Employee or Independent Contractor in California

Most California owners who get in trouble over this didn’t set out to cheat anyone. They hired a helper, paid by the job, sent a 1099 at year end, and assumed that settled it. It doesn’t. The label on the paperwork carries almost no weight in California. What counts is how the work happens day to day, and the law starts from the assumption that the worker is your employee.

This page is the hub for my guides on contractors, contracts, and leases. It explains the test the state uses, the exemptions that change the test, what a mistake costs, and the practical steps I walk business owners through before they sign anyone on as a contractor.

What test does California use to decide employee or independent contractor?

California uses the ABC test for most workers. Under Lab. Code § 2775, a person providing labor or services for pay is an employee unless the hiring entity demonstrates that all three conditions are satisfied.

Under Lab. Code § 2775(b)(1), the test applies for purposes of the Labor Code, the Unemployment Insurance Code, and the wage orders of the Industrial Welfare Commission. In practice that reaches minimum wage, overtime, meal and rest breaks, expense reimbursement, and unemployment insurance. Under Lab. Code § 2785(c), the article applies to work performed on or after January 1, 2020. It traces to the 2019 bill known as AB 5.

Two features trip people up. First, the burden is on you, the business, to prove each condition. Second, failing any one of the three makes the worker an employee. There’s no weighing or balancing under the ABC test.

How does each part of the ABC test work?

Each prong asks a separate question, and the answer has to be yes on all three. Here is what each one means in plain terms, with the kind of facts that decide it.

Prong	What you must prove	Facts that help you	Facts that hurt you
A: Control	The worker is free from your control and direction in how the work is done, under the contract and in fact	They set their own hours and methods; you judge only the finished result	You train them, set a schedule, require your procedures, or supervise day to day
B: Outside your usual business	The work is outside the usual course of your business	A dental office hires an IT firm to fix its network	A dental office hires a hygienist to clean teeth
C: Independent business	The worker is customarily engaged in an independently established trade or business of the same kind	They have other clients, a business license, their own insurance, a website, and advertise	You’re their only client, or they started “their business” the day you hired them

Prong B is where most small businesses lose. If the worker does the same thing your company sells to customers, you almost always fail it, no matter how independent the person is. A roofing company can’t make its roofers contractors by paying them per job.

Prong A looks at reality as well as the contract. The statute says the worker must be free from control “both under the contract for the performance of the work and in fact.” A well-drafted agreement helps you prove the relationship you intended, but it can’t rescue a relationship that runs like a job.

When does the Borello test still apply?

Borello still governs any worker who fits one of the statutory exemptions, and it fills in when a court holds the ABC test can’t apply. Borello is the California Supreme Court’s 1989 decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations, and the statute names it directly.

Under Lab. Code § 2775(b)(3), if a court rules that the ABC test cannot be applied to a particular context on grounds other than an express exception, the determination is governed by Borello. And under Lab. Code § 2785(d), a hiring entity that demonstrates compliance with all of the conditions in any one of §§ 2776 to 2784 has its workers’ status decided under Borello.

Borello is a weighing test. The Labor Commissioner’s independent contractor FAQ describes the main factor as whether the hiring business has the right to control the manner and means of the work, considered alongside factors like these:

• Whether the worker holds themselves out as running a distinct business
• Whether the work is a regular or integral part of your business
• Who supplies the tools and the place of work, and whether the worker has invested in equipment
• Whether the work takes a special skill, and whether it’s usually done without supervision
• The worker’s opportunity for profit or loss
• How long the relationship lasts, and whether you pay by the hour or by the job
• Whether the worker hires their own help, and whether you can fire at will

No single Borello factor decides the case. That’s why it’s more forgiving than the ABC test and also less predictable. An exemption gets you to Borello. It doesn’t make anyone a contractor by itself.

Which workers are exempt from the ABC test?

The exemptions sit in Lab. Code §§ 2776 to 2784, and each one has its own conditions. You have to meet every condition of the exemption you rely on, and then the worker still has to pass Borello.

Exemption	Section	Who it covers	Key conditions
Business to business	§ 2776	A sole proprietor or entity providing services to another business	All 12 criteria, including a written contract stating pay and due date; excludes work that needs a contractor’s license
Referral agencies	§ 2777	Service providers booked through a referral platform or agency	Provider sets own rates and hours, works under own name, is free to work elsewhere
Professional services	§ 2778	Marketing, HR administration, graphic design, grant writing, fine artists, enrolled agents, photographers, freelance writers and editors, appraisers, and others on the statutory list	Six factors, including a separate business location, own rates, own hours, and independent judgment
Single-engagement events	§ 2779	Two sole proprietors working one event	Written contract stating total pay and each person’s rate
Music industry	§ 2780	Recording artists, songwriters, producers, and related roles	Varies by role
Construction subcontractors	§ 2781	Licensed subcontractors working for a contractor	Written subcontract, CSLB license covering the work, separate business location, authority to hire and fire
Data aggregators	§ 2782	Research subjects giving feedback	Free to reject requests without penalty
Listed occupations	§ 2783	Licensed insurance agents, certain physicians and dentists, licensed lawyers, architects, engineers, private investigators, accountants, registered broker-dealers and investment advisers, direct sales, commercial fishers, and others	Must hold the active license where one is required
Motor clubs	§ 2784	Tow and roadside providers working for a separate business	Third party is a separate and independent business

