Hiring independent contractors can provide businesses with flexibility and access to specialized services without adding permanent staff. However, California businesses should carefully evaluate how workers are classified. Simply referring to someone as an “independent contractor,” paying that person using a Form 1099, or including independent-contractor language in an agreement does not, by itself, determine the worker’s legal status. For many workers, California applies the ABC test, which generally treats a worker as an employee unless the hiring entity can establish each of the test’s three requirements.
Under the ABC test, the hiring entity must demonstrate that:
(A) the worker is free from its control and direction in performing the work, both under the parties’ agreement and in practice;
(B) the worker performs work outside the usual course of the hiring entity’s business; and
(C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work being performed. California law also contains numerous exceptions and special rules for particular occupations and business relationships. Depending on the circumstances, another standard—such as the Borello multifactor test—may apply instead.
Worker classification should therefore be evaluated based on the actual working relationship and the applicable legal standard, rather than the title used in a contract. Misclassification can result in significant exposure, including liability relating to unpaid wages and overtime, payroll and unemployment insurance taxes, workers’ compensation obligations, other employee benefits and protections, and statutory penalties. California law also provides additional civil penalties for willful misclassification. Businesses that regularly engage independent contractors should periodically review both their agreements and their day-to-day practices to determine whether their classifications remain appropriate. Addressing classification issues proactively can help businesses reduce risk and establish clearer working relationships.
This article is provided for general informational purposes only and does not constitute legal advice. Businesses with questions regarding worker classification should consult qualified legal counsel regarding their specific circumstances.