This topic includes the following information:

• Dynamex and the “ABC Test”
• Common Law “Borello Test”
• Exceptions to the ABC Test
• Application of the Law
• Consequences of Misclassification
• Defining Independent Contractor for Unemployment and Disability Insurance
• Workers’ Compensation and Independent Contractors
• Defining Independent Contractor for Federal Tax Purposes
• Reporting Obligations and Independent Contractors
• Other Laws Applicable to Independent Contractors

Dynamex and the “ABC Test”

California uses a three-part “ABC test” as the general test for independent contractors for purposes of applying the Labor and Unemployment Insurance Codes, a test adopted and codified from the California Supreme Court 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 several exceptions under which a different test will apply.1

In Dynamex, the California Supreme Court ruled that the long-standing common law “right to control” test, also known as the “Borello test,” did not apply in a wage and hour class action lawsuit. Instead, the Court adopted an “ABC test” to be applied when distinguishing between an employee and an independent contractor. Under the ABC test, an individual is presumed to be an employee, unless the company can prove all of 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 fact;
• 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.

If the hiring entity fails to show that the individual worker satisfies each of the three criteria, the worker is treated as an employee, not an independent contractor.2

In Dynamex, the plaintiffs were delivery drivers for a nationwide package and document delivery company, which classified them as independent contractors. The Court applied the ABC test and found that the drivers were employees, not contractors, because they:

• Performed work that was in the usual course of the employer’s business (delivering packages and documents for a delivery company); and
• Were not engaged in an independently established business because they worked exclusively for Dynamex.

Under the circumstances, they did not satisfy parts B or C of the test.

After the Dynamex decision, California passed a law that codified the ABC test while also creating numerous exceptions, under which the common law Borello test applies.

Common Law “Borello Test”

The ABC test is more rigid and inclusive than the older common law classification test, commonly referred to as the Borello test ( S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989) (Borello)). Under the Borello test, the most important factor in determining proper worker classification is whether the business has the right to direct and control the manner and means of performing the work (sometimes referred to as the “right to control” test). In addition to the right to control, courts consider several factors, 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 the 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.

Held that the drivers were employees as a matter of law.3 This case ultimately settled for $228 million.

While the ABC test and the Borello test overlap, the significant difference is that the Borello test doesn’t require a business to satisfy all the factors listed above. Rather, courts consider and weigh the factors in each case, making it more flexible and less demanding than the rigid ABC test.

Exceptions to the ABC Test

California law contains more than 100 distinct exceptions to the ABC test, which vary in their specificity and complexity. Some are vague while others are extremely specific and narrow, qualified by multiple criteria and statutory references. Many of the specifics are included in the descriptions below to illustrate the law’s complexity and emphasize that, regardless of whether an exception seems clearly applicable or not, businesses should consult with legal counsel regarding the use of independent contractors under the law.

Additionally, the law also provides that if a court determines the ABC test “cannot be applied in a particular context,” the Borello test will govern whether a worker is an employee or independent contractor. Employers will have to wait and see how the courts utilize this provision.

Business-to-Business Contracting Relationships

Labor Code section 2776 states that the ABC test doesn’t apply to a “bona fide business-to-business contracting relationship.” If an individual acting as a sole proprietor or a business entity — formed as a sole proprietorship, partnership, LLC, LLP or corporation (business service provider) — contracts to provide services to another business (contracting business), the Borello test determines employee or independent contractor status if the contracting business can satisfy all of the following criteria.

The business service provider must:

• Be free from the control and direction of the contracting business 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.
• Provide services directly to the contracting business rather than to customers of the contracting business. This requirement does not apply if the business service provider’s employees are solely performing the services under the contract under the name of the business service provider and the business service provider regularly contracts with other businesses.
• Have a contract in writing.
• Have the required business license or business tax registration if the work is performed in a jurisdiction that requires such licensing and registration.
• Maintain a business location that’s separate from the contracting business’ work location.
• Customarily be engaged in an independently established business of the same nature as that involved in the work performed.
• Be able to contract with other businesses to provide the same or similar services and maintain a clientele without restrictions from the hiring entity.
• Advertise and hold itself out to the public as available to provide the same or similar services.
• Provide its own tools, vehicles and equipment to perform the services.
• Be able to negotiate its own rates.
• Be able to set its own hours and location of work consistent with the nature of the work.
• Not be performing the type of work for which a license from the Contractor’s State License Board is required, pursuant to Chapter 9 (commencing with section 7000) of Division 3 of the Business and Professions Code.

Businesses must comply with all of the aforementioned factors to use this exception — which only means that the Borello test applies instead of the ABC test. Businesses must be mindful of the details in using this exception. For example, the lack of a contract in writing or a required business license may be the difference between applying Borello or the ABC test.

One of the most important factors above is the requirement that the service provider only provide services directly to the contracting entity, not to its customers. This presents a problem for a number of work/service arrangements. Subsequent legislation attempted to clarify this requirement by adding that the requirement doesn’t apply if the business service provider’s employees are “solely performing the service under the contract under the name of the business service provider and the provider regularly contracts with other businesses.” The revision may help some business arrangements, but it remains to be seen how courts will interpret this provision.

Businesses should consult with legal counsel regarding their business-to-business contracts.

