Employee vs. Independent Contractor in California: What Small-Business Owners Need to Know

Hiring an independent contractor can appear to be a simple way to obtain specialized help without adding another employee to payroll. Contractors can support short-term projects, provide expertise your company does not maintain internally, and give a growing business access to additional capacity.

However, California businesses cannot classify someone as an independent contractor merely because both parties prefer the arrangement. A worker’s classification depends on the substance of the relationship, the work being performed, and the legal test that applies.

This makes employee-versus-independent-contractor classification one of the most complicated areas of California HR compliance.

A written independent contractor agreement is important, but it does not determine the outcome by itself. Neither does paying someone through accounts payable, issuing a Form 1099, allowing the person to work remotely, or giving the worker a flexible schedule. California generally starts with a presumption that a worker is an employee, and the hiring entity may be responsible for establishing that the requirements for independent-contractor status have been satisfied.

Misclassification can expose a business to unpaid wages, overtime, meal- and rest-period claims, payroll taxes, workers’ compensation issues, civil penalties, interest, and other liabilities. It can also disrupt operations and damage relationships with workers.

This guide explains the California ABC test, the Borello test, important exemptions, common classification mistakes, and the steps small-business owners can take before engaging an independent contractor.

This article provides general HR information and is not legal or tax advice. Worker-classification decisions are highly fact-specific. Businesses should consult qualified California employment counsel and tax professionals when applying these rules to a particular relationship.

Why Worker Classification Matters in California

An employee and an independent contractor have different legal and financial relationships with the business.

Employees may be protected by requirements involving:

• Minimum wage

• Overtime

• Meal and rest periods

• Wage statements

• Payroll deductions

• Reimbursement of necessary business expenses

• Workers’ compensation

• Unemployment insurance

• Paid sick leave

• State disability insurance

• Certain protected leaves

• Workplace safety

• Retaliation protections

• Other federal, state, and local employment requirements

Employers are generally responsible for withholding and paying applicable employment taxes for employees. They must also maintain required payroll and time records and comply with wage-and-hour obligations.

A properly classified independent contractor generally operates an independent business, controls the manner in which the contracted result is achieved, bears meaningful business risk, and handles applicable self-employment tax obligations.

Independent contractors are generally not covered by many California wage-and-hour protections that apply to employees. However, it is incorrect to say contractors have no protection from workplace harassment. California’s Fair Employment and Housing Act prohibits harassment based on protected characteristics against certain people providing services under contract. The California Civil Rights Department explains that harassment is prohibited even in workplaces with only one employee or independent contractor. California employers can review the Civil Rights Department’s employment guidance.

Classification therefore affects important rights and responsibilities, but it does not give a business permission to tolerate harassment, unsafe behavior, retaliation prohibited by another law, or other misconduct toward a contractor.

What Is an Employee in California?

An employee generally performs services for an employer within an employment relationship. The employer may direct the work, establish expectations, determine schedules, provide tools or systems, evaluate performance, and control important aspects of how the work is completed.

No single fact always decides the issue. Depending on the applicable test, relevant facts may include:

• The company’s right to control the work

• Whether the work is central to the company’s business

• Whether the worker operates an independent business

• Who supplies tools and equipment

• How the worker is paid

• Whether the relationship is ongoing

• Whether the worker can experience profit or loss

• Whether the worker offers services to the public

• Whether the worker serves other clients

• Whether the worker can negotiate rates

• Whether the person hires or supervises assistants

• How the parties operate in practice

A part-time worker can still be an employee. A remote worker can be an employee. A temporary worker can be an employee. A highly skilled professional can also be an employee.

What Is an Independent Contractor?

A legitimate independent contractor is generally self-employed and operates a business that is separate from the hiring company.

