Employee vs Contractor FAQ

The distinction between employees and independent contractors in California determines what legal protections and benefits a worker receives. Employees are entitled to minimum wage, overtime pay, meal and rest breaks, workers compensation insurance, unemployment insurance, paid sick leave, expense reimbursement, and protection from wrongful termination, discrimination, and retaliation. Independent contractors are not entitled to these protections and are responsible for their own taxes, insurance, and business expenses.

In California, the determination of whether a worker is an employee or independent contractor is made under the ABC test codified in Labor Code Section 2775. Under this test, a worker is presumed to be an employee unless the hiring entity proves all three of the following: A - the worker is free from the control and direction of the hiring entity in performing the work, both under the contract and in fact; B - the worker performs work that is 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 performed.

This presumption of employee status places the burden on the business to prove independent contractor status.

Assembly Bill 5, or AB5, is a California law that took effect on January 1, 2020, and significantly changed how worker classification is determined in California. AB5 codified the ABC test established by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court (2018) and extended its application to most workers in California.

Under AB5, codified in Labor Code Sections 2775 through 2787, workers are presumed to be employees rather than independent contractors. To classify a worker as an independent contractor, the hiring entity must prove all three prongs of the ABC test. The law was enacted to address widespread misclassification of workers as independent contractors, which deprived them of employee protections while allowing businesses to avoid payroll taxes and benefit obligations.

AB5 does provide exemptions for certain occupations and professional services where workers are deemed to have more bargaining power and independence, including certain licensed professionals, business-to-business relationships meeting specific criteria, and workers in specified occupations. However, these exemptions have their own requirements that must be satisfied. Proposition 22, passed in November 2020, created an exemption for app-based transportation and delivery companies, though this exemption was challenged in court. Most workers in California remain subject to the ABC test under AB5.

The ABC test is California's primary standard for determining whether a worker is an employee or independent contractor for purposes of the Labor Code, Unemployment Insurance Code, and Industrial Welfare Commission wage orders. Under this test, a worker is presumed to be an employee unless the hiring entity demonstrates that all three conditions are satisfied.

Prong A requires that the worker be free from the control and direction of the hiring entity in performing the work, both under the contract for the performance of the work and in fact. This examines whether the worker has genuine autonomy over how they perform their work. Prong B requires that the worker perform work that is outside the usual course of the hiring entity's business. This is often the most difficult prong to satisfy. A worker whose services are part of the hiring entity's core business will likely be classified as an employee.

For example, a delivery driver working for a delivery company fails Prong B because deliveries are the company's usual business. Prong C requires that the worker be customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity. This means the worker must have their own business, serving multiple clients, before and independent of the relationship with the hiring entity. All three prongs must be satisfied for independent contractor status.

If you believe you have been incorrectly classified as an independent contractor when you should be an employee, you have several options to pursue the benefits and protections you were denied. First, gather and preserve all documentation related to your work arrangement, including contracts, payment records, communications with the hiring entity, records of hours worked, and any evidence showing the nature of control exercised over your work.

You can file a wage claim with the California Labor Commissioner (DLSE) to recover unpaid minimum wages, overtime, meal and rest break premiums, expense reimbursements, and other compensation you would have received as an employee. The Labor Commissioner's office can investigate your classification and order the hiring entity to pay back wages and penalties.

Alternatively, you can file a civil lawsuit either individually or as part of a class action if other workers were similarly misclassified. An employment attorney can evaluate your case and advise on the best approach. Many take these cases on contingency. You can also file a complaint with the Employment Development Department regarding unpaid unemployment and disability insurance contributions, or with the IRS for tax-related issues. The statute of limitations is generally three years for wage claims in California, so act promptly. Document everything and avoid signing any releases without understanding your rights.

If you were misclassified as an independent contractor but should have been treated as an employee, you may be entitled to recover significant compensation and benefits that were wrongfully denied. For wage and hour violations, you can recover unpaid minimum wages for all hours worked, overtime pay at 1.5 times or 2 times your regular rate, meal and rest break premium pay for each day breaks were not provided, and reimbursement for all business expenses you paid out of pocket such as mileage, phone, equipment, and supplies.

You may also be entitled to paid sick leave retroactively and other benefits provided to employees. Beyond the direct compensation, California law provides substantial penalties. Waiting time penalties under Labor Code Section 203 can add up to 30 days of wages if final pay was not timely. Wage statement penalties under Labor Code Section 226 can add $50 to $4,000 for inaccurate pay stubs. Minimum wage and overtime violations allow recovery of liquidated damages equal to the unpaid wages.

Interest accrues at 10% per year. You may also have claims for workers compensation coverage and unemployment insurance benefits you were denied. Attorney's fees and costs are recoverable in successful wage claims. PAGA claims can add civil penalties. The total recovery for misclassification can substantially exceed the direct wages owed.

California imposes significant penalties on employers who misclassify workers as independent contractors. Under Labor Code Section 226.8, willful misclassification subjects employers to civil penalties between $5,000 and $15,000 per violation for initial violations, and between $10,000 and $25,000 per violation for pattern or practice violations. Willful misclassification means the voluntary and knowing misclassification of an individual as an independent contractor.