Referral Agencies

Labor Code section 2777 excludes “referral agencies” from the ABC test on certain conditions. If an individual acting as a sole proprietor, or a business entity formed as a partnership, LLC, LLP or corporation (service provider) provides services to clients through a referral agency, the Borello standard applies if the referral agency can show the following:

• The service provider is free from the control and direction of the referral agency in connection with the performance of the work for the client, both as a matter of contract and in actually performing the work.
• If work for the client is performed in a jurisdiction that requires the service provider to have a business license or business tax registration, the service provider has the required business license or business tax registration.
• If work for the client requires the service provider to hold a state contractor’s license pursuant to Chapter 9 (commencing with section 7000) of Division 3 of the Business and Professions Code, the service provider has that license.
• If there is an applicable professional licensure, permit, certification, or registration administered or recognized by the state available for the type of work being performed for the client, the service provider must certify to the referral agency that they have the appropriate licensure, permit, certificate or registration.
• The service provider delivers services to the client under service provider’s name without being required to deliver services under the name of the referral agency.
• The service provider provides its own tools and supplies to perform the services.
• The service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed for the client.
• The referral agency does not restrict the service provider from maintaining a clientele and the service provider is free to seek work elsewhere, including through a competing referral agency.
• The service provider sets their own hours and terms of work or negotiates their hours and terms of work directly with the client.
• Without deduction by the referral agency, the service provider sets their own rates, negotiates their own rates with the client through the referral agency, negotiates rates directly with the client, or is free to accept or reject rates set by the client.
• The service provider is free to accept or reject clients and contracts, without being penalized in any form by the referral agency. This doesn’t apply if the service provider accepts a client or contract and then fails to fulfill any of its contractual obligations.

The law defines “referral agency” as a business that connects clients with service providers to provide certain services under a contract. For the purpose of this exception referrals for services “include, but are not limited to , graphic design, web design, photography, tutoring, consulting, youth sports coaching, caddying, wedding or event planning, services provided by wedding and event vendors, minor home repair, moving, errands, furniture assembly, animal services, dog walking, dog grooming, picture hanging, pool cleaning, yard cleanup, and interpreting services.”

The law specifically excludes certain services, including janitorial, delivery, courier, transportation, trucking, agricultural labor, retail, logging, in-home care, construction services other than minor home repair, and high hazard industry services.

The law defines “referral service contract” as the agency’s contract with clients and service providers governing the use of its intermediary services, which are limited to “client referrals and other administrative services ancillary to the service provider’s business operation.” A referral agency’s contract may include a fee or fees to be paid by the client for using the referral agency.

Professional Services Contracts

Labor Code section 2778 provides that if specific criteria are met, certain “professional services” contracts are exempt from the ABC test and will be controlled by the Borello test. To fall under this exception, the hiring entity must establish that the individual (contractor):

• Maintains a business location, which may include the individual’s residence, that’s separate from the hiring entity (but the individual may perform services at the hiring entity’s location);
• Has a business license and any required professional licenses or permits to practice in the profession if work is performed more than six months after this section’s effective date;
• May set or negotiate their own rates for the services performed;
• May set their own hours outside of project completion dates and reasonable business hours;
• Customarily performs the same type of work under contract with another hiring entity or holds themselves out to other potential customers as available to perform the same type of work;
• Customarily and regularly exercises discretion and independent judgment in performing the services.

An “individual” under this provision may provide services through sole proprietorship or other business entity. Even if all the above criteria are met, only certain “professional services” qualify for the exception, including:

