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Independent Contractor or Employee in California? What Employers Need to Get Right
In California, whether a worker is treated as an employee or an independent contractor determines what the company is responsible for providing. Employees handle work that fits into the company’s regular business and follow its direction on when, where, and how tasks get done. Contractors run their own operations and deliver services with more control over the details.
Most benefits and protections under the Labor Code, including paid sick leave, unemployment, workers’ compensation, rest breaks, and wage enforcement, apply only to employees. Contractors are outside that system and depend on their agreements or personal resources if there is a dispute, injury, or loss of income.
The decision at hiring affects how taxes are reported and what each side expects, but California looks at how the work is actually done, not the job title or what was written in an agreement.
Why California Uses the ABC Test and When It Applies
State agencies generally use the ABC test to determine whether a worker should be classified as an employee or an independent contractor under California wage and hour law. The ABC test applies to minimum wage claims, as well as claims related to overtime, rest breaks, and other Labor Code protections.
Under the ABC test, a worker is deemed an employee, unless the company they work for can prove all three of the following elements:
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The worker has the freedom to decide how the job is done and is not directed by the company.
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The work the worker performs is not part of the company’s usual business.
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The worker runs an independent business that provides the same service to other clients.
If the company can satisfy all three elements, the worker is classified as an independent contractor. However, if the company fails to satisfy even one element, the worker is classified as an employee.
Misclassification happens with the second element when the work directly supports the company’s main business. A bakery that sells decorated cakes cannot treat a cake decorator as an independent contractor. The third element is also missed when a worker performs the service only for one company. Having a website or business name does not meet the standard if there are no other clients.
The Exception to the Rule: the Borello Test
In situations where the nature of the work doesn’t align with a strict, three-part standard California applies the Borello test instead of the ABC test. Examples of workers who are exempted from the ABC test include licensed insurance agents, certain medical providers, commercial fishermen, creative professionals, and those classified through referral agencies or professional services arrangements.
Evaluations look at how the worker performs the job and how much control the company exercises over the details. Unlike the ABC test, Borello does not rely on a fixed checklist. Considerations are focused on whether the worker sets their own schedule, supplies their own tools, and takes on financial risk.
If the ABC test applied in every situation, employers would be required to treat legitimate contractors as employees, even when that classification does not reflect how the work is structured. The Borello test gives a way to evaluate the full relationship without disqualifying contractor status based on a single factor. Agencies like the Employment Development Department (EDD) usually apply the Borello test when reviewing claims related to unemployment benefits or payroll tax audits.
What Triggers an EDD or DLSE Audit
The EDD and the Division of Labor Standards Enforcement (DLSE) may review how a worker was classified after the worker files for unemployment, reports an injury, or submits a wage claim.
Agencies also examine payroll records, tax filings, and 1099 payments when something raises a flag, like when a company pays contractors to do jobs that require supervision, regular hours, or work that looks like part of the company’s operations.
In some cases, a review starts because a worker contacts the agency with a complaint, even if the complaint doesn't mention a classification dispute. Once the process begins, the agency may go back several years and look at other workers in similar roles.
Consequences of Misclassifying a Worker
Misclassification can lead to significant costs and additional oversight from the EDD or DLSE. A single case can lead the state to review how the business classifies and pays all workers.
Problems can sometimes come to light when a worker applies for unemployment, files a wage case, or reports a workplace injury. The Employment Development Department (EDD) or the Division of Labor Standards Enforcement (DLSE) then reviews the actual work arrangement to decide if the worker meets the definition of an employee.
If the review finds misclassification, the employer may be ordered to:
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Pay back wages, unpaid overtime, missed rest breaks, and unreimbursed business expenses
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Cover unpaid payroll taxes, including unemployment insurance and disability contributions, with penalties and interest
The Labor Commissioner’s Office can also issue separate penalties for each violation, which increase if the misclassification was intentional. In some cases, the state seeks attorneys’ fees and other enforcement costs.
Workers may also file cases under the Private Attorneys General Act (PAGA) for Labor Code violations on behalf of the state. PAGA cases can involve multiple workers and assess penalties for each violation, which can escalate quickly when misclassification is widespread.
Missteps Employers Make When Trying to Classify Employees as Contractors
Missteps Employers Make When Trying to Classify Employees as Contractors
Employers sometimes try to avoid employee classification by checking certain boxes. They sign a contractor agreement, accept invoices from an LLC, or send payments to a business name, then treat the worker as an independent contractor. That approach does not hold up under California law.
Why Business-to-Business Agreements Are Not a Loophole
Paying through a business name or an LLC does not remove the obligation to classify a worker as an employee if the relationship meets the ABC test or Borello. California law considers how the work is structured, not just how it is labeled, so a worker operating under a business name can still be an employee.
What Written Contracts Can and Cannot Do
A signed contractor agreement does not settle whether a worker is an employee or an independent contractor. If the facts show the worker operates like an employee, the state will classify them that way under the ABC test or Borello, regardless of the contract.
How Employers Can Reduce Risk Without Restructuring Everything
Employers don’t need to eliminate every contractor role to comply with California classification law, but they do need to review how each role is structured. Some roles are clearly independent, but others raise red flags that warrant closer examination.
Employers should take a second look when:
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The contractor performs the same tasks as W-2 employees
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The work is part of the company’s main service or daily operations
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The company sets the worker’s hours or directs how the work is done
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The contractor does not work with other clients
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The contractor uses company tools, systems, or space
Employers who are unsure whether to classify a worker as an employee or an independent contractor should review the structure of the work before making a hiring decision. If concerns arise about an existing classification, the relationship should be restructured to meet the requirements for independent contractor status or the worker should be reclassified as an employee.
Conn Maciel Carey, LLP
Misclassification can expose your business to audits, penalties, and lawsuits. If you’re relying on contractor agreements or business labels to avoid employee status, your risk may be higher than you think. To review your worker classifications with a member of the national Labor & Employment Group at Conn Maciel Carey LLP, call (202) 715-6244.
This article is for informational purposes only and does not constitute legal advice. While we strive to ensure accuracy, laws and regulations may change, and unintended errors may occur. This content may not address every aspect of the relevant legal requirements. For guidance on your specific situation, consult your attorney.