Why Does EDD Target Construction?

The construction industry has been on EDD’s radar for a long time. If you run a construction business in California and you use independent contractors, framers, electricians, laborers, specialty subs, you need to understand exactly why your industry draws this level of scrutiny, and what the consequences look like when EDD decides to take a closer look.

How Long Has EDD Been Going After Construction Companies?

The current wave of enforcement in construction didn’t start recently. John Milikowsky, founder of Milikowsky Tax Law, has been handling these cases for nearly two decades:

“Back in 2009, we had a bunch of these cases. In the beginning, 2009, you remember the stock market was melting, real estate was plummeting. And CDTFA was going after and EDD was going after owners of companies that were not paying workers as employees.”

That economic crisis period exposed just how many construction companies were using independent contractors to keep labor costs down. Some were legitimate classifications. Many were not. EDD and CDTFA took notice,  and they didn’t come alone.

The State Compensation Insurance Fund (SCIF) joined those enforcement efforts. CSLB,  the Contractors State License Board,  got involved too. In some cases, business owners weren’t just facing civil liability. They were facing criminal prosecution.

That wave eventually slowed. But it never went away entirely. And now it’s back.

What Is EDD Actually Looking For When It Audits a Construction Company?

The core issue is worker classification. When a construction company pays workers as independent contractors rather than employees, it avoids payroll taxes, unemployment insurance contributions, and workers’ compensation premiums.

Workers’ comp is not optional in California. If a business doesn’t carry it privately, the state requires coverage through SCIF. When EDD determines that someone misclassified employees as contractors to avoid that obligation, they treat it as intentional. Not a paperwork mistake. Not a gray area.

In the agency’s view, that’s theft from the state. That framing matters. It shapes how auditors approach these cases and how aggressively they pursue them.

Why Are 2025 and 2026 Particularly High-Risk Years for Construction Businesses?

Enforcement goes in cycles, but the current one is backed by real money. As John explains:

“The state of California, Governor Newsom has authorized another funding of about eight and a half million dollars,  every year he does it,  and he just gave $8.5 million to a bunch of district attorneys in different cities. I think there’s like 16 different cities in California. They got extra money to go prosecute people for underpaying employees.”

That budget includes prosecution of businesses that use independent contractors in ways the state considers improper. Contractors aren’t just a civil issue anymore. They’ve become a criminal enforcement target.

This isn’t hypothetical. District attorneys in major California cities now have dedicated resources for these cases. EDD is coordinating with those offices. The enforcement machinery is funded and running.

Why Does My Industry Keep Getting Targeted While Others Don’t?

One reason construction is perpetually targeted: the business model lends itself to contractor use in ways that can look legitimate on the surface.

Project-based work. Specialized trades. Workers who move from job to job. On paper, a lot of construction labor looks like independent contractor work. The problem is that California’s legal standards for contractor classification are strict, and the gap between how construction companies actually use their workers and what the law requires can be significant.

If a contractor shows up every day, works under your supervision, uses your tools, and only works for you, EDD is not going to accept a 1099 and a signed contractor agreement as proof of independent contractor status. They’re going to look at the actual working relationship.

When they find what they’re looking for, the exposure goes beyond back taxes. It includes interest, penalties, and, depending on the case, potential criminal referrals to the district attorney’s offices that now have the budget to act on them.

What Should a Construction Business Owner Do Before Receiving an Audit Notice?

If your business uses independent contractors, the time to evaluate your classification practices is before you receive an audit notice.

The ABC test doesn’t apply to EDD cases the way it does under AB 5, but the Borello factors still matter. EDD will look at behavioral control, financial control, and the nature of the relationship. Contracts help, but they don’t control the analysis.

Documentation of how your contractors operate matters more than the contract language itself. That means evidence of their other clients, their own business licenses, their ability to set their own hours and methods. A well-drafted agreement paired with a working relationship that looks like employment is not going to hold up.

If you’ve already received an EDD audit notice, the time for paperwork cleanup has passed. The focus shifts to building the strongest possible defense around what actually exists.

We often see construction owners come in after they’ve responded to EDD’s initial information requests without legal guidance. Those early responses shape the entire audit. Getting ahead of it, or at least getting counsel involved before you respond, is considerably easier than trying to walk something back later.

Frequently Asked Questions About EDD Audits

Why Does EDD Focus So Much on Construction Compared to Other Industries?

Construction companies commonly use independent contractors for project-based work, and the savings from avoiding employee classification are substantial. EDD has identified the industry as a high-risk area, and the coordination between EDD, CSLB, and SCIF makes construction audits particularly layered.

What Happens If EDD Finds Misclassified Workers in My Company?

You can face assessments for unpaid payroll taxes, penalties, and interest going back multiple years. In cases where EDD determines the misclassification was intentional, the matter can be referred to criminal prosecutors. With district attorneys across California now receiving dedicated funding to pursue these cases, that referral risk is real.

Do Signed Contractor Agreements Protect Me From an EDD Audit?

Not on their own. EDD looks at the actual working relationship, not just how it’s labeled in a contract. A worker who functions like an employee will be treated as one regardless of what the paperwork says.

How Far Back Can EDD Audit My Business?

The standard lookback period is three years, but it can extend to six or more years if EDD believes records are inadequate or fraud is involved.

What Should I Do If I Receive an EDD Audit Notice?

Contact a tax attorney with EDD audit experience before responding. How you respond to the initial notice and what documentation you provide can significantly affect the outcome. Early decisions in an EDD audit tend to set the trajectory for everything that follows.