• Marketing, provided that the contracted work is original and creative in character and the result of which depends primarily on the invention, imagination, or talent of the employee or work that is an essential part of or necessarily incident to any of the contracted work.
• Administrator of human resources, provided that the contracted work is predominantly intellectual and varied in character and is of such character that the output produced or the result accomplished cannot be standardized in relation to a given period of time.
• Travel agent services provided by either of the following:
• A person regulated by the Attorney General under Article 2.6 (commencing with section 17550) of Chapter 1 of Part 3 of Division 7 of the Business and Professions Code; or
• An individual who sells travel within the meaning of subdivision (a) of section 17550.1 of the Business and Professions Code and who is exempt from the registration under subdivision (g) of section 17550.20 of the Business and Professions Code.
• Graphic design.
• Grant writer.
• Fine artist who creates works of art to be appreciated primarily or solely for their imaginative, aesthetic, or intellectual content, including drawings, paintings, sculptures, mosaics, works of calligraphy, works of graphic art, crafts, or mixed media.
• An enrolled agent licensed by the U.S. Treasury Department to practice before the Internal Revenue Service pursuant to Part 10 of Subtitle A of Title 31 of the Code of Federal Regulations.
• Payment processing agent through an independent sales organization.
• A photographer, photojournalist, videographer or photo editor who works under a written contract that specifies the rate of pay and obligation to pay by a defined time, as long as the individual providing the services is not directly replacing an employee who performed the same work at the same volume, and the individual does not primarily perform the work at the hiring entity’s business location.
• This clause is not applicable to an individual who works on motion pictures (includes theatre, television, streaming, other shows, etc.). Details on what constitutes a “submission” have been omitted.
• A Digital Content Aggregator, defined as a licensing intermediary that obtains a license or assignment of copyright from a still photographer, photojournalist, videographer or photo editor for the purposes of distributing that copyright by way of sublicense or assignment to the intermediary’s third-party end users.
• A freelance writer, translator, editor, copy editor, illustrator or newspaper cartoonist who works under a written contract that specifies the rate of pay, intellectual property rights, and obligation to pay by a defined time, as long as the individual providing services is not directly replacing an employee who performed the same work at the same volume and the individual doesn’t primarily perform the work at the hiring entity’s location.
• Services provided by an individual as a content contributor, advisor, producer, narrator, or cartographer for a journal, book, periodical, evaluation, other publication or educational, academic, or instructional work if the individual works under a contract that specifies the rate of pay, intellectual property rights and obligation to pay by a defined time, as long as the individual is not replacing an employee who performed the same work at the same volume, and the individual does not primarily work at the hiring entity’s location.
• Licensed estheticians, electrologists, licensed manicurists, barbers or cosmetologists provided that the individuals:
• Set their own rates, process their own payments and are paid directly by clients.
• Set their own hours of work and have sole discretion to decide the number of clients and which clients for whom they will provide services.
• Have their own book of business and schedule their own appointments.
• Maintain their own business license for services offered.
• If the individual is performing services at the hiring entity’s location, then the individual issues a Form 1099 to the salon or business owner from which they rent their business space. - This exception to the ABC test expires, with respect to licensed manicurists, on July 1, 2029.
• Master class teacher, who is someone hired by a performing arts company to teach a master class for no more than one week. “Master class” means a “specialized course for limited duration that is not regularly offered by the hiring entity and is taught by an expert in a recognized field of artistic endeavor who does not work for the hiring entity on a regular basis.”
• Appraiser as defined in Part 3 (starting with section 11300) of Division 4 of the Business and Professions Code.
• Registered professional forester licensed pursuant to the Public Resources Code.
• Real Estate Licensee licensed by the state of California pursuant to Division 4 (commencing with section 10000) of the Business and Professions Code. The real estate licensee’s classification is determined by Business and Professions Code section 10032 or, if that’s not applicable, under various statutes or the Borello test, depending on the context.
• Home Inspector as defined by section 7195 of the Business and Professions Code.
• Repossession agency licensed pursuant to Business and Professions Code section 7500.2, which determines worker classification if the agency is free from the hiring person’s or entity’s control and direction in connection with the performance of the work, both under the contract for the performance of the work and in actually performing the work.

Some of the professional services listed above are clear, as they're qualified by specific statutory references; however, some of them are described in vague terms.

Employers considering the use of contractors for any of these professional services should consult with legal counsel before doing so to reduce the risk of misclassification.

Single Engagement Events

Labor Code section 2779 contains an exception to the ABC test for single-engagement events. The ABC test does not apply to two individuals wherein each is acting as a sole proprietor or separate business entity formed as a partnership, LLC, LLP, or corporation providing services under a contract at the location of a single-engagement event under the following conditions:

• Neither individual is subject to the control and direction of the other, in in connection with the performance of the work, both under the contract for performance and in actually doing the work.
• Each individual has the ability to negotiate their rate of pay with the other.
• The written contract specifies the total payment for services provided by both individuals at the event and the specific rate paid to each.
• Each individual maintains their own business location, which may include the individual’s personal residence.
• Each individual provides their own tools, vehicles, and equipment to perform the contract services.
• Each individual has the required business license or business tax registration, if required by the jurisdiction in which the work is performed.
• Each individual is customarily engaged in the same or similar type of work performed under the contract or each individual separately holds themselves out to the other potential customers as available to perform the same type of work.
• Each individual can contract with other businesses.

A single-engagement event is a stand-alone non-recurring event in a single location, or a serious of events in the same location no more than once a week. Services under this exception do not include janitorial, delivery, courier, transportation, trucking, agricultural labor, retail, logging, in-home care, construction services other than minor home repair, and high hazard industry services.

Music Industry

Labor Code section 2780 provides an exception to the ABC test for occupations connected with creating, marketing, promoting, or distributing sound recordings and musical compositions. Under this exception, the Borello test applies to:

• Recording artists, subject to certain conditions.
• Songwriters, lyricists, composers, and proofers.
• Managers of recording artists.
• Record producers and directors.
• Musical engineers and mixers engaged in the creation of sound recordings.
• Musicians engaged in the creation of sound recordings, subject to certain conditions.
• Vocalists, subject to conditions.
• Photographers working on recording photo shoots, album covers, and other press and publicity purposes.
• Independent radio promoters.

Any other individual engaged to render any creative, production, marketing, or independent music publicist services related primarily to the creation marketing promotion, or distribution of sound recordings or musical compositions.

This exception does not apply to film and television unit production crews or publicists who are not independent music publicists.

Section 2780 doesn’t create a blanket exception for the occupations listed above. Most notably, it provides that musicians and vocalists who don’t receive royalties from the sound recordings or musical compositions will be treated as employees solely for purposes of receiving minimum and overtime wages for the hours worked during the engagement.

Additionally, a musician or musical group performing for a single-engagement live performance event (e.g., a concert) is subject to Borello unless the musical group is performing as a symphony orchestra, performing at a theme park, performing in a musical theatre production, or the group is headlining an event with more than 1,500 attendees or performing at a festival that sells more than 18,000 tickets per day, in which case the ABC test applies.

