Under the Employment Development Department (EDD), fraud during an audit includes failing to report employees or misclassifying employees. This results in penalties that include a $5,000 to $15,000 fine for each misclassified or unreported employee the employer knew about. If the EDD determines that the employer has a pattern of purposefully misclassifying employees and other illegal behavior, the fine increases to anywhere between $10,000 and $25,000.