An EDD worker-classification audit asks one question: were the people you paid as independent contractors actually employees under California’s ABC test? If the answer flips, every 1099 becomes unpaid payroll tax — UI, ETT, SDI, and PIT withholding — going back three years, plus penalties.
The whole question hinges on the ABC test (Labor Code § 2775, from Dynamex and AB 5): a worker is an employee unless you prove all three — (A) freedom from your control, (B) work outside your usual course of business, and (C) an independently established trade. Prong B decides most audits: a construction company paying “contractor” framers, a salon paying stylists, a delivery business paying drivers — the work is the business, and the EDD knows it. But the statute also carries dozens of exemptions (licensed professionals, B2B relationships meeting twelve criteria, referral agencies), and whether an exemption applies — which routes the analysis back to the older Borello factors — is where these audits are actually won.
How the audit runs
It usually starts with a trigger you can name: a worker filing for unemployment benefits, an EDD benefit-audit crossover, or a referral from another agency. The auditor requests payroll records, 1099s, contracts, and bank data for a three-year test period, interviews workers, and issues a proposed assessment. From there you have 30 days from the Notice of Assessment to file a petition for reassessment with the CUIAB — the deadline that preserves everything, and the EDD equivalent of the CDTFA’s petition window.
What actually wins these cases
Exemption analysis first — the B2B and professional-services exemptions rescue more California businesses than prong-by-prong ABC argument. Then documentation: the contractor’s own business license, insurance, other clients, invoices, and marketing are prong-C evidence that most businesses never collected and can sometimes still assemble. Then scope control: keeping a two-worker question from becoming a whole-workforce reclassification is often the highest-value move in the audit. And always the crossover risk: EDD findings travel — to the IRS, to workers’ comp, and in willful cases toward criminal referral.
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.
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Related: EDD audit defense · the EDD audit process · California payroll tax practice.
By Sam Brotman, JD, LLM, MBA — managing attorney, Brotman Law. CA Bar No. 274966. Last updated August 29, 2026.
