The EDD Worker Classification Finding: What the ABC Test Means for Your Assessment and How to Contest It

The worker classification finding from the Employment Development Department (EDD) is the auditor’s conclusion that the people you paid as independent contractors were your employees under the ABC test, and once it becomes a Notice of Assessment you have 30 days to file a petition for reassessment. The finding turns every payment to those workers into wages for unemployment insurance, employment training tax, state disability insurance and personal income tax withholding. The number is usually larger than payroll would have cost you, because the income tax and disability insurance that would have come out of the workers’ paychecks are charged to you, with penalties and interest on top. Our EDD audit attorney page covers the whole engagement.

What the worker classification finding is and why you received it

The finding is the EDD’s determination, worker by worker, that your business did not prove all three parts of the ABC test, so the payments you reported on Forms 1099 were wages. The test is in section 2775 of the Labor Code, which applies it to the Unemployment Insurance Code, and it presumes that anyone you pay for labor is your employee unless you show all three: the worker is free from your control and direction, under the contract and in fact (prong A); the work is outside the usual course of your business (prong B); and the worker is customarily engaged in an independently established business of the same nature as the work performed (prong C). Failing any one prong ends the inquiry, and prong B decides most audits: a construction company paying framers is paying people to do what it does.

Some relationships are judged instead under the older multi-factor Borello test: the licensed occupations in section 2783 of the Labor Code, certain professional services, and business-to-business contracts under section 2776, where a real business with its own license, location and clients contracts with yours. An exempt relationship run through the ABC test is an error you can raise in the petition.

The deadline and what happens if nothing is done

The finding itself carries no deadline, but the Notice of Assessment that follows it does: 30 days from the date it is served to file a petition for reassessment under section 1222 of the Unemployment Insurance Code, and an administrative law judge can add 30 more for good cause. Before the notice issues the auditor will still take corrections, and that is the cheapest point in the case to fix a wage total or pull a worker out. With no petition the assessment becomes final, a 15 percent penalty is added under section 1135 when it goes unpaid, and the EDD can file a state tax lien and levy bank accounts and receivables.

How engagements work

Many matters like this one run as a monthly flat-fee engagement: one number, agreed up front, that covers the work — agency contact, deadlines, document responses, strategy — until the matter resolves. Shorter, well-defined projects are often a one-time flat fee instead, and some matters genuinely fit hourly billing better. We will tell you which you are looking at on the first call, before you commit to anything. If you want the details first, see how we price our work.

How many workers did the EDD reclassify, and has the notice issued?

Tell us where things stand. We respond to new inquiries within one business day.

What to do in the first 30 days

The first 30 days are for reading the audit report line by line, deciding which workers and figures you can contest, and getting a petition on file. In order:

Ask the auditor for the full audit report and working papers, with the wage schedule and the test applied to each worker.
Check the arithmetic: the quarters covered, the check register totals against your Forms 1099, and any worker paid through a corporation.
Sort the workers: real independent businesses, work outside what your business sells, and workers who fail the test on any reading.
Start the personal income tax adjustment now, because it runs on its own track and does not extend the petition deadline.
File the petition in writing within 30 days of the notice date; a letter that identifies the notice and states your grounds is enough.
Put the workers who fail the test on payroll going forward, without conceding the past.

Your options for a classification finding

A worker classification finding is resolved one of five ways, and most cases use two of them together.

Correct the figures with the auditor. Before the notice issues, a wrong wage total, a duplicated quarter or a worker paid through an entity can be fixed at no cost.
Petition and contest the classification. The petition puts the case before an administrative law judge at the California Unemployment Insurance Appeals Board (CUIAB), and nothing is collected while it is pending, although interest keeps running.
Adjust the personal income tax. The EDD will recalculate the withholding from the workers’ withholding certificates or at the single-with-zero-allowances rate, and remove it for any worker who certifies that the wages went on a California return.
Settle. Once a petition is on file, the EDD’s settlements office can settle under section 1236, on its risk of losing at hearing and the cost of getting there, not your ability to pay alone; fraud cases are generally not eligible.
Pay and move on. For a small assessment with workers who plainly fail the test, paying and putting them on payroll costs less than a hearing.

What Brotman Law does with a worker classification finding

For a classification finding our work is to shrink the assessment worker by worker before the notice issues, file the petition, and build the prong B and prong C evidence the auditor never asked for. The first step is the power of attorney, so the EDD deals with us. Then we rebuild the wage schedule from your check register and Forms 1099, because the fastest reductions are arithmetic: duplicated quarters and payments to corporations. We sort the workers by the test that applies, since an exempt occupation or a business-to-business relationship under section 2776 goes back to the Borello factors. For prong B we document what your business sells and what each worker did, because the question is whether their work is your product. For prong C we assemble each worker’s own business file: the license, the fictitious business name and the invoices to other clients. We run the income tax adjustment with the auditor, file the petition, and open settlement talks once the file shows the EDD its hearing risk.