Depending on the work and applicable classification test, a genuine contractor may:

• Offer services to the public

• Maintain a separate business location

• Advertise the business

• Work for multiple clients

• Negotiate rates

• Decide when and where to perform the work

• Supply appropriate tools and equipment

• Maintain required licenses

• Carry business insurance

• Hire employees or subcontractors

• Bear the risk of profit or loss

• Invoice for services or project results

• Control how the contracted work is performed

These facts can support contractor status, but checking a few boxes does not guarantee the classification is correct.

For example, forming a limited liability company does not automatically make the individual a valid independent contractor. A business license, insurance policy, website, or Form 1099 can be relevant, but the entire relationship must still satisfy the applicable legal standard.

California’s Presumption of Employee Status

California’s ABC test generally begins with the assumption that a worker is an employee. The hiring entity must establish all three parts of the test for the worker to qualify as an independent contractor, unless a statutory exception or another legal standard applies.

The California Supreme Court adopted the ABC test in Dynamex Operations West, Inc. v. Superior Court in 2018. Assembly Bill 5 later codified and expanded the use of that test, and Assembly Bill 2257 amended the statutory framework.

The current provisions are primarily found in California Labor Code sections 2775 through 2787.

The California Labor Commissioner’s independent-contractor guidance explains the ABC test, its application, and major categories of exceptions. Because the statutes and temporary exceptions can change, employers should review the current guidance instead of relying on an old checklist.

Understanding California’s ABC Test

Under the ABC test, a worker is considered an employee unless the hiring entity can establish all three of the following:

A: The worker is free from control and direction

The worker must be free from the hiring entity’s control and direction in connection with the performance of the work, both under the written contract and in actual practice.

Questions may include:

• Who determines how the work will be performed?

• Does the company provide detailed instructions?

• Who establishes the work sequence?

• Is the worker supervised like an employee?

• Must the worker follow an employee schedule?

• Does the company evaluate the worker through its employee performance process?

• Can the worker determine the methods used to produce the agreed result?

• Does the agreement reflect what occurs in practice?

A company does not necessarily have to control every minor detail for an employment relationship to exist. The question includes whether the business retains the type or degree of control ordinarily exercised over employees.

The original article suggested that an independent contractor must always provide their own tools to satisfy Part A. Tool ownership may be relevant to the overall analysis, but it is not the wording of Part A and should not be treated as an independent, automatic requirement under this portion of the ABC test.

B: The work is outside the usual course of the hiring entity’s business

The worker must perform work outside the usual course of the hiring company’s business.

This is frequently the most difficult element for businesses that use contractors to deliver the same products or services they sell to customers.

Consider the following examples from California’s official guidance:

• A retail store hires an outside plumber to repair a bathroom leak. Plumbing is outside the store’s usual retail business.

• A clothing manufacturer engages workers to make the dresses the company sells. That work is within the usual course of the manufacturer’s business.

• A bakery regularly hires cake decorators to decorate the custom cakes it sells. Cake decorating is part of the bakery’s usual business.

The job title does not control the analysis. The important question is whether the worker is performing part of what the company ordinarily provides to its customers or relies upon as its regular business.

A healthcare staffing company, for example, should not assume it can classify the professionals it supplies to clients as independent contractors merely because the professionals work at client locations. A consulting firm should be cautious about classifying consultants who deliver its core client services as independent contractors.

C: The worker operates an independently established business

The worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as the services provided to the hiring entity.

Relevant questions may include:

• Did the independent business exist when the work began?

• Does the worker advertise or offer the service publicly?

• Can the worker maintain other clients?

• Does the worker actually operate a separate business?

• Does the worker maintain required licenses?

• Has the worker invested in the business?

• Does the worker negotiate rates?

• Does the worker bear genuine business risk?

• Is the worker dependent on one hiring entity?

• Would the worker’s business continue if the relationship ended?

A company cannot create independent-contractor status simply by requiring a worker to sign a contract, obtain a business license, or accept a 1099.

The independent business must exist in reality—not merely on paper or as a possibility for the future.

All Three ABC Factors Must Be Satisfied

The ABC test is conjunctive. That means the hiring entity generally must satisfy Parts A, B, and C.