Additionally, employers must pay all wages and benefits the worker would have received as an employee, including minimum wage, overtime, meal and rest break premiums, expense reimbursements, and paid sick leave. Employers are liable for unpaid employer contributions to unemployment insurance and disability insurance, plus penalties and interest assessed by the Employment Development Department. Employers may also face liability for back taxes, penalties, and interest from the Franchise Tax Board and the IRS. Workers compensation violations can result in additional penalties if the employer failed to carry coverage.

Private Attorney General Act (PAGA) claims allow workers to recover civil penalties of $100 per employee per pay period for initial violations and $200 for subsequent violations. Class actions can multiply liability across all affected workers. In some cases, individual managers or officers may be personally liable under Labor Code Section 558.1. The California Attorney General and city attorneys can also bring enforcement actions.

Yes, AB5 includes exemptions for certain occupations and business relationships where workers may be classified as independent contractors without satisfying all three prongs of the ABC test. These exempted workers are instead evaluated under the older Borello test, which considers multiple factors including the right to control how work is performed.

Licensed professionals with certain exemptions include doctors, dentists, lawyers, architects, engineers, accountants, insurance agents, and real estate agents, among others. These professionals must meet specific requirements including maintaining a professional license, having control over their work, setting their own rates, and other criteria detailed in Labor Code Section 2778. Business-to-business relationships may qualify for exemption under Labor Code Section 2776 if they meet all twelve specified criteria, including having a written contract, operating under a separate business name, having the ability to serve other clients, and controlling the means of performance.

Certain occupations have specific exemptions, including freelance writers and photographers (with limitations), musicians, certain hair stylists and barbers, and others detailed in the statute. Proposition 22 created an exemption for app-based drivers for transportation network companies and delivery network companies, though this exemption has faced legal challenges. Each exemption has its own detailed requirements, and simply being in an exempt occupation does not automatically make someone an independent contractor.

Prong B of the ABC test requires that the worker perform work outside the usual course of the hiring entity's business. This prong is frequently the most challenging for hiring entities to satisfy and is the reason many workers previously classified as independent contractors are now considered employees under California law.

To pass Prong B, the work performed must be outside the core business activities that the hiring entity regularly performs. Consider a plumbing company: if they hire an electrician to rewire their office, that is outside their usual business of plumbing, and Prong B could be satisfied. But if they hire a plumber to perform plumbing services for their customers, that is within their usual business, and Prong B fails.

Application in common industries demonstrates this impact. Rideshare companies like Uber and Lyft are in the business of providing rides, so drivers are performing work within their usual business. Delivery companies are in the business of delivering goods, so delivery drivers are performing their usual business work. Staffing agencies that provide workers to clients are in the business of providing labor, so those workers are within their usual business. Prong B creates a bright line that makes it very difficult to use independent contractors for core business functions. This was intentional, as the legislature recognized that companies were using contractor classification to avoid employee obligations for workers performing essential business services.

No, signing a contract that labels you as an independent contractor does not make you one under California law. Worker classification is determined by the actual nature of the working relationship, not by contract language, labels, or titles chosen by the parties. California Labor Code Section 2775 makes clear that the ABC test applies regardless of what the parties have agreed to in writing.

Courts and the Labor Commissioner look beyond contract language to examine the substance of the relationship. If the work arrangement fails any prong of the ABC test, the worker is an employee regardless of what the contract says. Similarly, providing a worker with a 1099 tax form instead of a W-2 does not determine employment status; it merely reflects how the hiring entity has chosen to classify the worker for tax purposes, which may be incorrect.

Having an LLC or business entity also does not automatically make someone an independent contractor. Some hiring entities encourage workers to form LLCs and sign contracts as businesses, but if the underlying relationship is that of employment, the legal classification remains employee. Contract provisions that purport to waive employee rights are void and unenforceable under Labor Code Section 219. If your working relationship satisfies the ABC test's requirements for employment, you are entitled to all employee protections regardless of any contract language to the contrary.

California provides multiple avenues for reporting worker misclassification, each addressing different aspects of the problem. To recover unpaid wages and benefits for yourself, you can file a wage claim with the California Labor Commissioner (Division of Labor Standards Enforcement) online, by mail, or in person. The DLSE investigates wage claims, conducts hearings, and can order employers to pay back wages and penalties. There is no filing fee, and you do not need an attorney.

You can also file a complaint with the Employment Development Department if you believe the employer failed to pay unemployment insurance or disability insurance contributions that would have been required for employees. The EDD can audit employers and assess back taxes plus penalties. For broader enforcement, you can report misclassification to the Labor Commissioner's Bureau of Field Enforcement, which conducts investigations of employer practices and can issue citations and penalties.

You can also report to the California Attorney General's office or local city attorney offices that have labor enforcement programs. Private Attorney General Act (PAGA) claims allow individual workers to bring enforcement actions on behalf of themselves and other aggrieved employees, recovering civil penalties that are divided between the state and affected workers. For significant or widespread misclassification, consulting with an employment attorney about a class action lawsuit may result in broader relief. All reports and claims are protected against retaliation under California law.