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Employment Law
Surviving an Independent Contractor Audit in California
By Ingrid Rainey · August 19, 2026 · 7 min read
Worker classification audits rarely begin with a regulator deciding to look at your business. They begin with one contractor filing for unemployment, one wage claim, or one workers' compensation report — and the agency then asks the same questions about everyone else in the same role. Because California applies the ABC test, the burden sits with the hiring business, which makes preparation before the letter arrives far more valuable than argument after it.
Key takeaways
- Under Labor Code section 2775, a worker is presumed to be an employee unless the hiring entity proves all three prongs: freedom from control, work outside the usual course of the hiring entity's business, and an indep…
- 1099s and the general ledger accounts used to pay contractors.
- The business-to-business exemption, the professional services exemption, and the referral agency exemption each apply the older Borello multi-factor standard instead of the ABC test — but only when every listed condit…
- Inventory every 1099 relationship and map each to a specific exemption or reclassify.
How the ABC test is actually applied
Under Labor Code section 2775, a worker is presumed to be an employee unless the hiring entity proves all three prongs: freedom from control, work outside the usual course of the hiring entity's business, and an independently established trade of the same nature.
Prong B does most of the damage. A marketing agency engaging a contract marketer, or a law firm engaging a contract attorney, struggles regardless of how much autonomy the worker has. Contracts labeling someone an independent contractor carry almost no weight on their own.
What the auditor asks for
- 1099s and the general ledger accounts used to pay contractors.
- Written agreements, statements of work, and any renewal history.
- Evidence of the contractor's own business: business license, EIN, insurance, marketing, other clients.
- Invoices — who prepared them, and whether amounts vary by project or look like a salary.
- Communications showing scheduling, supervision, and performance direction.
Have a question about your situation?
Rainey Law P.C. advises San Diego businesses and employees on matters like this one.
Request a consultationExemptions that still matter
The business-to-business exemption, the professional services exemption, and the referral agency exemption each apply the older Borello multi-factor standard instead of the ABC test — but only when every listed condition is satisfied. Missing a single condition, such as the contractor's failure to maintain a business license, pushes the relationship back under ABC.
Reducing exposure now
- Inventory every 1099 relationship and map each to a specific exemption or reclassify.
- Require and collect evidence of independent business operation at onboarding, not at audit.
- Stop mixing employees and contractors in identical roles — side-by-side comparison is the fastest way to lose.
- Model the true cost of reclassification, including back payroll taxes, penalties, and potential wage-and-hour derivative claims.
Frequently asked questions
How far back can an EDD audit reach?
Audits commonly cover a three-year lookback period, and assessments can include unpaid payroll taxes, interest, and penalties for each year examined.
Does a signed independent contractor agreement protect us?
Not by itself. Agencies and courts look at the actual relationship. A contract helps only when the facts support it.
What happens if workers are reclassified?
Beyond payroll tax assessments, reclassification often triggers wage-and-hour exposure for overtime, meal and rest breaks, expense reimbursement, and wage statement penalties.
This article is general information, not legal advice, and does not create an attorney-client relationship. Outcomes depend on the facts of each matter.
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