A worker may use personal equipment and choose their own schedule but still fail Part B because the work is within the hiring entity’s usual business.

A worker may perform services outside the company’s usual business but fail Part C because the individual does not actually operate an independent business.

A worker may have several clients but fail Part A if the hiring company exercises employee-like control over the performance of the work.

Passing one or two parts is not enough when the ABC test applies.

Does the ABC Test Apply to Every Worker?

No. California’s worker-classification framework contains numerous exceptions and special rules.

Some occupations or relationships are evaluated under the Borello multifactor test instead of the ABC test. For certain exceptions, Borello applies only if the hiring arrangement first meets specific statutory requirements. Special standards may apply to some real estate licensees, repossession agencies, app-based drivers, and other defined relationships.

Categories addressed in the statutes include certain:

• Licensed professionals

• Insurance professionals

• Direct salespersons

• Professional-services providers

• Business-to-business relationships

• Referral-agency relationships

• Construction subcontractors

• Performing artists and music-industry professionals

• Photographers and content professionals

• Newspaper workers

• Commercial fishers

• Home inspectors

• Real estate licensees

• App-based drivers

This list is only illustrative. It does not mean everyone working in one of these fields automatically qualifies as an independent contractor.

An exception from the ABC test is not necessarily an exception from worker-classification law. It often means a different test applies after the hiring entity satisfies detailed preliminary requirements.

Temporary expiration dates also change. For example, California’s official guidance updated in June 2026 reflects extended dates for certain commercial fishers and newspaper distributors and carriers. This is why employers should not rely on older articles that contain expired dates or incomplete occupational lists.

What Is the Borello Test?

The Borello test comes from S.G. Borello & Sons, Inc. v. Department of Industrial Relations. It evaluates multiple factors to determine whether a worker is an employee or independent contractor.

Unlike the ABC test, the Borello test does not require three separately mandatory elements. The factors are considered together in light of the work, the parties’ relationship, and the purpose of the law being applied.

The principal factor is generally whether the hiring entity has the right to control the manner and means of accomplishing the desired result.

Additional factors may include:

• Whether the worker operates a distinct business

• Whether the work is part of the hiring entity’s regular business

• Who supplies tools, equipment, and the work location

• Whether the worker has invested in the business

• Whether the service requires a specialized skill

• Whether the work is typically performed under supervision

• The worker’s opportunity for profit or loss

• The duration of the relationship

• The degree of permanence

• Whether payment is based on time or completion of a job

• Whether the worker hires employees

• The parties’ understanding of the relationship

No single factor automatically decides a Borello analysis. Calling the worker a contractor in an agreement may be relevant, but the label does not control the legal result.

The Professional-Services Exception

California law provides a potential professional-services exception for certain types of work, including specified marketing, human resources administration, graphic design, photography, writing, editing, fine art, grant writing, and other professional services.

However, being a marketing consultant, HR professional, writer, or graphic designer does not automatically create independent-contractor status.

The relationship must meet detailed statutory conditions before the Borello test can be used.

Depending on the applicable provision, those conditions may address:

• A separate business location

• Business licensing

• The ability to establish or negotiate rates

• Control over work hours

• Independent discretion and judgment

• The ability to work for other businesses

• The exercise of independent business judgment

Employers should review the exact statutory requirements rather than assuming that all “professional” work is exempt from the ABC test.

The Business-to-Business Exception

A common misconception is that hiring a corporation or LLC automatically avoids the ABC test.

California provides a business-to-business exception for certain bona fide contracting relationships. If every required condition is met, the relationship may be evaluated under Borello instead of the ABC test.

Factors include whether the service provider:

• Operates as a genuine business

• Maintains a business location separate from the hiring entity

• Provides services directly to the contracting business

• Has any required licenses

• Can contract with other businesses

• Advertises or holds itself out to the public

• Supplies appropriate tools and equipment

• Negotiates its own rates

• Sets its own hours and work location when consistent with the work

• Is free from the contracting business’s control

• Operates under a written contract

• Performs work outside certain restricted licensing circumstances

The business-to-business exception does not declare the service provider an independent contractor automatically. It changes which test may be used if the threshold requirements are met.