Lastly, section 2780 provides an exception for “individual performance artists” including comedians, improvisors, magicians, illusionists, mimes, spoken word performers, storytellers and puppeteers performing original work they created so long as they are free from the control of the hiring entity, retain their intellectual property rights, set the terms of work and negotiate their rates.

This exception for the music industry contains some complicated provisions. Businesses in the music industry should consult with legal counsel on worker classification issues.

Contractor and Subcontractor Relationship

Section 2781 creates an exception for the “relationship between a contractor and an individual performing work pursuant to a subcontract in the construction industry.” Both the Borello test and Labor Code section 2781, which is specific to contractors and very similar to the Borello test, will determine whether an individual is a contractor’s employee. To qualify for this exception, the contractor must show that:

• The subcontract is in writing.
• The subcontractor is licensed by the Contractors State License Board and the work is within the scope of that license.
• If the subcontractor is domiciled in a jurisdiction that requires the subcontractor to have a business license or business tax registration, the subcontractor has the required business license or business tax registration.
• The subcontractor maintains a business location that’s separate from the contractor’s business or work location.
• The subcontractor has the authority to hire and to fire other persons to provide or to assist in providing the services.
• The subcontractor assumes financial responsibility for errors or omissions in labor or services as evidenced by insurance, legally authorized indemnity obligations, performance bonds, or warranties relating to the labor or services being provided.
• The subcontractor is customarily engaged in an independently established business of the same nature as that involved in the work performed.

Data Aggregator

Section 2782 provides that the ABC test doesn’t apply to the relationship between a “data aggregator” and a “research subject” providing feedback to the data aggregator under the following conditions:

• The research subject is free from the control and direction of the data aggregator with respect to the substance and content of the feedback.
• The nature of the feedback requested requires the research subject is providing feedback to exercise independent judgment and discretion.
• The research subject is has the ability to reject feedback requests without being penalized by the data aggregator.

For purposes of this exception, a “data aggregator” is a business, research institution, or organization that requests and gathers feedback on user interface, products, services, people, concepts, ideas, offerings or experiences from individuals willing to provide it.

A “research subject” is any person who willingly engages with a data aggregator in order to provide individualized feedback on user interface, products, services, people, concepts, ideas, offerings, or experiences, and does not engage solely for the purposes of completing individual tasks.

Specific Occupations

Section 2783 provides that the ABC test doesn’t apply to the following occupations, which are subject to the Borello test:

• A person or organization licensed by the Department of Insurance under Chapters 5 (commencing with section 1621), Chapter 6 (commencing with section 1760) and Chapter 8 (commencing with section 1831) of Part 2 of Division 1 of the Insurance Code (e.g., certain insurance agents, brokers, analysts, etc.).
• Physician, surgeon, dentist, podiatrist, psychologist or veterinarian licensed by the state of California under Division 2 of the Business and Professions Code (commencing with section 500), performing professional medical services to or by a health care entity, including an entity organized as a sole proprietorship, partnership or professional corporation. Nothing in the subdivision applies to employment settings “currently or potentially governed by collective bargaining agreements” for the licensees identified (it’s unclear at this time what it means to be “potentially” governed by a CBA).
• A practicing lawyer, architect, engineer, private investigator or accountant who holds an active license from the state of California.
• A securities broker-dealer or investment adviser registered with the Securities and Exchange Commission or the Financial Industry Regulatory Authority or licensed by the state of California under Chapter 2 (commencing with section 25210) or Chapter 3 (commencing with section 25230) of Division 1 of Part 3 of Title 4 of the Corporations Code.
• A direct salesperson as described in section 650 of the Unemployment Insurance Code, so long as that section’s conditions are met.
• A commercial fisherman working on an American vessel (details of commercial fisherman exception omitted). This exception expires January 1, 2031.
• A newspaper distributor working under contract with a newspaper publisher, and a newspaper carrier. This exception expires January 1, 2030.
• Individual engaged by an international exchange visitor program that has obtained full official designation under federal law.
• A competition judge with specialized skill or expertise. This includes amateur umpires and referees.

For the most part, the above exceptions are clear. But because some exceptions are narrow and/or qualified by reference to specific statutes, employers should consult with legal counsel to determine whether the exception applies to their specific circumstances and, if so, whether the circumstances meet the Borello standard.

Motor Clubs

Per section 2784, the ABC test will not apply to “the relationship between a motor club holding a certificate of authority issued pursuant to Chapter 2 (commencing with section 12160) of Part 5 of Division 2 of the Insurance Code and an individual performing services pursuant to a contract between the motor club and a third party to provide motor club services utilizing the employees and vehicles of the third party.”

Instead, the Borello test will apply if the motor club shows that the third party is a “separate and independent business” from the motor club.

• Even if an exception to the ABC test applies, employers should use caution in classifying workers as independent contractors — consult with legal counsel before doing so to assess any risk of misclassification.

Application of the Law

California's worker classification law, enacted in 2020, states that it does not change, “but is declaratory of, existing law” with regard to the IWC Wage Orders and “violations of the Labor Code relating to wage orders.” In other words, the ABC test applies to any claim, including Labor Code violations, that rest on an employer's obligations under a wage order, including minimum wage, overtime, reporting time pay, recordkeeping violations, meal and rest periods and others.

