ABC test prong-by-prong in depth. For the complete strategy on California EDD audit defense — including the 12-quarter lookback, entrance interview preparation, and CUIAB appeals — see our complete guide to California EDD audit defense.
Why the ABC Test Presumes Employee Status — and What That Means for Your Audit
Quick Answer: California's ABC test under AB 5 (Labor Code §2775) presumes every worker is an employee. The burden falls entirely on your business to prove all three prongs — free from control (A), outside your usual course of business (B), and independently established trade (C). Failure on any single prong reclassifies the worker as an employee retroactively across the full audit period.
Before Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018), California used the Borello multi-factor balancing test — a flexible standard where no single factor was dispositive. Dynamex replaced that standard for most workers with the ABC test, and AB 5 (effective January 1, 2020) codified it at Labor Code §§2775–2787. AB 2257 (September 4, 2020) later expanded the exemption list.
The ABC test is conjunctive, not balancing. Under Borello, a strong showing on several factors could overcome weakness on others. Under the ABC test, a single failure on any prong means the worker is an employee — period. This structural shift is why EDD auditors reclassify workers at significantly higher rates since 2020 than they did under the prior framework.
In an EDD audit, the auditor starts from the presumption of employment. Your business must produce documentation — contracts, multi-client records, business registrations, evidence of independent operations — to rebut each prong individually. The EDD treats the absence of documentation as failure on the relevant prong.
Prong A: Free From Control and Direction — Both in Contract and in Fact
Prong A requires that the worker is free from your control and direction "both under the contract for the performance of the work and in fact" (Labor Code §2775(b)(1)(A)). The "in fact" language is the critical qualifier — a contract that says the worker is independent means nothing if your actual practices tell a different story.
What fails Prong A in EDD audits:
- Setting work hours, shifts, or requiring attendance at specific locations
- Providing tools, equipment, materials, or uniforms to the worker
- Supervising methods of work — dictating how tasks are performed, not just what the final deliverable is
- Requiring attendance at company meetings or trainings
- Retaining the right to terminate without cause — the California Supreme Court in Dynamex identified this as an indicator of control (4 Cal.5th at 955)
What supports Prong A: The worker chooses their own hours, works from their own location, uses their own tools, and determines the method and sequence of completing the work. Your contract specifies the deliverable and the deadline — nothing about how the work gets done.
Prong B: Work Outside the Usual Course of Your Business — the Most Common Failure Point
Prong B is where most EDD reclassifications happen. The worker must perform work "outside the usual course of the hiring entity's business" (Labor Code §2775(b)(1)(B)). If your business provides marketing services and you hire a marketing consultant, Prong B fails — regardless of how the contract is structured.
The California Supreme Court provided the paradigm example in Dynamex: a delivery company that reclassifies its delivery drivers as independent contractors cannot satisfy Prong B because delivery is the company's core business (4 Cal.5th at 955–956). The same logic applies to a staffing company classifying its placed workers as contractors, or a construction company classifying its laborers.
What passes Prong B: A law firm hires an electrician to repair the office wiring — electrical work is outside the usual course of a law practice. A restaurant hires a web developer to build its website — web development is outside the usual course of a restaurant business. The key question is whether the worker's function is part of what you sell to your customers.
The EDD auditor's approach: The auditor compares what your business does (as reflected on your business license, marketing materials, and client contracts) against what the worker does. If there is overlap, Prong B fails. This comparison is objective — the auditor does not consider whether you "intended" to keep the functions separate.
Prong C: Independently Established Trade — the Worker Must Be a Real Business
Prong C requires that the worker "is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed" (Labor Code §2775(b)(1)(C)). The independent business must exist at the time of the work — a worker cannot retroactively satisfy Prong C by forming a business entity after the audit begins (Dynamex, 4 Cal.5th at 962).
Evidence the EDD looks for:
- Business license or fictitious business name filing
- Separate business entity (LLC, corporation, sole proprietorship)
- Independent advertising, website, or marketing materials
- Services provided to multiple clients — not just your business
- Own professional liability insurance or general liability coverage
- Own tools, equipment, and workspace
A worker who has no other clients, no separate business entity, no independent marketing presence, and relies exclusively on your business for income will fail Prong C. The EDD treats single-client dependency as one of the strongest indicators of employee status.
When the Borello Test Applies Instead of the ABC Test
The ABC test does not apply to every worker. Over 100 professions are exempted under Labor Code §§2776–2785 and evaluated under the Borello multi-factor test instead. Key exempted categories include:
- Licensed professionals: Attorneys, CPAs, physicians, surgeons, dentists, podiatrists, psychologists, veterinarians (Lab. Code §2783)
- Licensed contractors and subcontractors in the construction industry (Lab. Code §2781)
- Licensed insurance agents and brokers (Lab. Code §2782)
- Licensed real estate salespersons (Lab. Code §2785)
- Professional services: Marketing, HR, graphic design, photography, freelance writing, appraisers, home inspectors — subject to additional conditions (Lab. Code §2778)
- Business-to-business contracting: Sole proprietors, partnerships, and LLCs meeting 12 specific conditions (Lab. Code §2776)
Identifying Borello-eligible workers during an EDD audit is one of the most effective defense strategies. Borello is a multi-factor balancing test from S.G. Borello & Sons v. Department of Industrial Relations, 48 Cal.3d 341 (1989), that evaluates the hiring entity's right to control the work. Unlike the ABC test, a strong showing on several Borello factors can overcome weakness on others — and the burden of proof is more evenly distributed between the EDD and the employer.