A contractor’s LLC, business card, or invoice is not enough by itself.

California and Federal Classification Rules Are Not Identical

A worker relationship may be examined under more than one legal framework.

California may use the ABC test, Borello, or another statutory standard. The IRS generally applies federal common-law principles that consider behavioral control, financial control, and the nature of the parties’ relationship.

Under IRS guidance, the substance of the relationship—not the label—determines status. The IRS focuses on whether the business has the right to control what will be done and how it will be done. The IRS provides current guidance on common-law employees.

Other federal laws may apply their own employment tests.

A worker could potentially be classified differently under different laws because the tests serve different purposes. The California Labor Commissioner expressly notes that a worker may be an employee under California law even if the worker is not treated as an employee under a federal standard.

Business owners should therefore avoid assuming that a federal tax conclusion resolves every California wage, unemployment, or workers’ compensation question.

A 1099 Does Not Make Someone an Independent Contractor

Issuing Form 1099-NEC is a reporting action. It is not a classification test.

The following actions do not independently establish contractor status:

• Issuing a Form 1099

• Paying invoices

• Paying a flat project fee

• Omitting payroll deductions

• Calling the person a freelancer

• Including “independent contractor” in an agreement

• Allowing remote work

• Permitting a flexible schedule

• Requiring the worker to create an LLC

• Requiring the worker to obtain insurance

• Asking the worker to waive employee rights

California’s Labor Commissioner specifically states that a written contractor agreement, 1099 reporting, and lack of payroll deductions do not determine employment status.

The law examines how the relationship actually operates.

Common Worker-Classification Mistakes

Hiring contractors to perform the company’s core service

Part B of the ABC test creates significant risk when contractors perform the same service the company sells to its customers.

Treating flexibility as proof of contractor status

Employees can have flexible hours, work remotely, and use substantial professional judgment. Flexibility alone does not make them contractors.

Relying exclusively on the contract

A well-written agreement cannot correct an employment relationship that operates differently in practice.

Assuming a license or LLC resolves the issue

Business formalities may support independent-business status, but they do not automatically satisfy every applicable factor.

Copying a competitor’s practices

Another business may also be misclassifying workers. Its workforce, contracts, exemption, or risk tolerance may also be different.

Applying the wrong test

Some employers use the federal common-law test when California’s ABC test applies. Others assume Borello applies without confirming that every prerequisite for an exception has been met.

Keeping contractors indefinitely without review

A legitimate project can evolve into an ongoing employee-like relationship. Classification should be reassessed when the work, supervision, duration, or business model changes.

Treating contractors exactly like employees

Requiring contractors to follow employee schedules, obtain routine time-off approval, attend all staff meetings, use employee performance reviews, or accept employee-style supervision may undermine the intended classification.

Not every shared process is automatically disqualifying. Security, confidentiality, safety, and project coordination may require reasonable standards. The full relationship matters.

Examples of Employee and Contractor Relationships

Example 1: Likely employee relationship

A bakery regularly engages a cake decorator to create the cakes it sells. The bakery establishes the decorator’s schedule, supplies the materials, sets detailed production requirements, supervises the work, and pays the person by the hour.

The arrangement raises concerns under all three parts of the ABC test:

• The bakery exercises substantial control.

• Cake decorating is part of the bakery’s usual business.

• The decorator may not operate a separate decorating business.

Calling the person a contractor would not resolve those concerns.

Example 2: Potential independent-contractor relationship

A retail store hires an established plumbing company to repair a broken pipe. The plumber serves multiple customers, advertises publicly, maintains the appropriate license and insurance, supplies tools, determines the repair methods, and invoices for the job.

The facts are more consistent with a genuine business providing services outside the retail store’s usual course of business.