In 2021, the California Supreme Court determined that the Dynamex decision applies retroactively to all cases “not yet final” as of the date Dynamex was decided.4 The court reasoned that Dynamex did not change any “settled rule” about what test applied to the Wage Orders and, thus, it would not be “improper or unfair” to apply it to employers retroactively.

Regarding retroactivity and existing claims, it’s unclear the extent to which employers may be able to use the exceptions to the ABC test described above and codified in Labor Code sections 2776 through 2784. The law specifically states that the exceptions apply “retroactively to existing claims and actions to the maximum extent permitted by law,” though that language is far from clear and the courts have not yet decided any cases on that issue.

• Employers should continue using caution in classifying workers as independent contractors - they should consult with legal counsel about which classification standard likely applies to a given arrangement/contract, whether any of the numerous exceptions apply, and if there's any risk of misclassification under the applicable standard.

App-Based Drivers

In 2020, California voters approved Proposition 22, a ballot measure that allows certain app-based rideshare and delivery drivers to be classified as independent contractors provided that the hiring entity:

1. Doesn’t unilaterally prescribe specific dates, times of day, or minimum number of hours during which the driver must perform services;
2. Doesn’t require the driver to accept any specific rideshare or delivery service request or assignment as a condition of maintaining access to the company’s application or platform;
3. Allows drivers to perform rideshare or delivery services for any other company, including direct competitors; and
4. Doesn’t restrict the worker from performing any other kind of lawful work.

Additionally, the law provides covered rideshare and delivery drivers with certain benefits and protections, including an earnings guarantee of 120 percent of the applicable minimum wage and mileage compensation for all “engaged” time spent driving. Covered drivers can also receive a health care subsidy if they work at least 15 hours per week.

Proposition 22 also protects drivers from discrimination and directs hiring entities to develop harassment prevention policies to protect the drivers and users of the app. Companies are required to conduct background checks and safety training for its drivers.

• Effective January 1, 2026, California law provides covered rideshare drivers right to unionize under the jurisdiction of the California Public Employment Relations Board (PERB).5 Under the new law, the Transportation Network Company Drivers Labor Relations Act, covered drivers have the right to form, join and participate in driver organizations, bargain through representatives of their own choosing and engage in concerted activities for the purpose of bargaining or other mutual aid or protection, for which the law details various procedures and rules.

Covered transportation network companies have new obligations under the law, including quarterly reporting requirements starting January 1, 2026.

Covered entities should consult legal counsel to ensure compliance.

 

Consequences of Misclassification

Mislabeling a worker as an independent contractor creates potential liability for employment taxes and penalties, and liability for failure to fulfill the many legal obligations owed to an employee, such as wage and hour requirements.

California administrative agencies, the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) closely scrutinize alleged principal/independent contractor relationships to ensure that those relationships are not, in reality, employer/employee relationships.

Challenges to the legitimacy of an existing independent contractor/principal relationship can arise in many forms, including:

• Filings for unemployment insurance (UI) benefits.
• Claims for unpaid wages.
• Claims for workers’ compensation.
• Charges of employment discrimination.
• Investigations by the IRS, the DOL, the California Department of Industrial Relations (DIR) and California Employment Development Department (EDD) to audit wage payments, workers’ compensation coverage and Unemployment Insurance Fund contributions.

In addition to federal and state agencies, under California law, a city attorney for a city with a population of 750,000 or more (San Francisco, San Jose, Los Angeles, San Diego) can bring an action for injunctive relief against businesses suspected of misclassifying workers as independent contractors.

The consequences of misclassifying an employee as an independent contractor in a wage or hour context include, but are not limited to, liability for unpaid wages for a period of up to three years, including potential overtime pay. If employee status is found, the failure to pay all wages due every pay period can result in penalties of $100 to $200 per employee per pay period, and up to 25 percent of the wages not paid to each employee for each pay period.6 Moreover, employers making lump sum payments to individuals improperly classified as independent contractors may violate the statutory obligation to provide itemized wage statements to employees each pay period, and become subject to additional civil penalties of $250 per employee for the first violation and $1,000 per employee for each subsequent violation.7

In addition, failing to pay all wages due and owed to a terminated employee who was improperly classified as an independent contractor in a timely fashion can subject you to penalties of up to 30 times the employee’s daily wage without regard to the actual amounts of unpaid wages.8

Misclassification also exposes employers to liability under California’s Private Attorneys General Act, under which aggrieved employees can bring civil actions on behalf of the state to enforce provisions of the Labor Code and recover civil penalties. On the federal level, the Department of Labor will enforce the Fair Labor Standards Act and will investigate claims of improper classification of workers as independent contractors. The National Labor Relations Board may also take action to require employers to reclassify independent contractors as employees.

Willful Misclassification

It is unlawful for any person or employer to “willfully misclassify” an individual as an independent contractor. The law also prohibits employers from charging a misclassified independent contractor for goods, materials, space, rental, services, government licenses, repairs, equipment maintenance or fines that arise from the individual’s employment, if the charges would have violated the law if the person had been an employee.9

Willful misclassification means: “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.”

The civil penalty for violation of this law ranges from $5,000 to $25,000 for each violation. Other remedies include requiring the employer to display on its website or in the workplace a notice of the serious violation of misclassifying an independent contractor, a statement that the employer has changed its business practices in order to comply with the law, and information on how to contact the California Labor and Workforce Development Agency to report misclassification. The notice must be posted for one year and signed by an officer of the employer.