Real estate licensees, home inspectors, and licensed repossession agencies have their own rules under Lab. Code § 2778(c). App-based rideshare and delivery drivers are governed by Proposition 22, which is outside this page.

The business-to-business exemption, up close

The B2B exemption is the one most small businesses try to use, and it’s the hardest to meet. Under Lab. Code § 2776(a), the contracting business must demonstrate that all 12 criteria are satisfied before Borello governs the relationship.

Among the 12 criteria: the provider is free from your control, serves your business rather than your customers, has a written contract that specifies the payment amount and the due date, holds any required business license, keeps a separate business location, can contract with other businesses, advertises to the public, supplies its own tools, negotiates its own rates, and sets its own hours. Lab. Code § 2776(a)(12) adds that the provider can’t be doing work that requires a license from the Contractors State License Board.

A one-person “LLC” that works only for you, from your office, on your schedule, fails several of these at once. Forming an entity doesn’t convert an employee into a vendor.

Does the EDD use the same test for payroll taxes?

Yes. Section 621(b) of the Unemployment Insurance Code states the same three-part test, and the EDD’s employment status page tells employers that a worker is an employee unless all three conditions are met or a statutory exception applies.

Two EDD rules matter to owners of their own companies. Section 621(a) makes any officer of a corporation an employee, and section 621(f) does the same for a member of an LLC that is taxed as a corporation. If you run an S corporation, you’re on payroll, and the reasonable salary question follows from that.

The federal rules are different. The IRS uses a common-law control test and accepts Form SS-8 requests for a federal worker-status determination. Passing the federal test doesn’t mean you pass California’s.

What does misclassification cost a California business?

The direct penalties are large, and they sit on top of the wages, taxes, and benefits you would have owed anyway. Here is the stack a business faces when a worker turns out to be an employee.

• Willful misclassification penalties. Under Lab. Code § 226.8, a person or employer found to have willfully misclassified an individual is subject to a civil penalty of $5,000 to $15,000 for each violation. For a pattern or practice of violations, the civil penalty is $10,000 to $25,000 for each violation.
• A public notice. Lab. Code § 226.8(e) requires the employer to post a notice on its website that it committed a serious violation of the law by willfully misclassifying employees, and Lab. Code § 226.8(f) requires that notice to stay up for one year.
• Back wages and reimbursement. Minimum wage, overtime, and meal and rest premiums become due. Lab. Code § 2802 requires an employer to indemnify an employee for necessary expenditures incurred in the discharge of the employee’s duties, which reaches mileage, phones, and tools the worker paid for.
• Workers’ compensation exposure. Lab. Code § 3700 requires every employer except the state to secure the payment of workers’ compensation. Under Lab. Code § 3706, if an employer fails to secure compensation, an injured employee may sue the employer for damages as if the workers’ compensation law did not apply.
• Payroll tax assessments. The EDD can assess unpaid unemployment and disability contributions with penalties and interest. The Labor Commissioner’s FAQ notes EDD may add a 15 percent penalty where misclassification reflects negligent or intentional disregard of reporting requirements.

There’s also a trap for the people giving the advice. Under Lab. Code § 2753, a person who, for money, knowingly advises an employer to treat a worker as an independent contractor to avoid employee status is jointly and severally liable with the employer if the worker is found not to be an independent contractor. That section excludes attorneys giving legal advice, but it can reach a paid consultant who recommends the setup.

A worked example

A Thousand Oaks heating and air company pays four installers as 1099 contractors at $6,000 a month each. Installation is what the company sells, so it fails prong B for every one of them, and no exemption fits because the work needs a contractor’s license.

If the state or a court finds the misclassification was willful, the penalty under Lab. Code § 226.8 is $5,000 to $15,000 for each violation. For four installers, that’s $20,000 to $60,000 before a dollar of back overtime, unpaid payroll tax, or reimbursed truck expense. If one installer falls off a roof and the company has no workers’ comp policy, the exposure is the full civil damages of the injury.

How do I classify a worker correctly?

Work through the test before the first day of work, not after a complaint. I take clients through the steps in this order.

