Key takeaways
- California presumes a worker is an employee unless all three parts of the ABC test are met.
- Test B, work outside your usual line of business, is where most small businesses fail.
- Willful misclassification can cost $5,000 to $25,000 per violation in civil penalties.
In most states, calling someone a "contractor" and sending a 1099 is common. In California it's one of the most expensive mistakes a small business can make. Since AB 5 (effective 2020) wrote the Dynamex decision into law, workers are presumed to be employees unless the business proves all three parts of the ABC test (Labor Code §2775, based on Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903).
The three tests
A worker is an independent contractor only if all three are true:
| Test | The question | Example that passes | Example that fails |
|---|---|---|---|
| A: Control | Is the worker free from your control and direction in doing the work, by contract and in practice? | A web designer sets her own hours and methods and delivers a finished site | You set the schedule, train them and tell them how to do the job |
| B: Outside your usual business | Is the work outside the usual course of your business? | A bakery hires a plumber to fix a sink | A plumbing company "contracts" plumbers to do its jobs |
| C: Independent business | Is the worker customarily engaged in an independently established trade or business of that kind? | The plumber has a license, a business name and other clients | The worker only works for you and has no business of their own |
Test B is where most small businesses fail. If the person does the same work your business sells, they are very likely an employee.
Exemptions
AB 5 and later laws (especially AB 2257 in 2020) exempt some professions and relationships. These include certain professional services, business-to-business arrangements, and referral agency relationships. In those cases the older, more flexible Borello test applies instead (Labor Code §§2776–2784). Each exemption has detailed conditions, so don't rely on a job title alone. App-based rideshare and delivery drivers are covered separately by Proposition 22, whose core contractor rule the California Supreme Court upheld in 2024 (Castellanos v. State of California).
What getting it wrong costs
If a worker you treated as a contractor is really an employee, you can owe:
- unpaid minimum wage and overtime, meal and rest break premiums, and expense reimbursements;
- unpaid payroll taxes, plus penalties and interest from the Employment Development Department (EDD) and the IRS;
- workers' compensation exposure if they're hurt while uninsured; and
- civil penalties for willful misclassification of $5,000 to $15,000 per violation, or $10,000 to $25,000 per violation if it's a pattern or practice (Labor Code §226.8).
Claims often start when a worker files for unemployment, files a wage claim with the Labor Commissioner, or is injured.
Checklist before you hire someone as a contractor
- Do they do work that is outside what your business sells?
- Do they decide how, when and where they work?
- Do they have their own business: license, business name, insurance, website or other clients?
- Do they use their own tools and set their own price?
- Is there a written contract that matches how the relationship really works?
- If you're relying on an exemption, have you checked every condition in the statute?
If any answer is "no", treat the person as an employee or get advice first. Hiring an employee means payroll, withholding, workers' compensation insurance and EDD registration. For registering with EDD and payroll taxes, see California payroll taxes for employers.
Common mistakes
- Relying on the 1099 or the contract alone. A contract that calls someone a contractor doesn't decide the question. What counts is whether all three tests are met, in the contract and in practice.
- Hiring contractors to do the work you sell. A cleaning company "contracting" cleaners, or a salon "contracting" stylists to serve its clients, runs straight into Test B.
- Assuming an exemption from a job title. Exemptions under Labor Code §§2776–2784 have detailed conditions. A title such as "consultant" or "freelancer" isn't enough.
- Letting the relationship drift. A worker who started as an outside contractor can start to look like an employee once you set their hours, train them and they stop serving other clients.
- Assuming the risk ends when the work ends. Claims often start later, when a worker files for unemployment, files a wage claim or is injured.
Frequently asked questions
What is the ABC test in California?
It's the test California uses to decide whether a worker is an employee or an independent contractor. A worker is presumed to be an employee unless the business shows that all three parts are met: (A) the worker is free from the business's control, (B) the work is outside the usual course of the business, and (C) the worker has an independently established business of that kind (Labor Code §2775).
Who has to prove a worker is an independent contractor?
The business does. Under Labor Code §2775, a worker is treated as an employee unless the hiring business demonstrates that all three conditions of the ABC test are satisfied.
Can I hire a 1099 contractor in California?
Yes, if the worker truly meets all three parts of the ABC test or falls within one of the statutory exemptions. Sending a 1099 doesn't make someone a contractor. If the person does the same work your business sells, they are very likely an employee.
Does the ABC test apply to unemployment insurance?
Yes. Labor Code §2775 applies the ABC test for purposes of the Labor Code, the Unemployment Insurance Code and the Industrial Welfare Commission wage orders. That's why a worker's unemployment claim is a common way misclassification comes to light.
What is the penalty for misclassifying an employee in California?
Willful misclassification carries civil penalties of $5,000 to $15,000 per violation, or $10,000 to $25,000 per violation if it's a pattern or practice (Labor Code §226.8). On top of that, a business can owe unpaid wages, overtime, break premiums, expense reimbursements, payroll taxes, penalties and interest.
What is the Borello test?
It's the older, more flexible test California used before AB 5. It still applies to workers who fall within one of the AB 5 exemptions, such as certain professional services, business-to-business arrangements and referral agency relationships (Labor Code §§2776–2784). Each exemption has its own detailed conditions.
Are rideshare and delivery drivers covered by the ABC test?
App-based rideshare and delivery drivers are covered separately by Proposition 22. The California Supreme Court upheld its core contractor rule in 2024 in Castellanos v. State of California.
Sources
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