The law also imposes joint liability on a person who is retained to assist with classification and who knowingly advises an employer to treat an individual as an independent contractor to avoid employee status. Joint liability does not apply to a licensed attorney or to a person who provides advice to their own employer. Joint liability would apply to a non-attorney outside consultant.

The civil penalties for deliberate misclassification are in addition to any fines or taxes owed to the DOL, IRS or the EDD or any unpaid wages owed to workers.

• You should assume all workers are employees unless they clearly meet all legal requirements and pass all tests for proper classification of independent contractors. Consult with legal counsel to help ensure proper classification of independent contractors.

Defining Independent Contractor for Unemployment and Disability Insurance

For the purposes of unemployment and disability insurance, California’s Employment Development Department (EDD) applies the ABC test to determine whether an individual is an employee or independent contractor.10

If individuals classified as independent contractors are found to be employees, you will be assessed for amounts due for unemployment insurance contributions, disability insurance contributions and state income tax withholding amounts. In addition, if you, without good cause, fail to pay required contributions for unemployment or disability insurance benefits, you are liable for a penalty of 10 percent of the amount of the contributions (plus interest) on any unpaid contributions.11

For more information on Unemployment Insurance and independent contractors, see “Unemployment Insurance and Independent Contractors” in Employers Subject to the Unemployment Insurance Tax.

Workers’ Compensation and Independent Contractors

The test for independent contractors for purposes of applying workers compensation law is the ABC test described above. Misclassification of employees as independent contractors can result in denial of workers’ compensation coverage, penalties for failure to provide workers’ compensation, and payment of workers’ compensation premiums from the date of hire of the independent contractor(s).12

If you have misclassified an individual as an independent contractor and have not provided them with workers’ compensation coverage, you can be held liable for civil tort liability to the individual and to third parties who are injured as a result of negligent acts by the misclassified individual during the course of employment. In addition, if you fail to secure workers’ compensation insurance for your employees, you are subject to all of the following potential liabilities:

• Workers’ compensation claims and lawsuits filed by injured employees
• A penalty of up to $10,000 payable to the state13
• An additional penalty of 10 percent of any workers’ compensation benefits recoverable by the injured employee14
• Attorneys’ fees15

Defining Independent Contractor for Federal Tax Purposes

The Internal Revenue Service (IRS) has its own test to determine if someone is an independent contractor or employee, which has implications for payment of federal employment taxes, including Social Security taxes, payment under the Federal Unemployment Tax Act, and withholding of worker-owed employment taxes.

Misclassification of bona fide employees as independent contractors results in the federal government collecting significant financial penalties from employers, and the IRS aggressively audits organizations to expose abuses. If the IRS determines a business misclassified an employee, the business can be held liable for employment taxes, such as Social Security contributions, federal income taxes not withheld, along with penalties and fines.

The organization is not entitled to collect these amounts from the alleged independent contractor.

The IRS Test

The IRS examines its own set of factors to determine if an individual is an independent contractor, similar to California’s common law control test factors. Moreover, the IRS weighs the factors differently from its California counterparts.

When determining the level of control and independence of workers, the IRS generally looks at the following factors:

• Behavioral: Are the worker’s actions and work hours controlled by the hiring party?
• Financial: Does the hiring party provide the worker with expense accounts, expense reimbursements, tools, supplies and/or other equipment?
• Type of Relationship: Does the worker have benefits, such as vacation, PTO, sick leave, health insurance, etc.? Is the worker performing tasks that are a key function of the hiring party’s business? Is the relationship for a specified period of time?

You must consider all of these factors, along with the applicable standard under California law, before deciding to classify a worker as an independent contractor for federal tax purposes.

• Always document how you analyze each factor while making your determination. If you wrongly classify an employee as an independent contractor, the IRS can hold you liable for employment taxes.

The IRS website provides extensive guidance on properly classifying a worker as an independent contractor. Note that you must satisfy California’s test as well as the IRS test — they are not mutually exclusive.

Fair Labor Standards Act

For purposes of the federal Fair Labor Standards Act (FLSA), the U.S. Department of Labor (DOL) adopted a new independent contractor rule, effective March 11, 2024. Without any prioritizing, the DOL’s rule considers the following six key factors:

• Degree to which the potential employer controls the work;
• Worker’s profit or loss opportunity;
• Worker’s and potential employer’s investments in equipment and materials;
• Degree of permanence of the work relationship;
• Worker’s skill level; and
• Extent to which the work is an integral part of the potential employer’s business.

• On May 1, 2025, the DOL issued a field assistance bulletin stating it intends not to enforce its 2024 independent contractor rule while the agency reconsiders it. Instead, the DOL will make worker classification determinations in accordance with the 2008 version of Fact Sheet #13 and the reinstated Opinion Letter FLSA2019-6 addressing virtual marketplace companies.

For companies employing workers in California, the DOL rule won’t alter their approach to classifying workers as employees or independent contractors because California adheres to a stricter test for determining employment status.

The DOL’s rule may, however, be applicable to businesses with employees outside of California. As such, it’s essential for multi-state employers to conduct a thorough review of their worker classification procedures. This review should consider both the federal guidelines and relevant standards specific to each state where work is being performed.