1. Describe the work in one sentence. Then compare it to what your business sells. If they match, stop. The worker is an employee unless an exemption fits.
2. Check the exemptions. Find the section in §§ 2776 to 2784 that fits, if any, and list every condition it requires.
3. Test the facts against prongs A and C, or against the exemption’s conditions. Ask for proof: a business license, a certificate of insurance, a website, other clients.
4. Put the relationship in writing. A proper independent contractor agreement sets out the deliverables, the rate, the payment date, and who controls the method. Solo freelancers are also covered by California’s Freelance Worker Protection Act.
5. Keep other contracts consistent. A contractor agreement that also contains a non-compete clause or a broad confidentiality clause can undercut the very independence you’re trying to prove. My NDA guide covers what you can protect.
6. Report and file. Report the contractor to the EDD on Form DE 542 if you pay or contract for $600 or more in a year, and issue the federal Form 1099 at year end.
7. Review once a year. A contractor who has worked only for you, full time, for two years looks more like an employee each month.

The EDD reporting rule comes from Unemp. Ins. Code § 1088.8, which requires a business to report within 20 days of first paying $600 or more in a year to a service provider or entering into a contract for that amount. The EDD’s reporting page identifies the form as the DE 542.

Can the worker and I agree that they’re a contractor?

You can agree on it, and the agreement is evidence, but it doesn’t decide the question. The Labor Commissioner’s FAQ says the parties’ belief may be relevant, but the legal determination doesn’t turn on whether they believe they’ve formed an employment relationship.

Workers also can’t waive employee protections in advance. A worker who happily signed a contractor agreement can still file a wage claim later, and many do when the relationship ends badly.

Are owners and family members employees?

Your status as an owner depends on your entity. A sole proprietor isn’t their own employee, and LLC members in an LLC taxed as a partnership generally take draws rather than wages. Corporate officers are employees for EDD purposes, as noted above. The comparison of entity types on my LLC vs. S corp page explains how this plays into the tax choice, and entity formation covers setting the structure up.

Family members who help out are a common blind spot. A spouse or adult child who works regular hours in the business is usually an employee under the same test as anyone else, Ask your CPA whether any payroll tax exclusion for family members fits your entity.

Guides in this series

Classification is the first question. These guides cover the documents that follow from it, each written for California owners:

• Independent contractor agreements in California: what the contract should say, the Freelance Worker Protection Act, and the clauses that backfire.
• Non-competes in California: why most are void, the notice rule, and the sale-of-business exception.
• NDAs for California businesses: trade secrets, what an employee NDA can’t restrict, and settlement limits.
• Commercial lease review for California tenants: the clauses that cost small businesses the most.
• Personal guarantees on commercial leases: what you’re signing and how to limit it.

If your business has partners, the buy-sell agreement guide covers the other contract every co-owned company needs.

Where I fit

I review and draft the documents: contractor agreements, classification memos to your file, and the policies that go with them, at my $500 hourly rate. I also look at how a new hire fits into your overall business setup.

I don’t handle wage claims, EDD audits, Labor Commissioner hearings, or lawsuits. If a worker has already filed a claim or a lawyer has sent a demand, you need employment litigation counsel, and I can refer you to one.

Frequently asked questions

What is the ABC test in California?

It’s the three-part test in Lab. Code § 2775 for deciding whether a worker is an employee. The business must prove the worker is free from its control, does work outside its usual business, and runs an independent business of the same kind. Failing any one part makes the worker an employee.

Is a 1099 worker an employee in California?

Often, yes. The 1099 is a federal tax form, and issuing one doesn’t change the worker’s status under California law. If the worker fails the ABC test and no exemption applies, the worker is an employee no matter which form you send.

Can my independent contractor have only one client?

It’s risky. Prong C asks whether the worker is customarily engaged in an independent business, and a worker with one client has a hard time showing that. Several exemptions, including the business-to-business exemption, also require that the worker be free to serve other clients and advertise to the public.

Does forming an LLC make my worker an independent contractor?

No. The ABC test looks at the work and the relationship, not the worker’s legal form. An entity helps only under an exemption like the business-to-business rule, and only if all of its other conditions are met.

What happens if I misclassify a worker by mistake?

You still owe the wages, reimbursements, and payroll taxes an employee would have received. The larger civil penalties in Lab. Code § 226.8 apply to willful misclassification, meaning voluntary and knowing. Correcting the classification now limits the damage, and a worker who already has a claim needs to be handled with litigation counsel.

Does the Borello test still apply in California?

Yes, in two situations. Workers who fit one of the exemptions in Lab. Code §§ 2776 to 2784 are judged under Borello, and Borello applies when a court holds the ABC test can’t be used in a particular context. Borello weighs many factors, with the right to control the work as the main one.

Do I have to report independent contractors to the EDD?

Yes, if you pay or contract to pay an individual contractor $600 or more in a calendar year. The report is due within 20 days on Form DE 542, and it’s separate from the federal 1099.