From Our Practice
400+ Audit Clients Represented
In EDD audits involving ABC test reclassification, the difference between losing every contractor and retaining most of them is almost always the pre-audit documentation. Businesses that can produce signed contractor agreements addressing all three prongs, evidence of the contractor's independent business operations, and proof of multi-client relationships before the entrance interview put the auditor in a position where reclassification requires overriding documentary evidence.
Takeaway: The ABC test is defensible when each prong is supported by documentation created before the audit — not assembled in response to it.
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A single contractor who fails any prong of the ABC test opens your entire 1099 roster to the 12-quarter lookback.
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The Three Most Common ABC Test Mistakes in EDD Audits
Relying on the contract alone. The "in fact" language in Prong A means the EDD evaluates actual working conditions, not contract terms. A contract stating the worker sets their own schedule is irrelevant if time records show the worker consistently works your business's operating hours.
Overproducing records. Providing bank statements, P&L reports, or records for workers not on the auditor's list gives the EDD evidence it would not otherwise have. Every additional document is a potential reclassification trigger. Respond to document requests with exactly what the CUIC requires — nothing more.
Making entrance interview admissions. Statements like "I tell them where to show up" or "we provide the equipment" fail Prong A on the spot. These admissions enter the audit file permanently. File Form DE 48 authorizing attorney representation before the entrance interview is scheduled — the EDD must then communicate through your representative for all audit matters.
ABC Test Questions
What is the ABC test in California?
The ABC test is California's default worker classification standard, codified at Labor Code §2775(b)(1) under AB 5. It presumes every worker is an employee unless the hiring entity proves all three prongs: (A) free from control and direction, (B) work outside the usual course of business, and (C) independently established trade. The test replaced the multi-factor Borello test for most workers effective January 1, 2020. Failure on any single prong results in employee classification for the entire audit period.
Which prong of the ABC test is hardest to pass?
Prong B — work outside the usual course of business — is the most common failure point in EDD audits. If a worker performs any function that overlaps with what your business sells to its customers, Prong B fails regardless of contract language. The California Supreme Court in Dynamex specifically identified delivery drivers working for a delivery company as the paradigm Prong B failure (4 Cal.5th at 955–956). Businesses in staffing, consulting, and technology are especially vulnerable.
What happens if a worker fails the ABC test in an EDD audit?
The worker is reclassified as an employee retroactively across the full audit period — up to 12 quarters (three years). The EDD assesses the employer's share of UI, SDI, ETT, and PIT withholding for that worker, plus a 15% negligence penalty under CUIC §1127. If the EDD finds willful intent, CUIC §1128 adds a 50% fraud penalty. A single reclassified worker also triggers review of your entire 1099 contractor roster for the same period.
Does the ABC test apply to all workers in California?
No. Over 100 professions are exempted under Labor Code §§2776–2785 and evaluated under the Borello multi-factor test instead. Key exemptions include licensed attorneys, CPAs, physicians, engineers, licensed contractors, real estate agents, and insurance brokers. Professional services workers (marketing, graphic design, photography) may also qualify if they meet the conditions in Lab. Code §2778. For work performed before January 1, 2020, the Borello test applies to all workers.
Can I fix ABC test problems during an EDD audit, or is it too late?
You cannot retroactively satisfy the ABC test for work already performed — the documentation must have existed at the time of the work. However, you can contest the auditor's factual findings at the Proposed Notice of Assessment stage and, if that fails, file a petition with CUIAB within 30 days under CUIC §1222 for a de novo hearing before an independent Administrative Law Judge. Worker-by-worker analysis often reveals that some contractors do satisfy all three prongs or qualify for Borello exemptions — reducing the total assessment.
Do I need an attorney for an ABC test defense in an EDD audit?
Representation is not legally required, but the ABC test's burden-on-the-employer structure makes professional defense critical. EDD auditors are trained to ask entrance interview questions that elicit Prong A admissions about worker control — and those admissions cannot be retracted once they are in the audit file. An attorney files Form DE 48 on day one, controls the information flow, objects to overbroad document requests, and builds the worker-by-worker classification defense that is essential at both the PNA stage and the CUIAB hearing.
Related: Independent Contractor Defense Strategies for California EDD Audits →
Related: What Happens During a California EDD Independent Contractor Audit →
Part of Brotman Law's California EDD Audit Defense Guide
This page covers the ABC test prong-by-prong in depth. For the complete strategy — including the 12-quarter lookback period, ABC and Borello test defense, CUIAB appeals, and penalty abatement — read our complete guide to California EDD audit defense.
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