Do you need a lawyer for a worker classification finding?

Usually yes, when the finding covers more than one worker or more than one year, when the personal income tax line is a large share of the total, or when you are an officer or owner the EDD could reach under section 1735. It is a legal dispute over a three-part test with the burden on you.

A sole proprietor with one worker, one year and a small assessment, where the worker plainly did what the business does, can usually handle it with an accountant. We would rather say so on the free 15-minute call than sign you up for a hearing you do not need.

How the monthly flat fee works for a worker classification finding

Many matters like this one run as a monthly flat-fee engagement: one number, agreed up front, that covers agency contact, deadlines, document responses and strategy until the matter resolves. It does not include the payroll tax, any settlement amount, or the defense of a separate personal assessment under section 1735, which is its own engagement. The engagement ends when the assessment is withdrawn, reduced and paid, settled, or decided by the appeals board, and the monthly fee stops with it.

Documents to gather

Six items answer nearly every question a worker classification finding raises.

The audit report, the proposed and final Notices of Assessment, and the auditor’s wage schedules.
Forms 1099 for every worker in the finding, for every year in the audit period.
The written contracts with each worker, and the invoices the worker sent you.
Proof of each worker’s own business: license, fictitious business name, insurance, website, other clients.
Your own business license, website and marketing, which show what your business sells.
Each worker’s certification that the income went on a California return, and any signed withholding certificate.

What is the ABC test in an EDD audit?

The ABC test is the three-part rule in section 2775 of the Labor Code that treats every worker as your employee unless you prove all three parts: freedom from your control, work outside the usual course of your business, and an independently established business of the same kind. The EDD applies it to work performed from January 1, 2020, and uses the older Borello test for the occupations and relationships the Labor Code carves out.

How is an EDD worker classification assessment calculated?

The auditor treats every payment to each reclassified worker as wages and computes four taxes on it: unemployment insurance and employment training tax on the first $7,000 paid to each worker in a year, state disability insurance, and the personal income tax that should have been withheld. The income tax line is usually the largest, because it applies to every dollar paid and the auditor often estimates it at a flat rate.

What penalties does the EDD add to the assessment?

The penalty on most classification assessments is 15 percent of the deficiency under section 1127, added when the auditor finds negligence or intentional disregard of the rules. Where the auditor finds fraud or an intent to evade, section 1128 adds 50 percent, and another 50 percent when no Forms 1099 were filed, and a fraud finding generally rules out settlement. The negligence penalty is the one most often argued down, by showing the classification was considered rather than careless.

Can the personal income tax portion of an EDD assessment be removed?

Yes, for every worker who reported the wages on a California return, and it can be reduced for the rest by recalculating the withholding. The EDD accepts several methods: recalculating from each worker’s withholding certificate or at the single-with-zero-allowances rate, a certification from each worker that the wages went on a California return, and your own declaration that Forms 1099 or W-2 were filed on time. Recalculation also reduces the related penalties and interest; certification removes the tax but not the penalty.

Can the EDD hold me personally liable for the assessment?

Yes. Section 1735 of the Unemployment Insurance Code makes an officer, a major stockholder or any other person in charge of the affairs of a corporation or limited liability company personally liable for the contributions, withholdings, penalties and interest the entity did not pay, where the failure to pay was willful. The personal assessment comes as its own Notice of Assessment with its own 30-day petition right. Our EDD responsible person liability page covers the defenses.

Does an EDD finding mean the Internal Revenue Service will reclassify the workers too?

Not automatically, because the Internal Revenue Service (IRS) uses its own common-law control test rather than the ABC test, and a worker can be an employee under California law and a contractor under federal law. The agencies share information, so review the federal side at the same time. California has no equivalent of the federal safe harbor in section 530 of the Revenue Act of 1978, which is why a classification the IRS has accepted can still fail with the EDD.

The other pages in the sequence:

Talk to us

Brotman Law is in San Diego and was founded in 2013. We represent clients anywhere in the country before the EDD, and we have resolved 2,200+ matters along the way. The first step is a free 15-minute call with our intake team. From there, the next step is a strategy session with the attorney; if it has no value to you, it is refunded. Book a free 15-minute call.

Sam Brotman, JD, LLM, MBA. Last reviewed September 2026.