Updated October 2026 / ALLEVITY EMPLOYER SOLUTIONS / CALIFORNIA EMPLOYER GUIDE
Yes, California businesses can use independent contractors—but California decides who qualifies. Starting with the assumption that every worker is an employee, the business has to prove all three conditions under what’s known as the ABC test. A 1099, a signed agreement, or a contractor title doesn’t settle the question. The work itself does.
What does California assume about a worker you pay? →
What does the ABC test actually ask? →
Why doesn't a 1099 or a signed agreement settle it? →
Which workers are judged under Borello instead of the ABC test? →
What does misclassification cost a California employer? →
California assumes the worker is your employee. Since AB 5 took effect on January 1, 2020, anyone who performs labor or services for pay is presumed to be an employee unless the hiring relationship proves otherwise.
That presumption is the part owners tend to miss. Hiring a contractor feels like a paperwork decision: a W-9 in the file, an invoice every month, a 1099 in January. But in California, it is a legal classification, and the burden of proof sits with the business. The business is the one deciding on the label, and the business is the one to back it up.
The rule is codified in Labor Code section 2775 and came out of the California Supreme Court's 2018 Dynamex decision. It applies to the Labor Code, the Unemployment Insurance Code, and the wage orders.
The ABC test asks three questions, and the business has to answer yes to all three. The California Labor Commissioner's independent contractor FAQ lays them out:
| A | The worker is free from the hiring business's control and direction in doing the work, both under the contract and in practice. |
| B | The work is outside the usual course of the hiring business's business. |
| C | The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. |
Prong A is sticky. A Chico dental office that hires a web designer to rebuild its site can usually pass the ABC, because building websites is not what a dental office does. The same office paying a hygienist on a 1099 has a much harder time, because cleaning teeth is exactly what the office does.
Prong B can trip up the well-meaning owner. If the business sets the hours, supplies the tools, trains the worker in its own way of doing things, and reviews the work the way it reviews staff, the control is there, whatever the contract says.
A 1099 or a signed contractor agreement does not settle classification because California is looking at the relationship, not the paperwork. What the filing calls it doesn’t matter. The Labor Commissioner states plainly that being labeled a contractor, signing an agreement saying so, or being paid as one does not determine employment status.
From the employee’s side, agreeing to contractor status does not change the answer. Employment protections in California belong to the worker, and a worker cannot sign them away as a condition of getting the job.
Some occupations and business relationships are judged under the older Borello test instead of the ABC test.
The exemptions most small employers run into include certain professional services (marketing, graphic design, freelance writing, photography, and similar work), bona fide business-to-business relationships, and licensed professionals such as physicians, lawyers, accountants, and insurance brokers. Each one comes with conditions. The business-to-business exemption, for example, generally requires the contractor to be a real business with its own location, its own clients, and the ability to set its own rates. Similarly, the business service provider (the worker) must be a sole proprietor, or a business entity formed as a partnership, limited liability company, limited liability partnership, or corporation.
Borello still asks heavy hitting questions. It weighs a list of factors, including who controls the manner and means of the work, whether the worker has a distinct business, the skill involved, who supplies the tools, how long the relationship lasts, and how the worker is paid. A worker can fall under Borello and still be an employee.
Whether an exemption applies to a specific worker is a legal question. When the answer depends on an exemption, that is a conversation to have with employment counsel before the first invoice arrives.
Misclassification costs a California employer back wages, benefits, Workers’ Compensation premiums, and taxes it would have paid an employee, plus penalties on top. The bill grows fast, and it grows backward.
Once a worker is reclassified, the employer can owe unpaid overtime, missed meal and rest period premiums, unreimbursed business expenses, paid sick leave, and payroll taxes, often going back several years. The Employment Development Department can assess unpaid unemployment and disability insurance contributions. Under Labor Code section 226.8, willful misclassification carries civil penalties of $5,000 to $15,000 per violation, and $10,000 to $25,000 per violation when it is a pattern or practice.
Misclassification is also one of the most common triggers for claims under the Private Attorneys General Act (PAGA). That’s because a single classification decision can produce overtime, meal and rest break, and wage statement violations all at once (the 2024 PAGA reforms, however, such as AB 2288 and SB 92, gave employers more room to cure violations and reduce penalties. Learn more in our blog: How Paga Works In California).
The employer should decide by looking at the work before looking at the worker. The question to ask is whether this work is part of what the business does (and who will direct how it gets done).
Answering that well means knowing the business: what service or product it sells, which tasks are core and which are occasional, where the schedule comes from, and who trains and reviews. For our HR clients, Allevity spends time answering these questions where needed. The right answer for a ride-share service rarely matches the right answer for a pest-control service.
In practice, the answer usually lands in one of three places:
01 The work is core and ongoing. Hire an employee. Payroll, onboarding, and the paperwork that come with them are the kind of employer work Allevity HR handles behind the scenes.
02 The work is core but temporary or seasonal. Temporary staffing fits here. Allevity recruits and screens temporary workers and handles payroll and compliance for those employees, whether the need lasts a weekend, a season, or long enough to try a temp-to-hire arrangement.
03 The work is outside the business and the worker runs a real business of their own. A contractor relationship may fit. Document why, and revisit it if the work starts to look like a job.
If a worker already on a 1099 fits the first two descriptions better than the third, fix the classification now rather than waiting for a claim to do it for you.
Just because a person wants to be an independent contractor does not mean they can be one. Being the boss comes with the responsibility to decide how someone is treated. California asks employers to use that power accurately. Bring us the question, and we’ll help you sort out which of your roles need a closer look and when counsel should weigh in.
No. California businesses can legally hire independent contractors. The worker has to meet the ABC test or fall under an exemption and meet the Borello test, and the hiring business carries the burden of proving it. The label, the contract, and the tax form do not decide the question.
The ABC test is California's default standard for independent contractor status, codified in Labor Code section 2775. A worker is a contractor only if they are free from the business's control, the work is outside the business's usual course, and the worker has an independently established trade or business. All three must be true.
No. A signed agreement does not determine employment status in California. The Labor Commissioner looks at how the relationship works in practice, including who controls the work and whether the work is part of the business's usual course. An agreement can document a legitimate contractor relationship, but it cannot create one.
Willful misclassification carries civil penalties of $5,000 to $15,000 per violation under Labor Code section 226.8, rising to $10,000 to $25,000 per violation for a pattern or practice. Employers can also owe back wages, overtime, meal and rest premiums, expense reimbursement, payroll taxes, Workers’ Compensation, and PAGA penalties.
A worker's preference does not decide classification in California. If the ABC test or the applicable exemption is not met, the worker is an employee, even if they asked to be paid on a 1099. Employment protections cannot be waived as a condition of the work.
Temporary staffing fits when the work is part of the business's normal operations but the need is short-term or seasonal. Temporary workers placed through a staffing firm such as Allevity are employees, with payroll and compliance handled, which avoids using a contractor arrangement to cover work that belongs to the business.
Yes. California's ABC test and misclassification penalties apply to businesses of every size, including businesses with one or two workers. Small employers often have the most at stake, because a single long-standing contractor arrangement can represent most of their workforce.