Why Does EDD Target Construction?
Author
John Milikowsky, Esq. | Founder | John Milikowsky represents U.S. and foreign businesses and individuals in sophisticated business transactions involving U.S. tax matters. Relentlessly defending each client in federal and state audits and criminal investigations to protect their civil rights and provide financial security.
A framing crew shows up to a job site every day for six months. Same trucks, same guys, same supervisor calling the shots. Then one of them files for unemployment after the project wraps, and three weeks later the general contractor has an EDD audit notice sitting on the desk.
This is one of the most common ways a California construction business ends up under review. If your company uses independent contractors, framers, electricians, laborers, or specialty subs, it’s worth understanding why your industry draws this level of attention, and what happens once EDD decides to look closer.
How Long Has EDD Been Targeting Construction Companies?
The current enforcement push is not new. John Milikowsky, founder of Milikowsky Tax Law, has handled these cases for close to two decades. He traces the pattern back to the 2009 financial crisis: “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 period exposed how many construction companies relied on independent contractors to keep labor costs down. Some classifications were legitimate. Many were not. EDD and CDTFA took notice, and they weren’t alone. The State Compensation Insurance Fund got involved, along with the Contractors State License Board. Some business owners faced civil assessments. Others faced criminal charges.
Enforcement slowed after that wave passed, but it never disappeared. It has come back, and this time with dedicated funding behind it.
What Is EDD Actually Investigating in a Construction Audit?
The core issue is almost always worker classification. When a construction company pays workers as independent contractors instead of employees, it avoids payroll taxes, unemployment insurance contributions, and workers’ compensation premiums.
Workers’ comp coverage is mandatory in California. If a business doesn’t carry it privately, the state requires coverage through SCIF. When EDD determines that a company misclassified employees to sidestep that requirement, the agency tends to treat it as a deliberate choice rather than an oversight. That framing shapes how aggressively auditors pursue the case from the start.
Companies that want a fuller picture of how these reviews unfold can look at our EDD audit defense practice page, which walks through the legal tests EDD applies and how audits typically progress.
Why 2025 and 2026 Bring Higher Enforcement Risk
Enforcement runs in cycles, and the current cycle has real budget behind it. 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 sixteen different cities in California. They got extra money to go prosecute people for underpaying employees.”
That funding supports prosecution of businesses that use independent contractors improperly. Sixteen cities now have district attorneys with dedicated resources for these cases, and EDD is coordinating directly with those offices.
The Lookback Period Compounds the Exposure
Most EDD audits start with a standard three-year review. When the agency believes records are incomplete or that misclassification was intentional, that window can extend well beyond three years. We cover how and why that expansion happens in our breakdown of extended EDD audit lookback periods, and it’s worth understanding before assuming a three-year exposure figure is the ceiling.
Why Construction Keeps Landing on EDD’s Radar
Part of the answer is structural. Project-based work, specialized trades, and workers who move between job sites can look like independent contractor arrangements on paper. The problem is that California’s classification standards are strict, and the gap between how construction companies actually use their workers and what the law requires can be wide.
If a worker shows up daily, takes direction from your supervisor, uses your tools, and works exclusively for your company, EDD is not going to accept a signed contractor agreement as proof of independent status. The agency looks at the working relationship itself.
When that relationship doesn’t hold up, the exposure extends past back taxes into interest, penalties, and in some cases criminal referral to district attorneys who now have the resources to act on it.
What Should Construction Business Owners Do Before an Audit Notice Arrives?
If your business uses independent contractors, the right time to evaluate your classification practices is before a notice shows up in the mail.
The ABC test under AB 5 doesn’t govern every EDD case, but the older Borello factors still carry significant weight when it does not apply. EDD examines behavioral control, financial control, and the practical nature of the relationship. A contract helps establish intent, but it doesn’t control the outcome of the analysis.
What matters more is documentation of how contractors actually operate: evidence of other clients, their own business licenses, and their ability to set their own hours and methods. Our guide on ABC test and Borello classification standards for construction businesses breaks down which test applies in which situations and why that determination matters early.
A written agreement paired with a working relationship that looks like employment will not hold up under review.
We often see construction owners come to us after they’ve already responded to EDD’s initial information requests without legal guidance. Those early responses shape the entire audit. Getting counsel involved before you respond is considerably easier than trying to walk something back once the record is set.
Frequently Asked Questions About EDD Audits in Construction
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 significant. EDD has flagged the industry as high-risk, and coordination between EDD, CSLB, and SCIF makes construction audits particularly layered compared to a typical review.
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. When EDD determines the misclassification was intentional, the case can be referred to criminal prosecutors. With district attorneys across California now funded specifically 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 rather than how it’s labeled on paper. A worker who functions like an employee will be treated as one regardless of what the agreement says.
How far back can EDD audit my construction business?
The standard lookback period is three years, but it can extend to eight or more if EDD believes records are inadequate or that fraud is involved.
What should I do if I receive an EDD audit notice?
Contact a tax attorney with EDD audit experience before responding. Our guide on what to do when an EDD audit letter arrives walks through the notice codes and why your first response sets the direction for everything that follows.
Construction businesses that get ahead of classification questions now put themselves in a far stronger position if EDD ever comes asking.
