California Worker Classification: Independent Contractor or Employee?

The ABC Test for Independent Contractors

California uses a three-part “ABC” worker classification test to determine whether someone is an employee or independent contractor. This test is adopted and codified based on the California Supreme Court’s decision Dynamex Operations West, Inc v. Superior Court of Los Angeles, 4 Cal. 5th 903 (2018) (Dynamex). While the ABC test is the general rule in most circumstances, there are various exceptions under which a different test will apply.

Under the ABC test, an individual is presumed to be an employee, unless the company can prove all the following:

• A) That the worker is free from control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in actually performing the work;
• B) That the worker performs work that is outside the usual course of the hiring entity’s business; and
• C) That the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.

Simply put, this means that to classify someone as an independent contractor, the hiring entity must show that the individual truly operates independently, performs work different from its core operations, and maintains an ongoing business separate from the hiring entity.

If the hiring entity cannot demonstrate that the individual worker meets each of the three criteria, the worker is treated as an employee rather than an independent contractor, unless an applicable exception applies.

Exceptions to the ABC Test

California law contains numerous exceptions to the ABC test, each with varying levels of specificity and complexity. Some exceptions are broad and vague, while others are specific and narrowly defined, often subject to multiple qualifying criteria and statutory references.

The primary exceptions recognized under the ABC test include:

• Business-to-business contracting relationships — provided the contractor meets several detailed criteria, such as maintaining a separate business location and being free from the hiring entity’s control.
• Referral agencies — applies to entities that connect clients with individual service providers under specified conditions, such as for housecleaning, tutoring, event planning or minor home repair services, as outlined in Labor Code section 2777.
• Professional service contracts — controlled by the Borello test and covering certain occupations such as marketing, travel agents, graphic design, fine arts, photography, real estate, manicurists, barbers and several other specified professional fields under Labor Code section 2778.
• Single engagement events — applies to individuals contracting for stand-alone, nonrecurring events in a single location, or a series of events in the same location no more than once a week, such as a performance or presentation, as outlined under Labor Code section 2779.
• Music industry — controlled by the Borello test and covering specific roles such as recording artists, songwriters, producers and others engaged in the creation or performance of music under defined circumstances, as outlined under Labor Code section 2780.
• Contractor and subcontractor relationship — applies to construction industry relationships where subcontractors are licensed and meet specific criteria under Labor Code section 2781.
• Data aggregator — applies to businesses, research institutions or organizations that request and gather feedback on user interface, products, services, people, concepts, ideas, offerings or experiences from individuals willing to provide it, as specified under Labor Code section 2782.
• Motor clubs — controlled by the Borello test and applies to individuals providing motor club services who meet the criteria under Labor Code section 2784.
• Other specific occupations — this includes workers in certain licensed or regulated professions, such as physicians, surgeons, dentists, veterinarians, insurance brokers, lawyers, architects, engineers, accountants, and direct salespersons, and others as specified in Labor Code section 2783.

Given the numerous exceptions to the ABC test — each with its own distinct criteria, definitions and compliance requirements — employers should consult with legal counsel before determining whether an exception applies. Careful legal review helps ensure that all conditions are met and reduces the risk of misclassification under California law.

The Borrello Test

The ABC test is more rigid than the older common law standard, commonly known as the Borello test (S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989) (Borello)). It is important for employers to understand the Borello test, because it serves as the standard for determining worker classification under many of the exceptions to the ABC test.

Under the Borello test, the key consideration in determining proper worker classification is whether the business has the right to direct and control the manner and means by which the work is performed. In addition to the right to control, other factors must be considered, including:

• Ability to discharge at will, without cause;
• Whether the one performing services is engaged in a distinct occupation or business;
• The kind of work, and whether it’s usually done under close direction or supervision or by a specialist without supervision;
• Skill required in the particular occupation;
• Whether the principal or the worker supplies the instrumentalities, tools and place of work for the person doing the work;
• Length of time for which the services are to be performed;
• Method of payment, whether by the time or by the job;
• Whether the work is a part of the principal’s regular business; and
• Whether the parties believe they’re creating the relationship of employer-employee.

The ABC and the Borello tests share similar considerations, but the major difference is that the Borello test doesn’t require a business to satisfy all factors. Instead, courts evaluate and weigh the factors based on the specific circumstances of each case, making Borello a more flexible test than the ABC test.

Consequences of Misclassification

A worker who believes they have been improperly classified can file a wage claim and report a labor law violation with the Labor Commissioner’s Office, as well as file a lawsuit in court.

Misclassifying workers can be costly. If the Labor Commissioner’s Office, the Employment Development Department (EDD) or another division within the Labor and Workforce Development Agency (LWDA) determines that workers have been misclassified, employers may face substantial liability for restitution and penalties related to violations of employee rights and protections. This may include payment of minimum wages and overtime, unemployment insurance taxes and workers’ compensation coverage. Employers may also be required to pay the employees’ share of payroll taxes and could incur additional penalties and interest.

In addition to penalties that may be imposed for violations resulting from misclassifying a worker as an independent contractor, “willful misclassification” has separate civil penalties — meaning that the hiring entity voluntarily and knowingly classified an employee as an independent contractor.

Employers should continue to exercise caution when classifying workers as independent contractors and consult legal counsel to determine how the law applies to their specific work or service agreements. This includes identifying which classification standard applies, whether any statutory exceptions may apply and the potential risk of misclassification under the applicable test.

Freelance Worker Protection Act

When considering the use of independent contractor services in California, employers should also be aware that the state’s Freelance Worker Protection Act imposes specific requirements on those who engage “freelance workers,” including certain independent contractors.

A “freelance worker” means a person, or a single-person organization, hired as an independent contractor by a “hiring party” (employer) to provide “professional services” in exchange for compensation of $250 or more, either for a single contractor or in total for all services provided to the same hiring party within the previous 120 days.

The law doesn’t apply to every contract with independent contractors worth $250 or more; rather, it applies only to contracts involving the performance of “professional services” as defined in Labor Code section 2778.

An employer that engages a freelance worker to provide covered services must enter into a written contract with the individual that includes, at a minimum, the following information:

• The name and mailing address of each party.
• An itemized list of all services to be provided by the freelance worker, including the value of those services and the rate and method of compensation.
• The date on which the hiring party must pay or the method by which the date will be determined.
• The date by which a freelance worker must submit a list of services rendered under the contract to the hiring party for purposes of timely payment.

Employers must pay freelance workers on or before the payment date specified in the contract, or if no payment date is provided, no later than 30 days after the completion of services. Once work has begun, employers may not, as a condition of payment, require the freelance worker to accept reduced compensation, provide additional goods or services, or assign greater intellectual property rights than those agreed upon in the contract.

Employers are prohibited from discriminating against or taking any adverse action against a freelance worker for exercising rights under the law. A freelance worker who is aggrieved, or a public prosecutor, may file a civil action to enforce the law and may recover damages, attorney’s fees, and costs, as well as seek injunctive relief and any other remedies the court deems appropriate.

The law applies to contracts entered into or renewed on or after January 1, 2025. Employers must retain all contracts covered by this law for a minimum of four years.

Additionally, some local governments, such as the city of Los Angeles and San Francisco, have enacted ordinances pertaining to independent contractors. Hiring entities working with independent contractors must comply with both state law and any applicable local laws.