Reporting Obligations and Independent Contractors

All businesses and government entities who hire independent contractors must file reports with the EDD. This independent contractor reporting program is designed to locate parents who are delinquent in their child support obligations.16

The report must be made on the Independent Contractors Report - DE542.

• Independent Contractors Report - DE542

Specific information must be reported within 20 days of entering into a contract with, or making payments of $600 in any calendar year to, an independent contractor. EDD matches the reports against child support records to locate parents who are delinquent in payments.

When hiring an independent contractor, the law requires a report from anyone who is:

• Doing business in California
• Deriving trade or business income from sources within California
• Otherwise subject to California law

Businesses operating outside California are subject to this law. For example, an independent contractor who works in California for a business based in Texas must be reported to California’s EDD.

Hiring entities subject to the law include:

• Individuals
• Corporations
• Associations
• Partnerships
• Agents of any of the above
• California or any of its political subdivisions
• Charter cities
• Any political body that is not a subdivision or agency of the state

Hiring entities who have no employees and, therefore, are not registered with EDD, are not required to register and receive a California employer account number solely for purposes of reporting independent contractor service providers. Unregistered hiring entities will complete the required report using a Social Security number or Federal Employer Identification Number (FEIN).

Independent Contractor Report Content

The independent contractor reporting requirements apply if an independent contractor is hired and:

• You are required to file a Form 1099-MISC for the services performed by the independent contractor.
• You pay the independent contractor $600 or more or enter into a contract for $600 or more. If the cost of parts and materials is included in the contract or payments, this cost must be included in determining if the independent contractor has been paid $600 or more.
• The independent contractor is an individual or sole proprietorship.

If all three of the above statements apply, you must report the independent contractor to the EDD. No reporting is required for independent contractors that are corporations, general partnerships, limited liability partnerships or limited liability organizations.

If you are a California business or government entity, you must report all independent contractors who meet the minimum dollar requirements regardless of where they live or work. For example, a California business hires an independent contractor who lives and works in New York. You must report this independent contractor to the EDD.

If the independent contractor works in California, you must report to the EDD even if you are based in another state. A business based in New York must report to the EDD if it hires an independent contractor who lives and works in California.

The EDD requires a report of all of the following:

• The hiring entity’s:
• FEIN
• California employer account number
• Social Security account number (if applicable)
• Business name, address and telephone number
• The independent contractor’s:
• First name, middle initial and last name
• SSN
• Address
• The start date of the contract
• The contract expiration date (unless it is an ongoing contract)

Independent contractors may have FEINs and business names, making it difficult to determine if they are sole proprietors whom you must report. Reporting a FEIN does not meet the legal requirement of reporting the independent contractor’s SSN. By statute, you must obtain and report the first name, last name and SSN of any independent contractors that are sole proprietors. The IRS’s Form W-9 requires sole proprietors to list their first and last names. If you still don’t know the SSN after reviewing the Form W-9, you can ask the independent contractor for the SSN. Form W-9 is available on the IRS website.

• Independent Contractors Report - DE542

Forms for Independent Contractor Reporting

Independent Contractors Report - DE 542 is also available online from the EDD.

Mail or fax the completed report to:

Employment Development Department
P.O. Box 997350, MIC 96
Sacramento, CA 95899-7350
Fax: (916) 319-4410

Employers may also file these reports online, using EDD’s e-Services for Business.

When hiring a large number of independent contractors, you can send the information via magnetic media. For more information, contact the EDD’s Magnetic Media Unit at (916) 651-6945.

Independent Contractor Report Filing Deadlines

Send the Independent Contractors Report - DE 542 to the EDD within 20 days of entering into a contract for $600 or more in any calendar year with an independent contractor or within 20 days of making payments totaling $600 in any calendar year to an independent contractor, whichever is earlier. The contract can be written or verbal. If you are unable to determine when total payments issued equal or exceed $600, estimate the dollar amount of the contract and check the box on the Independent Contractors Report - DE 542 that indicates ongoing.

If you hire an independent contractor on more than one occasion during a year, report the independent contractor at whatever point the $600 threshold is met, even if it is not during the first period of work. After you make the report for a calendar year, you need not file further reports that year if the same independent contractor receives another $600.

Independent Contractor Reporting Penalties

There is a penalty of $24 for each instance of late filing or failure to file the independent contractors report, unless there is good cause. If a conspiracy exists between the hiring entity and the independent contractor to conceal the report or to supply a false or incomplete report, the penalty increases to $490.

Other Laws Applicable to Independent Contractors

Though retaining true independent contractors can allow you to avoid many employment obligations, the following concerns require your attention.

Freelance Worker Protection Act

California’s Freelance Worker Protection Act imposes certain requirements on employers that hire “freelance workers.”17

Under the new law, “freelance worker” means a person, or a one-person organization, that is hired as an independent contractor by a “hiring party” (employer) to provide “professional services” in exchange for an amount equal to or greater than $250, either by itself or when combined for services between the same hiring party and independent contractor over the course of the preceding 120 days.