The specific legal analysis would still depend on all relevant facts and applicable licensing rules.

Example 3: Marketing consultant requiring closer review

A dental practice hires a marketing consultant to redesign its website and create a limited advertising campaign. The consultant operates an established agency, serves several clients, negotiates a project fee, uses separate systems, and determines how the work is completed.

The facts may support contractor status. However, the dental practice should still determine whether the ABC test, a professional-services exception, a business-to-business exception, or another standard applies. It should also verify every statutory prerequisite instead of relying on the title “consultant.”

Example 4: Contractor arrangement that changes over time

A company initially hires a consultant for a three-month software implementation. After the project, the consultant begins working indefinitely, attends employee meetings, reports to a manager, works a company-assigned schedule, performs routine operational work, and needs approval for time away.

The original project relationship may have changed materially. The company should reassess classification rather than assuming the initial agreement continues to control.

What Can Happen If a Worker Is Misclassified?

Worker misclassification can create several forms of liability.

Depending on the facts, a business may face claims or assessments involving:

• Unpaid minimum wages

• Unpaid overtime

• Missed meal or rest periods

• Wage-statement violations

• Waiting-time penalties

• Unreimbursed business expenses

• Paid-sick-leave obligations

• Payroll taxes

• Unemployment insurance contributions

• Workers’ compensation premiums

• Interest

• Civil penalties

• Attorneys’ fees

• Government audits

• Representative or collective claims

• Contract disputes

Under California Labor Code section 226.8, willful misclassification can result in civil penalties of $5,000 to $15,000 per violation. If a pattern or practice is established, the range increases to $10,000 to $25,000 per violation. These penalties can be imposed in addition to other remedies. California Labor Code section 226.8 contains the current penalty provisions.

“Willful misclassification” generally involves voluntarily and knowingly misclassifying an individual as an independent contractor. A good-faith mistake and a willful violation are not necessarily treated identically, but even an unintentional error can still lead to significant unpaid-wage, tax, insurance, and recordkeeping liabilities.

What Should an Employer Do If It Suspects Misclassification?

Do not ignore the issue or simply replace the contractor agreement.

A careful review may include:

1. Identifying every contractor used by the business.

2. Documenting the services each person performs.

3. Determining which legal test applies.

4. Reviewing the written agreement.

5. Comparing the agreement with actual practices.

6. Evaluating Parts A, B, and C when the ABC test applies.

7. Confirming every condition of any claimed exception.

8. Reviewing payroll, tax, insurance, and wage exposure.

9. Consulting employment counsel and a tax professional.

10. Developing a lawful correction plan.

11. Updating processes to prevent the issue from recurring.

Do not retaliate against a worker for raising a classification or wage concern.

Employers should also avoid making abrupt changes before receiving advice. Reclassification can affect payroll, tax reporting, benefits, past compensation, workers’ compensation, contracts, and employee communications.

A Practical Independent-Contractor Review Checklist

Before engaging a California independent contractor, ask:

About the work

• Is the work outside our usual course of business?

• Do our employees perform similar work?

• Is this a distinct project or an ongoing operational function?

• Does the service require a license?

About control

• Who determines how the work is performed?

• Who sets the schedule and work location?

• Will the worker be supervised like an employee?

• Will the worker need routine approval for time away?

• Are we measuring a contracted result or managing daily activity?

About the worker’s business

• Does the worker operate an established business?

• Does the worker advertise services?

• Can the worker serve other clients?

• Does the worker negotiate rates?

• Does the worker have a separate business location?

• Does the worker carry appropriate licenses and insurance?

• Does the worker supply tools consistent with the trade?

• Would the business continue without our contract?

About the legal framework

• Does the ABC test apply?

• Is a statutory exception potentially available?

• Have we satisfied every condition of that exception?

• Does Borello apply?

• Are separate tax or federal standards relevant?

• Have counsel and the appropriate tax advisor reviewed close questions?

About documentation

• Is there a written agreement?

• Does the agreement accurately reflect the real arrangement?

