California is Increasing Enforcement on Worker Classification: What Employers Need to Know in 2025
With heightened audits from the California Employment Development Department (EDD), employers must take immediate action to ensure compliance and avoid costly consequences. Here's how to protect your business.
Rising EDD Audits in 2025: Be Prepared for Increased Scrutiny
The California Employment Development Department (EDD) has ramped up audits this year, especially focusing on the classification of workers as independent contractors. This surge in audits aligns with the state's ongoing budget shortfall and efforts to recover unpaid payroll taxes. Employers, particularly in industries like hospitality, logistics, tech, and gig work, should brace for scrutiny around their contractor classifications.
Misclassification: More Than Just an EDD Issue
Misclassifying workers as independent contractors can lead to substantial financial exposure. Not only can it trigger EDD assessments for unpaid unemployment insurance, disability insurance, and other payroll taxes, but misclassified workers may also pursue private legal claims. These claims can include unpaid overtime, missed breaks, unreimbursed expenses, and even penalties under the Private Attorneys General Act (PAGA). Financial damages can accumulate quickly, particularly when looking back over several years.
Misclassification: More Than Just an EDD Issue
Misclassifying workers as independent contractors can lead to substantial financial exposure. Not only can it trigger EDD assessments for unpaid unemployment insurance, disability insurance, and other payroll taxes, but misclassified workers may also pursue private legal claims. These claims can include unpaid overtime, missed breaks, unreimbursed expenses, and even penalties under the Private Attorneys General Act (PAGA). Financial damages can accumulate quickly, particularly when looking back over several years.
Written Contracts Aren't a Guaranteed Shield
Even if you have a signed agreement between the business and worker stating that the worker is an independent contractor, that contract doesn't necessarily protect you. Enforcement agencies and courts will look at the actual working relationship. If the business exercises too much control over the worker or the worker depends on the business for a significant portion of their income, classification as an employee may be legally required.
Proactive Classification Audits: The Smart Move for Employers
With increased audits and the potential for significant penalties, it’s essential for employers to proactively review their worker classifications. Using the ABC and economic realities tests, businesses can identify roles that may be at risk of misclassification. Taking this step before an audit occurs can help avoid assessments, back payments, and costly litigation.
California is growing budget deficit has led to an uptick in enforcement efforts from state agencies like the EDD. Whether you rely on contractors frequently or occasionally, it’s critical to reassess your classifications now to ensure compliance and protect your business from potentially damaging audits, financial penalties, and legal issues.