The law doesn’t apply to every agreement with independent contractors worth $250 or more, only to those involving the performance of “professional services” as that term is defined in Labor Code section 2778. For more information on the specific services included, see ”Professional Services Contracts” above.18

An employer engaging a freelance worker for covered services must have a written contract with the individual that includes, at a minimum, all 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 the freelance worker on or before the date specified in the contract or, if the contract doesn’t specify the payment date, no later than 30 days after the completion of services.19

Once performance of services has started, employers cannot require, as a condition of payment, that the freelance worker accept less compensation or provide more goods or services or grant more intellectual property rights than agreed to in the contract.20

Employers are prohibited from discriminating or taking any adverse action against a freelance worker for asserting their rights under the law.21 An aggrieved freelance worker or public prosecutor may bring a civil action to enforce the law, in which they may recover damages, attorney’s fees, costs, obtain injunctive relief and any other remedies deemed appropriate by the court.22

The law applies to contracts entered into or renewed on or after January 1, 2025. Employers must keep contracts covered by this law for no less than four years.23

Local Independent Contractor Ordinances

Some local governments, such as the city of Los Angeles and San Francisco, have enacted ordinances pertaining to independent contractors.

• Given the severe consequences of misclassifying a worker as an independent contractor, any business labeling a worker as such should do so with the assistance of legal counsel. For more information, see Consequences of Misclassification..

Workers properly classified as independent contractors under California law may also be afforded protections under applicable local ordinances such as the two described below. Hiring entities working with independent contractors must comply with both state law and any applicable local laws.

Los Angeles City Freelance Worker Protections Ordinance

The city of Los Angeles’ Freelance Worker Protections Ordinance (FWPO)16 requires that certain contracts between a “freelance worker” (a singular, natural person hired as a bona fide independent contractor to perform services for a hiring entity in exchange for compensation) and a hiring entity (entity regularly engaged in business or commercial activities that are owned or operated for any trade or business or represent itself in doing so) must be in writing.

A “freelance worker” must only be one person and excludes any natural person or entity that:

• Is required to have a written agreement pursuant to the California Business and Professions Code or another law;
• Is an employee of a hiring entity under Los Angeles Municipal Code section 187 et seq.;
• Agrees to perform services for a hiring entity for no pay; or
• Has employees other than the one individual natural person who is the sole legal and beneficial owner.

The FWPO does not apply to hiring entities that hire app-based transportation or delivery drivers for prearranged services.

Any contract for work in Los Angeles between a hiring entity and a freelance worker entered into on or after July 1, 2023, that is valued at $600 or more in a calendar year — either by itself or when aggregated with previous written or oral contracts — must be in writing. The written contract must include basic information such as contact information, an itemization of services, the value of services, the rate of compensation and the date that the hiring entity must pay the freelance worker.

The FWPO also requires that hiring entities must timely pay for work completed under the contract.

There is four-year recordkeeping requirement for retaining written records related to compliance with the FWPO, and failure to timely provide information to the city during an investigation will create a rebuttable presumption that the hiring entity violated the FWPO. The FWPO has an anti-retaliation provision that protects freelance workers who assert their rights under the ordinance.

For more information on Los Angeles’ FWPO, visit the Office of Wage Standards.

San Francisco Personal Services Minimum Contractual Rate Ordinance

The San Francisco Personal Services Minimum Contractual Rate Ordinance (PSMCRO)17 requires covered entities to pay at least the San Francisco minimum wage to covered contractors who complete 20 or more hours of personal services in a month for one or more covered entities within the geographic boundaries of the city.

A covered entity is simply a person, firm, proprietorship, partnership or corporation that obtains at least 20 hours of personal services from one or more “covered contractors” — which are defined as people who, in a particular month, are providing at least 20 hours of personal services for one or more covered entities within San Francisco. “Personal services,” means services provided personally by the individual or principal of an entity based on the intellectual or manual efforts of the individual rather than a salable product of their skills.

• San Francisco’s PSMCRO was approved in 2006, well before the Dynamex decision and subsequent codification of the “ABC Test” for independent contractors. Hiring entities must be sure to first confirm that their independent contractors are properly classified. If the PSMCRO applies to a hiring entity’s contractors, they must pay the covered contractor at least the San Francisco Minimum Wage.

Records reflecting the number of hours worked by and payments to a covered independent contractor must be retained for six months after the term of the contract. If the contract does not specify a term, the records must be retained for one year after each payment is made to the independent contractor.

Visit San Francisco’s Minimum Wage website under the section titled “Legal Authority” for more information on the PSMCRO.

• Check to see if any local ordinance applies to your contracts with independent contractors in places where you conduct business or where contract work is completed. Remember to use written contracts when required and timely respond to requests for information or records from local agencies.

Harassment and Independent Contractors

California’s Fair Employment and Housing Act (FEHA) protects independent contractors from harassment.24 FEHA makes it illegal to harass an independent contractor, defined as any “person providing services pursuant to a contract,” on the basis of race, religious creed, color, national origin, ancestry, physical disability, mental disability, medical condition, genetic information, marital status, sex, gender, gender identity, gender expression, age, sexual orientation, reproductive health decisionmaking, or veteran or military status For more information, see Harassment.

Bene fits and Independent Contractors

Independent contractors typically are ineligible for benefits offered to employees, such as health insurance, vacations and retirement plans. However, an employee misclassified as an independent contractor could retroactively be entitled to those benefits.25

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1. Lab. Code secs. 2775-2785