Under California’s "ABC" test,  a worker is an employee unless the company can establish that he or she (a) is free from the company’s control and direction; (b) performs work outside the usual course of the company's business; and (c) operates as an independent business of the same nature as the work performed.  For example, if a finance company hires a plumber to fix an office toilet, (a) the company does not tell the plumber how perform repairs; (b) the company does not do plumbing; and (c) the plumber operates an independent plumbing business.

The California legislature created several somewhat arbitrary exceptions to the ABC test that have been approved by federal and California courts.  See Question 4 of Independent contractor versus employee FAQs.

A written agreement is essential to meet any exception.  Most exceptions still require companies to establish that all prongs of a separate multi-factor test are met, including primarily the extent of the company's right to control the manner and means of work performance, and actual control. The company must also satisfy other state and federal criteria, including the IRS factors and the federal Department of Labor's Rule, currently under a revision process, with principal factors being:

• the economic reality of the relationship, i.e., is the worker dependent on the company or running his/her own business?;
• what control does the company have over the worker?; and
• what opportunity does the worker have to make a profit?

California misclassification consequences can include liability for unpaid wages for up to four years including possible overtime and missed breaks; itemized wage statement violations up to $4,000 per worker; waiting time penalties; liability under California's Private Attorneys General Act between $5,000 to $25,000 per violation; and attorneys' fees and court costs.

‍Indications of misclassification include:

• Company control over the worker’s performance, including schedule and how the work is done;
• No written independent contractor agreements;
• Independent contractor agreements that go on indefinitely or for a long term;
• Paying someone on 1099 basis to avoid payroll taxes or upon the worker’s request;
• Requiring contractors to work on an exclusive or full-time basis;
• Having contractors and employees performing the same job functions;
• Rehiring former employees as contractors for the same job;
• Paying contractors by the hour;
• Not requiring invoices from contractors;
• Providing contractors "benefits" such as paid vacation and expense reimbursements;
• Hiring contractors whose main area of expertise or work is in a different field;
• Having contractors perform central functions; and
• Hiring contractors who claim to have their own businesses without verifying.

Take-Aways:

A worker’s status is not a matter of personal preference of the company or the worker.  Assume workers are employees unless they unequivocally meet all legal requirements to qualify as independent contractors. Consult with a skilled management-side employment attorney to ensure you are analyzing the issues correctly.

For further information, please contact Tim Bowles, Cindy Bamforth or Helena Kobrin.

See also:

• Seemed Like a Good Idea: Home Care Outfit to Pay $2.3M for Misclassifying Caregivers as Independent Contractors (March 21, 2025)
• Sweat the Details - Friendly Workplace Practices Audits Before PAGA Comes Calling (January 24, 2025)
• California Invests $18 Million to Prosecute Wage Theft (March 8, 2024)

Helena Kobrin

April 10, 2026