• Is the project scope clear?

• Are confidentiality and intellectual-property responsibilities addressed?

• Are invoicing and payment terms defined?

• Is there a process for reviewing the relationship if the work changes?

A “yes” answer to one favorable question does not decide the classification. The checklist is a risk-screening tool, not a substitute for legal analysis.

How Small-Business HR Support Can Help

Small-business owners may not have the time or internal expertise to monitor every contractor relationship.

An HR consultant can help:

• Inventory current contractors

• Gather information about how relationships operate

• Identify arrangements that warrant legal review

• Coordinate with employment counsel

• Improve contractor-intake procedures

• Develop manager guidance

• Separate contractor and employee workflows

• Create classification review checklists

• Maintain appropriate documentation

• Implement reclassification decisions

• Train leaders on common risk factors

• Schedule periodic workforce audits

HR support should complement—not replace—legal and tax advice. The goal is to make classification review part of ordinary workforce planning instead of waiting for a claim or government audit.

Frequently Asked Questions About Employees and Independent Contractors in California

Can a worker choose to be an independent contractor?

The worker’s preference does not control the legal classification. Even if both parties want a contractor arrangement, the relationship must satisfy the applicable legal test.

Does working remotely make someone an independent contractor?

No. Employees and contractors can both work remotely. The business must evaluate the entire relationship.

Can an independent contractor work for only one company?

Dependence on a single hiring entity can create a significant problem under Part C of the ABC test. The complete facts and applicable test must be evaluated.

Does an LLC make the worker an independent contractor?

No. An LLC may support the existence of an independent business, but it does not automatically establish contractor status or satisfy the business-to-business exception.

Can an independent contractor be paid hourly?

The payment method can be relevant, particularly under Borello, but it is not conclusive by itself. An hourly worker may be a valid contractor in some circumstances, while a worker paid by project may still be an employee.

Are independent contractors protected from harassment in California?

Certain contractors are protected from harassment based on protected characteristics under California’s Fair Employment and Housing Act. Businesses should maintain respectful-workplace and complaint procedures that appropriately include contractors.

Does a Form 1099 establish contractor status?

No. Form 1099 reports compensation; it does not decide whether the classification is lawful.

Is every business-to-business contract exempt from the ABC test?

No. California’s business-to-business exception contains detailed requirements. If those requirements are satisfied, Borello may apply instead of the ABC test. The exception does not automatically establish independent-contractor status.

How often should contractor classifications be reviewed?

Review classifications before the relationship begins and periodically afterward. Reassess when the project, duration, supervision, duties, schedule, or business operations change.

Where can California employers find official guidance?

The California Labor Commissioner and Employment Development Department provide official classification guidance. Businesses should also obtain professional advice for fact-specific decisions.

Make Worker Classification Part of Your HR Compliance Strategy

California employee-versus-independent-contractor classification is too important to treat as a payroll preference.

The first question is not whether hiring a contractor would be cheaper or more convenient. The first question is whether the relationship legally qualifies for contractor status.

Small-business owners should remember:

• California generally presumes employee status under the ABC test.

• The hiring entity must ordinarily satisfy all three ABC factors.

• A 1099 or contractor agreement does not determine status.

• Exemptions often lead to another test rather than automatic contractor status.

• Federal and California standards can produce different results.

• Contractor relationships should be reviewed in practice, not only on paper.

• Misclassification can create substantial wage, tax, insurance, and penalty exposure.

• California contractors may still have protections against workplace harassment.

• Close or complex cases should be reviewed by qualified counsel.

At Moving Mountains HR Consulting, we help California businesses evaluate workforce practices, identify potential classification concerns, improve documentation, and build practical HR compliance systems. When legal analysis is required, we can help leadership organize the relevant facts and coordinate appropriately with employment counsel.

Concerned about employee-versus-independent-contractor classification in your business? Contact Moving Mountains HR Consulting to schedule an HR compliance review and take a more proactive approach to your workforce practices.